A highly significant event that occurred in the forex market over just the past decade or so has been the unification of many of the national currencies of Europe into a single consolidated currency known as the Euro.

The following sections describe in greater detail how this fascinating currency consolidation process occurred.

The Initial Precursor of the Euro: The Currency Snake

Europe has a fairly extensive recent history of attempting exchange rate controls within its borders. One of the earliest of these attempts after the failure of the Bretton Woods system of fixed or pegged exchange rates in 1971 was the "currency snake".

The snake initially arose from a the Basle Agreement of 1972 between members and future members of what was then the European Economic Community or EEC to maintain the values of their currencies within a narrow trading band of 2.25% relative to each other.

This was done so that European countries, corporations and individuals could carry on trade among themselves in an orderly fashion.

While the snake originally operated in a tunnel versus the U.S. Dollar, making it a "snake in the tunnel" system, the tunnel part of the exchange rate regime collapsed in 1973 when the Dollar was permitted to float.

Eventually, after several entries and exits, the snake system was abandoned by 1977 when it had basically become several minor currencies tied to the Deutschemark.

The Immediate Precursor of the Euro: The EMS and ERM

Despite the failure of the snake, many Western European governments joined together in 1979 to form the European Monetary System or EMS, basing it upon the previous currency snake system.

This exchange rate regime involved an Exchange Rate Mechanism or ERM which maintained relatively fixed values, known as central parity levels, between participating currencies. Exchange rates were then allowed to fluctuate within a narrow range of +/-2.25% from these parity levels.

The system also required that when the exchange rate between two currencies diverged by an amount greater than 2.25% from the central parity level, the appropriate central banks were required to either intervene in the forex market or adjust interest rates in order to bring the divergent currency pair back within its agreed upon range.

The British Pound Sterling was forced to leave the ERM in September of 1992, after having joined just a few years earlier in 1990. This dramatic event prompted a round of speculation that saw a number of other currencies come under attack until the EMS and its ERM were effectively suspended in August of 1993.

The Rise of the Euro and the Eurozone

The official name of the consolidated European currency was adopted on December 16^th, 1995 as the Euro and was seen as the replacement for the failed EMS.

The Euro was first introduced into global financial markets in the form of an electronic accounting currency on the first of January in 1999, and it replaced the former European Currency Unit or ECU at equal value.

The Euro first began circulating as a paper and coin currency on January 1^st of 2002 in twelve countries. The consolidated currency has since replaced individual currencies in sixteen European Union countries that together comprise the Eurozone.

The Eurozone currently consists of Germany, France, Italy, Spain, Portugal, Greece, Austria, the Netherlands, Ireland, Finland, Belgium, Luxembourg, Cyprus, Malta, Slovakia and Slovenia. On the first of January, 2011, Estonia is also scheduled to become part of the Eurozone.

Although the Euro has come under pressure recently as a result of the Greek sovereign debt crisis, it continues to represent an extraordinary attempt to consolidate the national currencies of what are otherwise highly divergent neighboring countries within a geographically-based trading bloc.

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