What Is the Euromarket?
Let me explain the term euromarket directly to you—it has two distinct meanings that you need to grasp.
In finance, it's the market for eurocurrencies, which are any currencies held as deposits by companies or individuals outside their country of issue.
In commerce, it refers to the single market of the European Union (EU), where goods and services trade freely between member countries, all under a common trade policy with non-EU countries.
Key Takeaways
- The euromarket may refer to the single market and free trade among European Union (EU) countries.
- The euromarket extends beyond the Eurozone countries that use the euro currency to all countries signed on to that free trade agreement.
- The euromarket may also refer to the eurocurrencies market, where an institution uses money from another country, but not in the originating country's home market.
Understanding the Euromarket
You should know that a euromarket describes the financial market for eurocurrencies. A eurocurrency is any currency held or traded outside its country of issue. For instance, a eurodollar is a dollar deposit held or traded outside the U.S.
The main incentive for this market's development and persistence is its freedom from the regulatory environment—and sometimes political or other country-specific risks—of the home country.
The 'euro-' prefix came about because these currencies were originally held in Europe, but that's no longer the case; a eurocurrency can now be held anywhere in the world where local banking regulations allow it.
This eurocurrency market is a major source of finance for international trade due to the ease of convertibility and the lack of domestic restrictions on trading.
Euromarket as the Single Market of the EU
The term also applies to the single market of the European Union. This single market emerged from abolishing restrictions on the movement of goods, services, and people between EU member countries.
The European Commission defines the single market as one territory without any internal borders or other regulatory obstacles to the free movement of goods and services.
This free flow across borders simplifies operations for companies in multiple countries. It's designed to improve efficiency, stimulate trade, and support growth, while advancing the political goal of deeper integration among EU members.
Keep in mind that most, but not all, EU members have adopted the euro, so the eurozone—countries in a common monetary union with the euro—is not the same as the euromarket.
A Hypothetical Example
Consider this scenario: Bank A is based in France, and Bank B is in the United States. Bank A plans to issue large loans to a client and figures they can profit more by borrowing in US dollars from Bank B and then lending it out.
Bank B earns interest on the loan to Bank A, while Bank A gains from the difference in loan terms between their client and what Bank B offers.
Though Bank A could theoretically do this at no cost just to please the client, more often they use eurocurrency to exploit an interest-rate discrepancy.
