Not to be confused with theEconomic and Monetary Union of the European Union, a term used to denote the entire path along with all related policies, leading to the adoption of the euro, of which the eurozone is the most advanced stage only.
Among non-EU member states,Andorra,Monaco,San Marino, andVatican City have formal agreements with the EU to use the euro as their official currency and issue their own coins.[10][11][12] In addition,Kosovo andMontenegro have adopted the euro unilaterally, relying on euros already in circulation rather than minting currencies of their own.[13] These six countries, however, have no representation in any eurozone institution.[14]
Since thefinancial crisis of 2007–2008, the eurozone has established and used provisions for granting emergency loans to member states in return for enacting economic reforms.[15] The eurozone has also enacted some limitedfiscal integration; for example, in peer review of each other's national budgets. The issue is political and in a state of flux in terms of what further provisions will be agreed for eurozone change. No eurozone member state has left, and there are no provisions to do so or to be expelled.[16]
In 1998, elevenmember states of the European Union had met theeuro convergence criteria, and the eurozone came into existence with the official launch of the euro (alongside national currencies) on 1 January 1999 in those countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Greece qualified in 2000 and was admitted on 1 January 2001.[citation needed]
These twelve founding members introduced physicaleuro banknotes andeuro coins on 1 January 2002. After a short transition period, they took out of circulation and rendered invalid their pre-euro national coins and notes.[citation needed]
Between 2007 and 2023, eight new states have acceded: Croatia, Cyprus, Estonia, Latvia, Lithuania, Malta, Slovakia, and Slovenia.[citation needed]
The euro is also used in countries outside the EU. Four states (Andorra, Monaco, San Marino, and Vatican City) have signed formal agreements with the EU to use the euro and issue their own coins.[30][31] Nevertheless, they are not considered part of the eurozone by the ECB and do not have a seat in the ECB or Euro Group.
Akrotiri and Dhekelia (located on the island of Cyprus) belong to the United Kingdom, but there are agreements between the United Kingdom and Cyprus[citation needed] and between United Kingdom and EU[citation needed] about their partial integration with Cyprus and partial adoption of Cypriot law, including the usage of euro in Akrotiri and Dhekelia.[citation needed]
Several currencies are pegged to the euro, some of them with a fluctuation band and others with an exact rate. TheBosnia and Herzegovina convertible mark was once pegged to theDeutsche mark at par, and continues to be pegged to the euro today at the Deutsche mark's old rate (1.95583 per euro). TheBulgarian lev was initially pegged to the Deutsche Mark at a rate of BGL 1000 to DEM 1 in 1997, and has been pegged at a rate of BGN 1.95583 to EUR 1 since the introduction of the euro and the redenomination of the lev in 1999. TheWest African andCentral African CFA francs are pegged exactly at 655.957 CFA to 1 EUR. In 1998, in anticipation ofEconomic and Monetary Union of the European Union, theCouncil of the European Union addressed the monetary agreements France had with theCFA Zone and Comoros, and ruled that the ECB had no obligation towards the convertibility of the CFA andComorian francs. The responsibility of the free convertibility remained in theFrench Treasury.
Kosovo andMontenegro unilaterally adopted the euro as their sole currency without an agreement and, therefore, have no issuing rights.[31] These states are not considered part of the eurozone by the ECB. However, sometimes the termeurozone is applied to all territories that have adopted the euro as their sole currency.[32][33][34] Further unilateral adoption of the euro (euroisation), by both non-euro EU and non-EU members, is opposed by the ECB and EU.[35]
Historical eurozone enlargements and exchange-rate regimes for EU members
The chart below provides a full summary of all applyingexchange-rate regimes forEU members, since the birth, on 13 March 1979, of theEuropean Monetary System with itsExchange Rate Mechanism and the related new common currencyECU. On 1 January 1999, the euro replaced the ECU 1:1 at the exchange rate markets. During 1979–1999, theDeutsche Mark functioned as a de facto anchor for the ECU, meaning there was only a minor difference between pegging a currency against the ECU and pegging it against the Deutsche Mark.
