Currencies Pegged to the Euro Exchange Rate

Currencies directly pegged to the Euro exchange rate are mostly comprised of African countries, and sovereign European nation-states outside the European Union. Currencies pegged to the Euro include the Tunisian Dinar, Croatian Kuna, Macedonian Denar, the Czech Koruna, Romanian New Leu, Bulgarian Lev, in addition to the currency of  Bosnia-Herzegovina and Serbia.

The total number of currencies either directly or indirectly pegged to an exchange rate of the European Union's Euro exceeds 20. Of the nation-sates that are African, some are former French colonies. In these cases, there is a diplomatic and historical-political basis for the currency exchange peg. A currency peg is different from a reserve currency that is used to combat adverse economic factors and cases of national financial collapse. The Euro, along with the U.S. dollar is also held as a reserve currency.

According to the European Commission, a legislative division of the European Union (EU), countries peg their currencies to the Euro exchange rate for more than one reason. These reasons include potential assimilation into the EU, economic stability, and to facilitate commerce. Moreover, monetary policy that guides pegged currencies may take into account factors such as deflation, import and export trade, consumer confidence, and any measured economic rational that provides a logical financial basis for the pegged currency.

Currency exchange pegs are facilitated by only allowing one currency to move in tandem with the other. For example if the Euro falls in value against the U.S. dollar, and Japanese Yen, then a currency pegged to the Euro will also experience a proportional decline in value if that currency's peg is determined by the Euro's value in terms of the U.S. Dollar and the Japanese Yen.

The amount by which a currency is allowed to move in proportion to the Euro's exchange rate is determined by the economic and monetary policy of each nation-state not within the European Union. In other words, how closely the exchange rate range of the currency is pegged to the Euro can vary by country. Some countries may have a very tight range they allow their currency to move, while others may provide a more flexible range. For example, currency A may allow it's currency to fluctuate 5% above or below its proportional value to the Euro whereas country B may only allow a 2% fluctuation.

Currencies can also be indirectly pegged to the Euro exchange rate via a currency basket i.e. a consolidated metric exchange rate comprised of major world currencies. The European Commission states theses countries to include Botswana, Russia, Libya, Morocco, Seychelles and Vanuatu. In the case of currency basket pegs, the movement of several major world currencies may be used to determine the value of the pegged currency.

Sources: 

1. http://bit.ly/bBcoBj    (European Commission)
2. http://bit.ly/b8gcjv     (Eurogl.com)
3. http://bit.ly/9OPMFo (JCSS: University of Tennessee)