Euro Zone

Wouldn't it be nice to be able to go abroad and not have to exchange your currency for the local currency? It would be so much easier to compare the prices and cost of living in general as well as to make financial decisions. The Euro Zone is a group of countries in Europe that has adopted a common currency for the above-mentioned reasons and more! The caveat? Turns out, just like two sides of a coin, together with the named advantages come some disadvantages from being the member states of the Euro Zone. What are they? Well, you will have to stick around for a little longer to find out.

Euro Zone Definition

Euro Zone definition refers to the geographical and economic territory known as the Euro Zone, which is sometimes referred to by its official name, the euro area, and is comprised of all of the member states of the European Union that have adopted the euro completely as their national currency.

The European Union (EU) has 20 members that use the euro as their primary currency as of 2023. These countries are Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.¹ The territory that comprises the Euro Zone is home to around 340 million people. The Euro Zone was officially launched on the 1st of January 1999.²

When compared to other currencies, the euro is regarded as having one of the highest levels of liquidity. The Euro Zone is one of the most important economic regions in the world.

The currency of this area continues to advance over time and is now occupying an increasingly significant place in the reserves of many different central banks. It is often used as an illustration when students are learning about the trilemmas, which is a theory in economics that postulates that countries have three alternatives to choose from when deciding how to handle their monetary policy.

Euro Zone Economy

The Euro Zone economy takes its roots in the formation of the European Union, which advances common economic policy among the member states.

The European Union (EU) came into being as a result of the signing of the Maastricht Treaty in 1992 by the nations that made up the European Community (EC). The establishment of the European Union had significant repercussions in a few key areas. On the one hand, it fostered a higher degree of policy coordination and collaboration, but on the other, it had particular implications on citizenship, security, and military policy, as well as economic policy.

In terms of economic strategy, the Maastricht Treaty intended to establish a unified economic and monetary union. This would include the establishment of a central banking system known as the European Central Bank (ECB), as well as a common currency (the euro).

In order to do this, the treaty called for the free movement of capital between the member nations. This free movement of money eventually progressed into an increasing collaboration between national central banks and the growing alignment of economic policy among the member states. The last stage was the launch of the euro currency itself, which was followed by the establishment of a unified monetary policy governed by the European Central Bank (ECB). The most important stages of the formation of the EU are illustrated in Figure 1 below.

Fig. 1 - Important milestones in the formation of the EU

The Euro Zone Crisis

The Euro Zone crisis started to develop in the aftermath of the 2008 Financial Crisis. Euro Zone was no exception to the rest of the world, which was hit hard by the crisis. However, the roots of the Euro crisis go all the way back to the 2000s. Due to the housing boom, inflation became rampant due to excessive borrowing and lending. The countries most affected by inflation were Ireland, Portugal, Spain, Italy, and Greece. Higher inflation resulted in ever-increasing budget deficits, which the Euro Zone countries struggled to repay. The 2008 Financial Crisis exacerbated these problems as the countries had little to no control over their monetary policies as they were tied to the European Central Bank (ECB).

The first country to declare its dire financial situation was Greece, followed by Spain, Ireland, and Portugal. This resulted in periods of severe austerity and, eventually, bailouts by the IMF for the affected member states. In the aftermath of the Euro Crisis, regulation was implemented to prevent such episodes from ever occurring again in the future. A balanced budget is now a priority for all member states. The establishment of the Single Supervisory Mechanism serves this purpose as well.

Euro Zone Countries

The Euro Zone currently consists of twenty member states which are shown in Table 1 below.

There is a wider union between the countries in Europe which includes members that collaborate on their economic policies. This is known as the Economic and Monetary Union (EMU). The EMU consists of 27 member states, but as we have seen from Table 1 above, only 20 of them are using a common currency.¹

Euro Zone GDP

Let's take a look at the Euro Zone GDP between 2000 and 2021, as shown in Figure 2 below. Note that the figure below includes only 19 of the 20 member states.

Fig. 2 - Real GDP of the Euro Zone between 2000 and 2021. Source: FRED Economic Data³

Figure 2 above shows the real GDP for the Euro Zone member states between 2000 and 2021. Real GDP is presented in millions of chained 2010 Euros. It can be inferred that the Euro Zone had a stable GDP growth between 2000 and 2008. It had a significant decline in real GDP in the aftermath of the 2008 Financial Crisis. Further sluggish growth and a fall in GDP can be explained by the Euro Crisis. From 2014 onwards, the real GDP of the Euro Zone was growing once again until the end of 2019. This is when the global COVID-19 pandemic hit the Euro Zone economy, taking its real GDP to roughly the same value it was back in 2006. However, a rapid recovery provides an optimistic outlook for the growth of the economy of the Euro Zone.