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What Is the Euro?
Let me tell you directly: the euro is the official currency of the European Union, and it's adopted by 19 out of the 27 member nations. You should know it's the world's second most popular reserve currency right after the US dollar, and it's also the second most traded.
Key Takeaways
Here's what you need to grasp: the euro is the official currency for those 19 EU member states. It's second only to the US dollar in terms of being widely held and traded. In the countries that use it, the euro is hugely popular because it simplifies trade and travel across Europe and helps with the EU's political integration. But remember, adopting this common currency without a proper fiscal union played a big role in sparking the European sovereign debt crisis, which pushed the EU to strengthen its economic and political ties.
Understanding the Euro
I launched into explaining this: the euro started in 1999 as part of the EU's push for integration through the European Economic and Monetary Union, but back then it was just electronic. It wasn't until 2002 that we saw actual paper notes and coins in euros. You'll often see it abbreviated as 'EUR'.
In the EU member states that have adopted it—like Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain—the euro is the only legal tender. These form the eurozone, where it's the common currency. Even four small non-EU places—Andorra, Vatican City, San Marino, and Monaco—use the euro officially, and some other countries peg their currencies to it.
The European Central Bank, or ECB, has the job from the EU to keep prices stable by protecting the euro's value. It's part of the bigger European System of Central Banks, which includes national central banks from all EU members, even those not using the euro.
By adopting the euro, European businesses and financial institutions got rid of foreign exchange risks in their cross-border dealings within the increasingly connected EU economy. The requirements for joining also pushed for more political integration among members.
On the flip side, the eurozone mixes economies that are quite different, with national budgets but no system for cross-border fiscal transfers like you see between the US federal government and states. This setup forced the EU to step in with things like ECB guarantees for member states' debt during the market chaos of the sovereign debt crisis. National governments and central banks are still limited in how they can respond to their own economic issues because they're tied to the ECB's monetary policy and EU budget rules.
For instance, if a country in the eurozone faces an economic slowdown, its central bank can't just cut interest rates or devalue a national currency to boost exports against other European partners. While you can't devalue the euro to adjust economies within the EU, that also makes it a more reliable store of value. And let me be clear: the euro is still overwhelmingly popular with people in the countries that use it.
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