The eurozone was born with its first 11 member states on 1 January 1999. The firstenlargement of the eurozone, to Greece, took place on 1 January 2001, one year before the euro physically entered into circulation. The next enlargements were to states whichjoined the EU in 2004, and then joined the eurozone on 1 January of the year noted: Slovenia in 2007, Cyprus in 2008, Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014, and Lithuania in 2015. Croatia, whichacceded to the EU in 2013, adopted the euro in 2023.
All new EU members joining the bloc after the signing of theMaastricht Treaty in 1992 are obliged to adopt the euro under the terms of their accession treaties. However, the last of the five economicconvergence criteria which need first to be complied with in order to qualify for euro adoption, is the exchange rate stability criterion, which requires having been an ERM-member for a minimum of two years without the presence of "severe tensions" for the currency exchange rate.
In September 2011, a diplomatic source close to the euro adoption preparation talks with the seven remaining new member states who had yet to adopt the euro at that time (Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Poland, and Romania), claimed that the monetary union (eurozone) they had thought they were going to join upon their signing of the accession treaty may very well end up being a very different union, entailing a much closer fiscal, economic, and political convergence than originally anticipated. This changed legal status of the eurozone could potentially cause them to conclude that the conditions for their promise to join were no longer valid, which "could force them to stage new referendums" on euro adoption.[36]
Before joining the eurozone, a state must spend at least two years in theEuropean Exchange Rate Mechanism (ERM II). As of January 2023, the central bank of Denmark and the Bulgarian central bank participate in ERM II.
Denmark obtained a specialopt-out in the originalMaastricht Treaty, and thus is legally exempt from joining the eurozone unless its government decides otherwise, either by parliamentary vote orreferendum. The United Kingdom likewise had an opt-out prior towithdrawing from the EU in 2020.
The remaining six countries are obliged to adopt the euro in future, although the EU has so far not tried to enforce any time plan. They should join as soon as they fulfill the convergence criteria, which include being part of ERM II for two years.Sweden, which joined the EU in 1995 after the Maastricht Treaty was signed, is required to join the eurozone. However, the Swedish people turned down euro adoption in a2003 referendum and since then the country has intentionally avoided fulfilling the adoption requirements by not joining ERM II, which is voluntary.[37][38] Bulgaria joined ERM II on 10 July 2020.[39]
Interest in joining the eurozone increased in Denmark, and initially in Poland, as a result of thefinancial crisis of 2007–2008. In Iceland, there was an increase in interest in joining the European Union, a pre-condition for adopting the euro.[40] However, by 2010 the debt crisis in the eurozone caused interest from Poland, as well as the Czech Republic, Denmark and Sweden to cool.[41]
In the opinion of journalist Leigh Phillips andLocke Lord's Charles Proctor,[42][43] there is no provision in any European Union treaty for an exit from the eurozone. In fact, they argued, the Treaties make it clear that the process ofmonetary union was intended to be "irreversible" and "irrevocable".[43] However, in 2009, aEuropean Central Bank legal study argued that, while voluntary withdrawal is legally not possible, expulsion remains "conceivable".[44] Although an explicit provision for an exit option does not exist, many experts and politicians in Europe have suggested an option to leave the eurozone should be included in the relevant treaties.[45]
On the issue of leaving the eurozone, theEuropean Commission has stated that "[t]he irrevocability of membership in the euro area is an integral part of the Treaty framework and the Commission, as a guardian of the EU Treaties, intends to fully respect [that irrevocability]."[46] It added that it "does not intend to propose [any] amendment" to the relevant Treaties, the current status being "the best way going forward to increase the resilience of euro area Member States to potential economic and financial crises."[46] TheEuropean Central Bank, responding to a question by aMember of the European Parliament, has stated that an exit is not allowed under the Treaties.[47]
Likewise there is no provision for a state to be expelled from the euro.[48] Some, however, including the Dutch government, favour the creation of an expulsion provision for the case whereby a heavily indebted state in the eurozone refuses to comply with an EU economic reform policy.[49]
In a Texas law journal,University of Texas at Austin law professor Jens Dammann has argued that even now EU law contains an implicit right for member states to leave the eurozone if they no longer meet the criteria that they had to meet in order to join it.[50] Furthermore, he has suggested that, under narrow circumstances, the European Union can expel member states from the eurozone.[51]
The monetary policy of all countries in the eurozone is managed by theEuropean Central Bank (ECB) and theEurosystem which comprises the ECB and the central banks of the EU states who have joined the eurozone. Countries outside the eurozone are not represented in these institutions. Whereas all EU member states are part of theEuropean System of Central Banks (ESCB), non EU member states have no say in all three institutions, even those with monetary agreements such as Monaco. The ECB is entitled to authorise the design and printing ofeuro banknotes and the volume ofeuro coins minted, andits president is currentlyChristine Lagarde.
