What Is The Eurozone?
The eurozone, or euro area, is a confederation of European Union (EU) nations that have adopted the euro (EUR) as their official currency.
As of November 2019, 19 countries populated the eurozone: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
History Of The Eurozone
The modern EU dates back to December 1991 and the European Council Summit held at Maastricht, the Netherlands. At Maastricht, the framework for an economic, political and currency union was put forth and agreed upon by future members of the EU. In addition, requirements for a member country to adopt the EUR as their domestic currency were outlined:
- Yearly deficits must not exceed 3% of GDP
- Public debt must fall beneath 60% of GDP
- Inflation rates must fall within a 1.5% band of the three EU members with the lowest inflation rates
- Long-term interest rates must fall within a 2% band of the bottom three EU interest rates
Upon the euro's launch on 1 January 1999, EU nations began considering the prospects of adopting the currency in a functional capacity. Following an introductory 3-year trial-term where it was used exclusively for accounting and electronic payment purposes, the EUR was ready to enter circulation.
On 1 January 2002, EUR banknotes and coinage were introduced into Europe's monetary system. Twelve EU nations initially adopted the EUR, conducting the largest currency changeover in history. Upon the changeover being completed, the original incarnation of the eurozone was formed.
Economics And Monetary Policy
Aside from the United Kingdom (as of this writing, still a member of the EU), the largest economies in the EU are included in the eurozone. For 2017, eurozone nations generated a majority of the EU's GDP led by Germany (21.3%), France (14.9%), Italy (11.2%) and Spain (7.6%).
Although 19 of the 28 EU members have adopted the euro, others have not yet met the criteria for EUR introduction or have chosen to opt-out:
- Awaiting Qualification: Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Sweden
- Opt-Out: Denmark, United Kingdom
In total, the eurozone boasts a population of 341.9 million people and a total land mass of 2.6 million square kilometers. While there is no centralised political or fiscal regulations governing the nations of the eurozone, monetary policy is managed by the European Central Bank (ECB). The mission statement of the ECB is as follows:
"The ECB and the national central banks together constitute the Eurosystem, the central banking system of the euro area. The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro."
In order to promote pricing stability and the integrity of the euro, the ECB is commissioned with several monetary system functions. Among them are banking supervision, issuance of banknotes, market research, and fostering international and European cooperation. The primary tools by which the ECB advances pricing stability are through the adjustment of short-term interest rates and preserving liquidity in the interbank lending market.
This page was last updated on 9th January 2020.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…