What exactly is the Eurozone? It is easy to confuse the Eurozone and the European Union, but hopefully this blog post will sort out some of the discrepancies. Simply stated, the Eurozone, also called the euro area, is made up of 19 European countries that all use the euro as their currency. The European Central Bank is in charge of monetary issues for all 28 members of the European Union; however, it also plays a major role in leading the cooperation between the central banks of the Eurozone member countries. The euro has a strong international presence and plays a major role in the global financial and monetary markets.
Having a single currency across a large economic region has many advantages. A single currency not only eradicates fluctuating exchange rates and exchange costs, but also makes it easier for companies to conduct trade across borders. Additionally, it encourages people in the euro area to travel and make purchases in other countries that use the euro for currency. However, there are also disadvantages associated with having a single currency across many borders. Although having a single currency can smooth exchange rate fluctuations, economic problems in just a couple of member countries can have a negative impact on the euro exchange rate. Thus, Eurozone member states whose economies are running smoothly can be negatively affected by other member states’ economic woes.
The size and economic presence of the Eurozone has led international economic organizations like the G8 and International Monetary Fund (IMF) to view the euro-area economy as one entity. Essentially, this gives the Eurozone a stronger voice in the international community. Collectively, the euro area countries can have a lot of influence on the global economy, as the euro is regarded as the second most important international currency behind only the U.S. dollar.
There is no doubt that the euro is a global currency, as it is used extensively in international trade transactions and actively traded in foreign exchange markets. Stay tuned to the globalEDGE blog the rest of this week to learn more about the Eurozone and its member countries. Specifically, we will discuss the impacts of the European Central Bank’s quantitative easing strategy, the widening of the Eurozone trade surplus, the large cash outflow from the Eurozone, and the regional impact of a potential Greek exit from the euro area.