The eurozone is represented politically by its finance ministers, known collectively as theEurogroup, and is presided over by a president, currentlyPaschal Donohoe. The finance ministers of the EU member states that use the euro meet a day before a meeting of theEconomic and Financial Affairs Council (Ecofin) of theCouncil of the European Union. The Group is not an official Council formation but when the full EcoFin council votes on matters only affecting the eurozone, only Euro Group members are permitted to vote on it.[52][53][54]
Since the globalfinancial crisis of 2007–2008, the Euro Group has met irregularly not as finance ministers, but as heads of state and government (like the European Council). It is in this forum, theEuro summit, that many eurozone reforms have been decided upon. In 2011, formerFrench PresidentNicolas Sarkozy pushed for these summits to become regular and twice a year in order for it to be a 'true economic government'.[55]
In April 2008 inBrussels, futureEuropean CommissionPresidentJean-Claude Juncker suggested that the eurozone should be represented at theIMF as a bloc, rather than each member state separately: "It is absurd for those 15 countries not to agree to have a single representation at the IMF. It makes us look absolutely ridiculous. We are regarded as buffoons on the international scene".[56] In 2017 Juncker stated that he aims to have this agreed by the end of his mandate in 2019.[57] However,Finance CommissionerJoaquín Almunia stated that before there is common representation, a common political agenda should be agreed upon.[56]
Leading EU figures including the commission and national governments have proposed a variety of reforms to the eurozone's architecture; notably the creation of a Finance Minister, a larger eurozone budget, and reform of the current bailout mechanisms into either a "European Monetary Fund" or a eurozoneTreasury. While many have similar themes, details vary greatly.[58][59][60][61]
Comparison with economies of individual sovereign countries
Economy
Nominal GDP (billions in USD) – Peak year as of 2020
(01) United States(Peak in 2019)
21,439
(02) China(Peak in 2020)
14,860
(03)Eurozone(Peak in 2008)
14,188
(04) Japan(Peak in 2012)
6,203
(05) United Kingdom(Peak in 2007)
3,085
(06) India(Peak in 2019)
2,868
(07) Brazil(Peak in 2011)
2,614
(08) Russia(Peak in 2013)
2,289
(09) Canada(Peak in 2013)
1,847
(10) Korea(Peak in 2018)
1,720
(11) Australia(Peak in 2012)
1,569
(12) Mexico(Peak in 2014)
1,315
(13) Indonesia(Peak in 2019)
1,112
(14) Turkey(Peak in 2013)
950
(15) Saudi Arabia(Peak in 2018)
787
(16) Switzerland(Peak in 2019)
715
(17) Argentina(Peak in 2017)
643
(18) Taiwan(Peak in 2020)
635
(19) Poland(Peak in 2018)
585
(20) Sweden(Peak in 2013)
579
The 20 largest economies in the world including eurozone as a single entity, bynominal GDP (2020) at their peak level of GDP in billions US$. The values for EU members that are not also eurozone members are listed both separately and as part of the EU.[63]
Interest rates for the eurozone, set by the ECB since 1999.[65] Levels are in percentages per annum. Between June 2000 and October 2008, themain refinancing operations were variable rate tenders, as opposed to fixed rate tenders. The figures indicated in the table from 2000 to 2008 refer to the minimum interest rate at which counterparties may place their bids.[4]
The following table states the ratio ofpublic debt to GDP in percent for eurozone countries given by EuroStat.[66] Theeuro convergence criterion is to not exceed 60%.
Comparison of government surplus/deficit (2001–2012) of eurozone, United States and United Kingdom
The primary means for fiscal coordination within the EU lies in theBroad Economic Policy Guidelines which are written for every member state, but with particular reference to the 20 current members of the eurozone. These guidelines are not binding, but are intended to represent policy coordination among the EU member states, so as to take into account the linked structures of their economies.
