Eurozone

A term used for member states of the EU and countries in the European continent who have incorporated the Euro as their national currency and use it for other monetary purposes.

The Eurozone is a term used for member states of the EU and countries in the European continent who have incorporated the Euro as their national currency and use it for other monetary purposes.

Eurozone

It had 19 countries as of August of 2020, which are-

  1. Austria
  2. Belgium
  3. Cyprus
  4. Estonia
  5. Finland
  6. France
  7. Germany
  8. Greece
  9. Ireland
  10. Italy
  11. Latvia
  12. Lithuania
  13. Luxembourg
  14. Malta
  15. Netherlands
  16. Portugal
  17. Slovakia
  18. Slovenia
  19. Spain

The Maastricht Treaty that was formed in 1992 formed the basic structure for the European Union or EU that we see today. 

It facilitated the formation of an economic cooperation agreement that included a common currency, a central banking system, and a common economic region known as the Eurozone.

It is also known as the European Economic Agreement or the EEA. It includes various economic synergies between the signatories and many tools for common monetary and fiscal progress.

It also includes a common currency agreement, a central banking system, and the existing national central banks. Still, they have almost no real power in front of the Central Bank as it is obligatory to follow the guidelines of the main Central Bank.

Central Bank of Europe

The headquarters of the main building of the European Central Bank is located in the city of Frankfurt, Germany.

Central Bank

The formation of the Eurozone also meant that member countries would also get benefits of common regulatory policies and economic measures on the part of forming a common central banking system for the area, which is known as the European Central Bank or ECB.

The formation of this central banking system allows Europe-

  • Synergize operations concerning the national central banks of each member state.

  • Implementation of singular monetary policy.

  • Simpler and unrestricted trade for member countries.

  • Easy movement of capital and other factors of production across state borders.

  • Make an inclusive and collective move in case of an unprecedented event like a liquidity crunch.

The European Central Bank is one of the most prominent Central Banks in the world, and its policy changes and measures are watched and followed by central banks of almost all developing countries.

Formation

The ECB is also responsible for maintaining inflation rates under check in the Eurozone and is the main reason behind the stability of the euro as a currency.

It is owned by the national central banks of individual member states. There is no private ownership in ECB whatsoever, and each member bank has to put a key capital into the ECB for its functioning, which is determined by the population and size of the economy of that country.

The key capital is changed every 5 years, and countries adjust their share in the ECB accordingly.

Who is not a member of the Eurozone?

Not every country that comes to the European continent is part of it. Countries like Denmark, Sweden, and other states that do not qualify for this membership do not come under this agreement.

Members

Some countries do this to maintain their economic individuality and to make sovereign and independent decisions about their economic policies.

Also, it is interesting to note that some countries which are not a part of the EU have also incorporated Euro as their national currency. These are-

  1. The Vatican City
  2. Andorra
  3. Monaco and
  4. San Marino

These countries have an economic agreement with the EU under which these countries also get to enjoy the benefits of taking up the Euro as their national currency.

Although Sweden applied for membership in the early decades of the 21st century, it was rejected by the countries in the union as they saw Sweden as unqualified for this membership.

Sweden and Denmark are qualified as developed economies and would benefit a ton from joining this agreement. Also, the above-listed four countries are believed to be very much on the positive side after joining the EEA.

Economy under the Eurozone

Economy

Nations under it thrived at the introduction of these economic policies. It had many unmatched benefits of its own, which are-

  • Cultural integration of people and decreasing the effects of borders with respect to trade and commerce.

  • It promoted peace and stability in Europe, which had been the epicenter of world conflicts in the 20th Century.

  • It increased trade between member countries.

  • It eliminated the problems of fluctuating exchange rates and made trade fair for each and every one.

  • It contained a check on Consumer Inflation, and its economic policies helped keep the Euro under control.

Trade and Investment grew at a rapid and never before seen pace after the introduction of the concept, but the Global Financial Crisis of 2008 revealed some flaws in this agreement-

  • The policies of the ECB are rigid, and no member state has the independence to carry an independent monetary stance which is different from the ECB.

  • The disparities in wealth and economy of member states create a conflict for the monetary policy decisions which are made by the ECB.

  • Decisions made by the ECB also affected the geopolitical stance of many member states, which caused irregularities in global situations.

  • Participation of economically weaker nations is not just and fair in respect of the rules which they have to follow.

  • After the crisis, sensitive economies like Greece and Spain were badly affected because of the nonresponsive economic stance of the ECB, which benefited economically superior countries like France and Germany.

