Any member country of the European Union (EU) that has adopted the euro as its national currency forms a geographical and economic region known as the eurozone.
The eurozone, officially called the euro area, is a monetary union of 19 of the 27 EU member states which have adopted the euro as their common currency. It forms one of the largest economic regions in the world.
It consists of 19 countries in the EU: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Altogether, the eurozone is almost equal to the population and Gross Domestic Product (GDP) of the U.S.
The European Central Bank (ECB) and the national central banks together constitute the Eurosystem, the central banking system of the eurozone.
The ECB exercises the sole authority to decide the printing and minting of euro notes and coins. Politically speaking, the eurozone is collectively represented by the Eurogroup, which consists of the member nations.
Understanding the Eurozone
The eurozone is a big area in the world with a strong economy. It uses a currency called the euro, which is very easy to buy and sell. Many central banks keep the euro in their reserves, which means they trust it a lot. People often talk about the euro when they study trilemmas, which is a theory about how countries make choices about their money on the global stage.
History of the Eurozone
In 1992, the European Community (EC) signed the Maastricht Treaty, which led to the formation of the EU. This had several important effects—it encouraged better coordination and cooperation in policies, especially in areas like citizenship, security and defense, and economic policy.
In terms of economic policy, the Maastricht Treaty aimed to create a unified economic and monetary union. This involved setting up a central banking system called the European Central Bank (ECB) and introducing a common currency known as the euro.
To achieve this, the treaty allowed for the free movement of money between member states. This led to closer cooperation among national central banks and greater alignment of economic policies among member countries. Eventually, the euro was introduced, along with a single monetary policy managed by the ECB.
However, not all EU countries use the euro. Denmark chose not to join the eurozone, but it could decide to do so later. Some EU countries haven’t met the requirements to join the eurozone yet. Others prefer to keep their currency to have more control over their economic and monetary matters.
Interestingly, some non-EU countries have adopted the euro as their official currency. The Vatican City, Andorra, Monaco, and San Marino have agreements with the EU allowing them to use the euro with certain conditions.
Requirements for Joining the Eurozone
To join the eurozone and use the euro as their currency, EU countries need to meet specific criteria. These criteria focus on four main economic indicators: price stability, healthy public finances, economic convergence, and stable exchange rates.
- Price Stability: Countries must maintain stable prices, with average inflation no more than 1.5 percent higher than the three best-performing EU countries.
- Sound Public Finances: Governments should keep their budget deficits below 3% of GDP and their public debt below 60% of GDP.
- Durability of Convergence: This is measured by comparing a country’s long-term interest rates with those of the three EU countries with the most stable prices. The difference should not exceed 2%.
- Exchange Rate Stability: Countries must participate in the Exchange Rate Mechanism (ERM) II for at least two years without significant problems and without devaluing their currency against the euro.