For their mutual assurance and stability of the currency, members of the eurozone have to respect theStability and Growth Pact, which sets agreed limits ondeficits andnational debt, with associated sanctions for deviation. The Pact originally set a limit of 3% of GDP for the yearly deficit of all eurozone member states; with fines for any state which exceeded this amount. In 2005, Portugal, Germany, and France had all exceeded this amount, but the Council of Ministers had not voted to fine those states. Subsequently, reforms were adopted to provide more flexibility and ensure that the deficit criteria took into account the economic conditions of the member states, and additional factors.
TheFiscal Compact[70][71] (formally, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union),[72] is anintergovernmental treaty introduced as a new stricter version of theStability and Growth Pact, signed on 2 March 2012 by allmember states of the European Union (EU), except the Czech Republic, the United Kingdom,[73] and Croatia (subsequentlyacceding the EU in July 2013). The treaty entered into force on 1 January 2013 for the 16 states which completed ratification prior of this date.[74] As of 1 April 2014, it had been ratified and entered into force for all 25 signatories.
Olivier Blanchard suggests that a fiscal union in the eurozone can mitigate devastating effects of the single currency on the eurozone peripheral countries. But he adds that the currency bloc will not work perfectly even if a fiscal transfer system is built, because, he argues, the fundamental issue about competitiveness adjustment is not tackled. The problem is, since the eurozone peripheral countries do not have their own currencies, they are forced to adjust their economies by decreasing their wages instead of devaluation.[75]
Thefinancial crisis of 2007–2008 prompted a number of reforms in the eurozone. One was a U-turn on the eurozone'sbailout policy that led to the creation of a specific fund to assist eurozone states in trouble. TheEuropean Financial Stability Facility (EFSF) and theEuropean Financial Stability Mechanism (EFSM) were created in 2010 to provide, alongside theInternational Monetary Fund (IMF), a system and fund to bail out members. However, the EFSF and EFSM were temporary, small and lacked a basis in the EU treaties. Therefore, it was agreed in 2011 to establish aEuropean Stability Mechanism (ESM) which would be much larger, funded only by eurozone states (not the EU as a whole as the EFSF/EFSM were) and would have a permanenttreaty basis. As a result of that its creation involved agreeing an amendment to TEFU Article 136 allowing for the ESM and a new ESM treaty to detail how the ESM would operate. If both are successfully ratified according to schedule, the ESM would be operational by the time the EFSF/EFSM expire in mid-2013.
In February 2016, the UK secured further confirmation that countries that do not use theEuro would not be required to contribute to bailouts for eurozone countries.[76]
In June 2010, a broad agreement was finally reached on a controversial proposal for member states to peer review each other's budgets prior to their presentation tonational parliaments. Although showing the entire budget to each other was opposed by Germany, Sweden and the UK, each government would present to their peers and the Commission their estimates for growth, inflation, revenue and expenditure levels six months before they go to national parliaments. If a country was to run a deficit, they would have to justify it to the rest of the EU while countries with a debt more than 60% of GDP would face greater scrutiny.[77]
The plans would apply to all EU members, not just the eurozone, and have to be approved by EU leaders along with proposals for states to face sanctions before they reach the 3% limit in theStability and Growth Pact. Poland has criticised the idea of withholding regional funding for those who break the deficit limits, as that would only impact the poorer states.[77] In June 2010 France agreed to back Germany's plan for suspending the voting rights of members who breach the rules.[78] In March 2011 was initiated a new reform of theStability and Growth Pact aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules.[79][80]
In 1997,Arnulf Baring expressed concern that the European Monetary Union would make Germans the most hated people in Europe. Baring suspected the possibility that the people in Mediterranean countries would regard Germans and the currency bloc as economic policemen.[81]
In 2001,James Tobin thought that the euro project would not succeed without making drastic changes to European institutions, pointing out the difference between the US and the eurozone.[82] Concerning monetary policies, the system ofFederal Reserve banks in the US aims at both growth and reducing unemployment, while theECB tends to give its first priority to price stability under theBundesbank's supervision. As the price level of the currency bloc is kept low, the unemployment level of the region has become higher than that of the US since 1982.[82] Concerning fiscal policies, 12% of the US federal budget is used for transfers to states and local governments. The US government does not impose restrictions on state budget policies, whereas theTreaty of Maastricht requires each eurozone member country to keep its budget deficit below 3% of its GDP.[82]
