The Euro, Which Countries Use It, Its Pros and Cons

Why Not Every EU Country Uses the Euro

1 Euro

The euro is the form of money for the 19 member countries of the eurozone. It's the second most widely used currency in forex trading after the U.S. dollar. It's also the second most widely held foreign exchange reserve used by central banks. As of the first quarter of 2019, foreign governments held $2.2 trillion compared to $6.7 trillion in U.S. dollar reserves. The International Monetary Fund (IMF) reports this quarterly in its COFER Table.

Like the dollar, the euro is managed by one central bank, the European Central Bank. But being shared by 19 countries complicates its management. Each country sets its own fiscal policy that affects the euro's value.

The euro was initially proposed to unify the entire European Union. All 28 member nations pledged to adopt the euro when they joined the EU. But they must meet budget and other criteria before they can switch to the euro. These were set out by the Maastricht Treaty. As a result, nine EU members have not adopted the euro. As of 2018, they were Bulgaria, Croatia, the Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, and the United Kingdom.

The euro symbol is €. Euros are divided into euro cents, each euro cent is one one-hundredth of a euro. There are seven denominations: €5, €10, €20, €50, €100, and €500. Each bill and coin is a different size. The bills also have raised print, while the coins have distinct edges. These features allow the visually impaired to distinguish one denomination from another.

Countries That Use the Euro

There are 23 countries that use the euro as of 2018. The eurozone consists of 19 members who are EU members and use the euro. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The non-EU countries are Andorra, Vatican City, and Monaco and San Marino.

Fourteen African nations peg their currency to the euro. They are former French colonies that adopted the CFA franc when France switched to the euro. They are Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Republic of Congo, Côte D’Ivoire, Equatorial Guinea, Gabon, Guinea-Bissau, Mali, Niger, Senegal, and Togo.

Iran prefers euros for all foreign transactions, including oil. Iran has the world's fourth-largest reserves of oil. It has converted all dollar-denominated assets held in foreign countries to the euro.

Euro Advantages

Countries receive many benefits for adopting the euro. Smaller ones have the advantage of being backed by Europe's powerhouse economies, Germany and France. The euro allows these weaker countries to enjoy lower interest rates. That's because the euro wasn't as risky to investors as a currency with less demand from users and traders. Over the years, these lower interest rates have led to more foreign investment. That boosted the smaller nations' economies.

Some say the more developed countries reaped greater rewards from the euro. Their larger companies could produce more at a lower cost, thus benefiting from economies of scale. They exported their cheap goods to the less-developed eurozone nations. Smaller companies couldn't compete.

These larger companies also profited from investing cheaply in the less-developed economies. That increased prices and wages in the smaller countries, but not the larger ones. The larger businesses gained even more of a competitive advantage. In a sense, the euro allowed them to export the inflation that typically comes with the expansionary phase of the business cycle. They enjoyed the benefits of high demand and production without paying the higher price.

Disadvantages

With all these advantages, why haven't the remaining eight EU members adopted the euro? Some countries are reluctant to give up some authority over their monetary and fiscal policies when they join the eurozone. Adopting the euro means countries also lose the ability to print their currency. That ability allows them to control inflation by raising interest rates or limiting the money supply.

They must keep their annual budget deficits less than 3% of their gross domestic product. Their debt-to-GDP ratio must be less than 60%. Many simply haven't been able to cut spending enough to meet this criterion.

Euro to Dollar Conversion

The euro to U.S. dollar conversion is how many dollars the euro can buy at any given time. The current exchange rate measures it. Forex traders on the foreign exchange market determine the exchange rate. They change on a moment-by-moment basis, depending on how traders assess the risk versus the rewards for holding the currency.

Traders base their assessment on a number of factors. These include central bank interest rates, sovereign debt levels, and the strength of the country's economy. The ECB website provides the current exchange rate for the euro. 

When the euro launched in 2002, it was worth $0.87. Its value grew as more people used it through the years. It reached its record high of $1.60 on April 22, 2008. Investors fled from dollar-denominated investments during the near-bankruptcy of investment bank Bear Stearns.

As it became apparent the U.S.-based subprime mortgage crisis had spread globally, investors fled back to the relative safety of the dollar. By June 2010, the euro was only worth $1.20. Its value rose to $1.45 during the U.S. debt crisis in the summer of 2011.

By December 2016, it had fallen to $1.03 as traders worried over the consequences of Brexit. It rebounded to $1.20 in September 2017 after traders grew frustrated with the lack of progress on President Trump's economic policies. It now stands at $1.11 as of August 2019. Traders are concerned about a global economic slowdown due to Trump's trade war.

Eurozone Crisis Impact

In 2009, Greece announced it might default on its debt. The EU reassured investors that it would guarantee the debt of all eurozone members. At the same time, it wants indebted countries to install austerity measures to ratchet down their spending. The Greek debt crisis threatened to spread to Portugal, Italy, Ireland, and Spain. The European economy has rebounded since then. But some say the eurozone crisis still threatens the future of the euro and the EU itself.

Euro History

The first phase of the euro launch occurred in 1999. It was introduced as the currency for electronic payments. These included credit and debit cards, loans and for accounting purposes. During this initial phase, old currencies were used for cash only. Eleven nations adopted it right away. They were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.

The second phase was launched in 2002 when euro coins and banknotes appeared in physical form. Each country has its own distinct form of the euro coin. 

The Bottom Line

After the U.S. dollar, the euro is the second most traded currency in the world. It is the currency of 19 countries in the European Union. It is managed by the ECB. The euro was created to facilitate and integrate the European economy.

As of 2019, twenty-five countries and five territories transact with the euro. Some of these use the euro even if they are not part of the EU. But other European countries such as the United Kingdom and Denmark, use their own currency. They have opted to set their own interest rates and monetary policies and maintain independence of their own economies. But in a financial crisis, they must manage their own without the assistance of the ECB.

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