What Is the Eurozone (Euro Area)?
While the US may be at the epicenter of the financial realm as it is considered the world’s biggest economy, the Eurozone is also noteworthy as it is one of the largest economies in the world, and its national currency, the euro, is considered to be one of the most liquid currencies in the Forex market.
Therefore, knowing what the Eurozone is, how it relates to the markets, and its history may be a good stepping stone to understanding the overall economy. Here’s what you need to know about the Euro Area:
Is the EU the Same as the Eurozone?
The short answer is no, the EU (European Union) is not the same as the Eurozone. While some may believe that the EU and the Eurozone are intertwined terms depicting the same body, these are in fact different.
This is because while the European Union is a political and economic union, the Eurozone is a subcategory of the European Union and it is considered a geographical and economic zone that includes 20 EU countries that use the euro as their national currency.
Furthermore, the EU consists of 27 countries that are Austria, Germany, Greece, Hungary, Croatia, Italy, Ireland, France, Finland, Estonia, Denmark, Belgium, Luxembourg, Lithuania, Latvia, Malta, Netherlands, Slovakia, Poland, Portugal, Romania, Slovenia, Spain, Sweden, Denmark, the Republic of Cyprus, and the Czech Republic. It is also worth noting that in the past, however, the EU included 28 countries of which the United Kingdom was part, until Brexit on February 1st, 2020.
What Is Brexit?
Brexit refers to the United Kingdom’s exit from the European Union on February 1st, 2020. The decision to exit the EU involved several steps. Voters in the UK overwhelmingly voted to leave the EU in the 2016 referendum. As a result of this decision, the UK and the EU began complex negotiations to draft a withdrawal agreement and a future relationship agreement.
Afterward, on January 31st, 2020, Brexit became official and the UK continued to follow EU regulations until December 31st, 2020. Moreover, it is worth noting that Brexit has had far-reaching economic and political consequences for the UK, the EU, and the globe as a whole.
Which Countries Are in the Eurozone?
As of 2023, there are 20 countries in the Eurozone. The Eurozone countries are Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
How Were the EU and the Eurozone Formed?
The Eurozone is a subgroup of the European Union (EU), so, to better understand how the former works, it is necessary to look into the history of the latter.
Historically, the EU was formed in 1993 under the Maastricht Treaty and was endorsed by all European Community (EC) members. The EU was formed in order to promote economic and political integration among European countries and this had a direct impact on the countries’ citizenship, security, defense, and economic policies.
In order to establish a common economic ground, the EU aimed to create a central banking system and a common national currency. The central banking system would be the European Central Bank while the national currency would be the euro.
A few years later, in 1998, 11 of the EU’s member states met the euro convergence criteria, which led to the formation of the Eurozone and the official launch of the euro alongside other national currencies.
Euro Adoption Timeline
As mentioned above, the euro is the national currency of many EU countries. But before the euro became this important currency a few steps had to be taken. Here’s a brief overview of the euro adoption process.
1992: The Maastricht Treaty was signed on February 7th, 1992 during which the European Central Bank and the European System of Central Banks came into existence, setting the stage for the creation of a European currency.
1995: The “euro” naming emerged on the 15th and 16th of December, 1995 during a European Council meeting in Madrid.
1996-1998: The Euro coins and banknotes were designed in a contest held by the European Monetary Institute (EMI).
1999: Eleven EU members join the EMU and adopt the euro as their currency, a currency that was only found in scripture at the time. These eleven countries were Finland, France, Germany, Austria, Belgium, Ireland, Italy, Spain, Luxembourg, Portugal, and the Netherlands. A year later, in 2000, Greece joined the Eurozone, hence adopting the euro as its national currency.
2002: the euro was introduced as a physical currency on January 1st, 2002. As such, euro coins and banknotes were circulated in euro-area countries.
Who Governs the Eurozone?
The European Monetary Union, otherwise abbreviated as the EMU, is the body responsible for the regulation of the EU’s economy and, as such, is responsible for the Eurozone’s economic growth.
This governing body oversees a number of institutions that regulate the European economy. Some of the main ones are the European Council, the European Central Bank (ECB), the Council of the EU, the ‘Eurogroup,’ the Member States, the European Commission, and the European Parliament.
Which Countries Are in the EU But Don't Use the Euro?
Not all EU countries use the euro as their national currency and some of those countries that don’t use it are Bulgaria, Czechia, Romania, Poland, Hungary, and Sweden. In spite of this, if these countries are approved to join the Eurozone, they will have to use the euro as their national currency. (Source:The European Union)
What Are the Criteria Needed to Qualify for Joining the Eurozone?
To qualify for joining the Eurozone, countries must have a stable economy with an inflation rate that does not exceed 1.5 percentage points above the three best-performing nations. In addition, the countries should have a proper and sustainable financial system and rates that are not more than two percentage points higher than the top three countries with the best performance. Moreover, participation in the Exchange Rate Mechanism (ERM II) for at least two years without significant changes from the ERM II central rate or devaluations of the currency's bilateral central rate against the euro is also required.
To conclude, the Eurozone is a rich and multifaceted area. Therefore, understanding its origins, history, and development is vital to understanding the overall economy.