In 2008, a study byAlberto Alesina andVincenzo Galasso found that the adoption ofeuro promotedmarket deregulation andmarket liberalization.[83][84] Furthermore, the euro was also linked to wage moderation, aswage growth slowed down in countries that adopted the new currency.[83]Oliver Hart, who received theNobel Memorial Prize in Economic Sciences in 2016, criticized the euro, calling it a "mistake" and emphasising his opposition to monetary union since its inception.[85] He also expressed opposition toEuropean integration, arguing that the European Union should instead focus ondecentralisation as it has "gone too far in centralising power".[85] In 2018, a study based onDiD methodology found that the adoption of euro produced no systematic growth effects, as no growth-enhancing effects were found when compared to European economies outside the eurozone.[86]
The eurozone has also been criticized for deepening inequality in Europe, particularly between the richest and poorest countries.[87] According to a study byBertelsmann Stiftung, countries such as Austria and the Netherlands benefited significantly from the common currency, while southern and eastern European members of the eurozone gained very little,[88] and some countries are considered to have suffered adverse effects from adopting the euro.[89] In an article forthe Politico,Joseph Stiglitz argues: "The result for the eurozone has been slower growth, and especially for the weaker countries within it. The euro was supposed to usher in greater prosperity, which in turn would lead to renewed commitment to European integration. It has done just the opposite — increasing divisions within the EU, especially between creditor and debtor countries."[89] Matthias Matthijs believes that the euro resulted in a "winner-take-all" economy, as national income differences between eurozone members have widened further.[90] He argues that countries such as Austria and Germany have gained from the eurozone at the expense of southern countries like Italy and Spain.[90]
By adopting the euro and abandoning their national currencies, eurozone countries gave up their ability to conduct independentmonetary policy; as such, monetary policies used to combat recession, such asmonetary stimulus orcurrency devaluation, are no longer available.[90] During theEuropean debt crisis, several eurozone countries (Greece, Italy, Portugal, Ireland, Spain, and Cyprus) were unable to repay their debt without third-party intervention by theEuropean Central Bank and theInternational Monetary Fund.[91] In order to grant the bailout, the ECB and the IMF forced the affected countries to adopt strictausterity measures.[90] The European bailouts were largely about shifting exposure from banks onto European taxpayers,[92][93][94] and exacerbated issues such as high unemployment and poverty.[95][96]
In 2019, a study from theCentre for European Policy concluded that while some countries had gained from adopting the euro, several countries were poorer than they would have been had they not adopted it, with France and Italy being particularly affected.[97][98] The publication prompted a large number of reactions, pushing its authors to put out a statement clarifying some points.[99] In 2020, a study from the University of Bonn reached a different conclusion: the adoption of the euro made "some mild losers (France, Germany, Italy, and Portugal) and a clear winner (Ireland)".[100] Both studies used thesynthetic control method to estimate what might have happened if the euro hadn't been adopted.
^The self-declaredTurkish Republic of Northern Cyprus is not recognised by the EU and uses theTurkish lira. However, the euro does circulate widely.[citation needed]
^abcFrench Pacific territories use theCFP franc, which is pegged to the euro at the rate of 1 franc to 0.00838 euro.
^The European Union internally uses the code EL for Greece, a deviation from theISO 3166-1 standard.
^Aruba is part of the Kingdom of the Netherlands, but not of the EU. It uses theAruban florin, which is pegged to the US dollar at the rate of 1 dollar to 1.79 florins.
^Dammann, Jens (10 February 2012). "The Right to Leave the Eurozone".U of Texas Law, Public Law Research Paper. 2013.48 (2).SSRN2262873.
^Dammann, Jens (26 August 2015). "Paradise Lost: Can the European Union Expel Countries from the Eurozone".Vanderbilt Journal of Transnational Law. 2016.49 (2).SSRN2827699.
^Figures from the October 2020 update of the International Monetary Fund'sWorld Economic Outlook Database.[1]Archived 20 January 2021 at theWayback Machine
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