What Is the Euro?

Can the Euro Work?

The euro is the world's second most popular currency. (Photo Credit Jasper Juinen / Getty Images).

Definition: The euro is the form of money for 332 million Europeans. It's used like the dollar is for the United States with one significant difference. The euro is shared by the 19 separate member countries of the Eurozone. That complicates management of the currency. 

The euro was initially proposed to unify the entire 27-member European Union (EU). In fact, all 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 are set out by the Maastricht Treaty.

Eurozone Countries

The EU introduced the euro in 1999. Eleven nations adopted it right away. By 2015, there were the following 19 members: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Many non-EU countries also adopted the euro. These include Montenegro, Vatican City, and Monaco. Also, 14 African nations that were former French colonies adopted the euro when the franc went away. Iran, the world's fourth-largest oil producer, uses euros for all foreign transactions, including oil. Iran has converted all dollar-denominated assets held in foreign countries to the euro.

Euro Advantages

Countries receive many benefits to 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 than 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 larger countries benefited even more from the euro. Their companies were larger, and so could produce more at a lower cost. They exported these cheap goods to the smaller eurozone nations, which couldn't compete.

These companies also profited from investing cheaply in the smaller economies. This increased investment meant prices and wages rose in the smaller countries, but not the larger ones. That made the businesses in the larger countries even more competitive. 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.

Euro Disadvantages

With all these advantages, why haven't the remaining EU members adopted the euro? (As of 2016, these countries were: Bulgaria, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom.)

Some countries are reluctant to give up some authority over their monetary and fiscal policies when they join the eurozone. That's because 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 deficits less than 3% of their GDP, and their debt-to-GDP ratio must be less than 60%. Others simply haven't been able to cut spending enough to meet this criterion.

Euro Conversion

The value of the euro depends on how many dollars, pounds, or other currency it can be converted to. The current exchange rate measures that. 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 vs 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. To find out the current exchange rate for the euro, visit the ECB web site.

Euro vs Dollar

The euro to U.S. dollar conversion means how many dollars the euro can buy at any given time.

When the euro was launched in 2002, it was worth $.87. Its value grew as more people used it through the years. It reached its maximum value 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 to a global recession, investors fled back to the relative safety of the dollar. By June 2010, the euro was only worth $1.20. Its value increased to $1.45 during the U.S. debt crisis in the summer of 2011. By 2015, it had fallen to $1.12. (Source: Federal Reserve)

Eurozone Crisis

In 2009, Greece announced it might default on its debt. Since then, the EU has reassured investors that it will guarantee the debt of all eurozone members. At the same time, it wants indebted countries to install austerity measures to ratchet down their debt. In two years it's taken for the EU to develop a response, the Greek debt crisis escalated into the potential for sovereign debt defaults from Portugal, Italy, Ireland and Spain. Some say the future of the euro and the EU itself is still at risk.

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. 

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.