If you're entering your source XML documents and stylesheets using a
text editor, then you need to specify the encoding that your text editor
is configured to use, which is probably ISO-8859-1 by default (actually
it might be the Microsoft variant of that, but that's sufficiently close
that it doesn't usually matter).

It probably does matter:  The Euro sign is encoded as 0x80 in
CP 1252.
If the text editor is MS Word or Works, there is also the "smart
quote" problem: they replace quotes with typographical quotes
which are encoded somewhere in the range 0x90..0x9F in CP 1252.