How the European Union Works


What Is the Euro?
An elderly person compares a current 100 German mark note to the new euro bank notes at a promotion of the euro in Berlin, in 2001. The euro entered public hands on Jan. 1, 2002. Sean Gallup/Getty Images

Starting in 1999, some EU member nations began adopting a common currency, the euro, to replace their own national currencies. As of 2018, 19 of the EU's 28 members — a group called the eurozone — use the euro. In addition to having the same paper money and coins, eurozone participants share a common central bank, the European Central Bank, which sets a common monetary policy for them all [source: Archick].

While having a common currency has advantages, in recent years it's become evident that there are major downsides as well. The eurozone nations still set their own fiscal policies, and essentially retain authority over their national spending, taxes and international borrowing. That can mean that if a national government mismanages its finances, problems can ripple through the eurozone system.

In the 2000s, for example, the Greek government borrowed heavily from international lenders to cover its budget and trade deficits. Greece's debt load grew so huge that by 2010, it was in danger of not being able to keep up the payments, which got the markets worried about other eurozone nations that also had high debt loads. And Greece could not devalue its currency nor cut interest rates to attract more business.

Eventually, the EU had to organize a bailout, which included having the European Central Bank purchase a lot of debt from those financially strapped countries and extend more credit. Some of the countries that received EU help eventually recovered. But Greece's economy and banking system kept struggling, and by 2015 its government was demanding more debt relief and an easing of austerity measures that it had been forced to accept. There even were rumblings that Greece might stage a "Grexit," though eventually, a deal was reached in 2017 that provided more assistance and averted a departure. Even so, the crisis raised questions about the eurozone's long-term stability [source: Archick].

Having a single currency makes things easier for trade and eliminates currency volatility but it can also make things harder when economies are in trouble. EU members who don't use the euro say that this allows them to set monetary policies customized for their country's conditions rather than for Europe as a whole. Some experts believe the U.K. was able to recover from the 2008 global financial crisis quicker than say, Greece, because it could cut interest rates immediately.

EU members are required to enter the eurozone (i.e. use the euro) once they meet the requirements of admission. But they can put off meeting the requirements, which effectively means they do not adopt the euro. The U.K. and Denmark are two EU members who don't use the euro [source: Seth].

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