The euro is the common European currency established by the Maastricht Treaty in 1992. Even though the currency was introduced in non-physical form on January 1st, 1999 (checks, bank accounts), euro notes and coins first came into circulation on January 1st, 2002.
Since 2001, the exchange rate ALL/EUR has changed as shown in the following schedule:
Source: Bank of Albania
Comments and Analysis: ODA
During the first half of June 2011, the average exchange rate was 142.54 ALL/EUR, compared with 138.65 ALL/EUR in January, showing an appreciation of the euro by 2.8% since the beginning of the year.
The appreciation of the euro by the end of the first half of the year is almost a new phenomenon in Albania. In the last ten years, this has happened only twice, first in 2002 (when the euro is appreciated by 10.2% from January to June) and second in 2009 (an appreciation of 4.2%). Given that 2002 is the year of introduction into circulation of euro notes and coins, as well as the last change of currencies in the Eurozone member countries, this year is not appropriate to be compared with the other ones because of its uniqueness. For this reason we can say that the phenomenon of appreciation of the euro during this period of the year is not normal, and we should continue analyzing the arguments for this appreciation.
The exchange rate is the price of the foreign currency in terms of the local currency, and therefore as all other prices it is determined by matching market demand and supply. The principal factors affecting supply and demand in the euro market are mentioned below:
• The existence of many foreign companies’ subsidiaries (mainly European) increases their need to exchange the income in euro in order to transfer them to the holding companies;
• Individuals borrowing in euro to purchase real estate;
• About 64% of imports come from the European Union countries; therefore the demand for euro is high in the commercial sector;
• The visa liberalization has increased the demand of individuals to go on holiday or purchase products overseas, mainly in European countries;
• The visa liberalization has increased the number of individuals visiting their relatives (emigrants), reducing the number of emigrants returning to Albania during the same period, which decreases the supply of euro in the market during the summer months compared to the previous years;
• The political situation in Albania and the various events that occurred during this period have made foreign investors leave, which reduces the demand for domestic currency;
• The prospect, though distant of the adoption of the euro by Albania;
• The euro has also been appreciated in terms of other currencies during this period. In 2011, the euro was appreciated by 5.6% to the USD.
All the factors mentioned above, indicate an increasing trend of the ALL/EUR exchange rate, a trend that in absence of any internal situation (resolution of the political situation, increased domestic production and exports, increase in the number of tourists), or external one (the deepening of the European debt crisis or recession experience in the Eurozone) has no reason to change.
Contributed by: R.E