Requirements for joining this pact.

In order to join this economic cooperation, member states need to fulfill certain criteria and conditions, which consist of mainly the economic indicators in macro terms like-

Requiements

The states also need to keep their inflation and money printing levels at the rate of at least 1.5% with the best performing member states of this agreement. The governments' deficits are also very important criteria that should be kept under control.

Member states should not be too much into debt which will create pressure on the Euro as a common currency.

After incorporating the Euro as a currency, the member state can peg its regional currency to the Euro and use the domestic currency differently from the Euro, or it can use Euro inside its own borders, both with the regulation of the ECB.

ECB

The member countries do not need to maintain foreign exchange for trade as trade between the member countries takes place in terms of the Euro.

Also, there are heavy restrictions on the printing of new currency and even circulation of new currency inside or outside the domestic borders, so a country can lose economic grip over the domestic economy.

What are the problems with the Eurozone and common currency?

There is no doubt that the eurozone has made Europe a better place to live with coexisting peace and economic development. The common currency has its benefits and has made trade simpler and flourishing in the region, but it has its own demerits and pitfalls.

Problems

  • Europe suffered heavily during the 2008 crisis. Some countries suffered more than others, and people lost their life savings because of various reasons concerning the common currency mechanism of the Euro.

  • The ECB has very strict and rigid policies for member states which can prove fatal, as we have seen after 2008. Countries like Germany and France dominate the political space of the EU, thus also attaining major control over Eurozone operations and the ECB.

  • Germany is a relatively strong economy because of its big export sector. Germany is one of the largest exporters in the world and mainly exports cars and other special luxury items.

  • France is a big supplier of arms and ammunition and luxury clothing and accessories like perfumes and designer bags.

These countries were resilient to the crisis because they had huge foreign exchanges and export capital to keep their economy back on track. Economies like Greece, Spain, Italy, etc., had their economies running on tourism and other cyclical sectors.

The crash demolished these cyclical sectors. Its impact is still felt in these sectors, and some of them have not fully recovered, like the exotic agriculture production sector in Spain and Italy.

These are relatively small and less developed economies with a very small population, mainly dependent upon cyclical businesses, and the contribution of cyclical businesses to the economy is very significant in these regions.

Crisis

On top of that, the Migrant Crisis in Europe is a very concerning issue for the whole continent. The migrants come from the middle east and sub-Saharan Africa, which is very close to all the three countries mentioned above.

This coincidence resulted in devastating impacts for these countries as they were flooded with migrants from across the two continents, which put more strain on the already stressed economy of these smaller European countries.

Migrant Crisis

Taking migrants in large quantities also increased crime rates and food shortages all across the affected countries-this created political instability and hence more trouble for the ruling people.

The regulations of the ECB disallowed these countries to carry out protective measures for their economies as they could not devalue their currency or even take up monetary actions like buying or selling currency contracts in the open market after a certain extent.

This was countered by countries like Germany, who blamed it all on the devaluation and instability of the euro as a currency. Still, it was Germany's own greed not to allow a devaluation of the Euro as that would lead to an economic loss to their own companies.

Germany

Also, these small countries had very less participation in political matters and working of the ECB. Their voices were not properly heard and understood on a greater platform and countries with bigger economies always had an upper hand over them.

These issues toppled many smaller nations like Greece and showcased the problems with a common economic structure for diverse nations with different interests. Still, these countries have an agreement because the benefits still supersede the pitfalls.

Key Features

Key Features

  • It is a term used for member states of the EU and countries in the European continent who have incorporated the Euro as their national currency and use it for other monetary purposes. It had 19 countries as of August of 2020.

  • It facilitated the formation of an economic cooperation agreement which included a common currency, a central banking system known as the European Central Bank or ECB and a common economic region.

  • The European Central Bank is one of the most prominent Central Banks in the world. It is also responsible for maintaining inflation rates under check.

  • Europe suffered heavily during the 2008 crisis. Some countries suffered more than others.

  • The ECB has very strict and rigid policies for member states which can prove fatal. Countries like Germany and France dominate the political space of the EU thus also attaining major control over Eurozone operations and the ECB.

  • The regulations of the ECB disallowed smaller economies to carry out protective measures for their economies as they could not devalue their currency or even take up monetary actions like buying or selling currency contracts in the open market after a certain extent.

  • These issues toppled many smaller nations and it also showcased the problems with a common economic structure for diverse nations with different interests but still to date these countries have an agreement because the benefits still supersede the pitfalls.

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Researched and authored by Aditya Murarka | LinkedIn

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