Eurozone

The eurozone or EZ (also called euro area) is a zone which is distinguished from others in geographic and mostly economic ways since all of its members use euro as the national currency. The euro is regarded as the most liquid currency. The eurozone is the biggest economic area and comprises nineteen countries (all of them are members of the European Union): Spain, Slovenia, Slovakia, Portugal, Netherlands, Malta, Luxembourg, Lithuania, Latvia, Italy, Ireland, Ireland, Germany, France, Finland, Estonia, Cyprus, Belgium, Austria.

Origin of the Eurozone

The event, which contributed mostly to the appearance of the eurozone, is the creation of the European Union in 1992 through the signing of the Maastricht Treaty. Actually, it wasn’t really creation, but renaming of the European Community. However, even this fact had a great influence on numerous areas, such as better cooperation between countries, improving defense policy, and especially it provided impetus for further development of economic policy.

Considering developing economic policy, the EU set its sights on the creation of the union, which would have not only a common economy, but which may be called an economic and monetary union. There was no doubt that such a union needed a structure that would control it, for this purpose the European Central Bank was created. However, the mere structure wasn’t enough, thus, a common currency was introduced, which also had a unifying effect. The common currency is euro.

Thus, free capital movement was started in order to provide better cooperation between the countries, which are parts of the union, and between their national central banks.

Exceptional cases

There are some countries that are members of the European Union, but they aren’t members of the eurozone since their national currency isn’t euro. For example, Denmark still retains its currency as the national one. Although, it doesn’t mean that Denmark will never change it and become a part of the eurozone. The reason for keeping the national currency may be hidden in the desire to continue to be a financially independent country, while dealing with economic and monetary issues. There are other reasons for not joining the eurozone as well. Some countries can’t meet the required conditions to join.

However, there are totally opposite cases. Countries that aren’t members of the European Union, such as Andorra, Monaco, San Marino, and the Vatican City decided to adopt the euro. Thus, the EU gave the permission to issue euros and they became their national currency.

Requirements for joining the Eurozone

Countries can’t become members of the eurozone without completing four conditions that are essential to join the area.

Price stability. The criteria means that the average inflation mustn't exceed more than for 1.5 percent the 3 best-performing members’ level inflation.

Sustainable public finances. To meet this criteria the government is obligated to maintain the level of the budget deficit no more than 3 percent of GDP. Moreover the public debt can’t be more than 60 percent of GDP.

Durability of convergence. In order to meet this criteria a country must show that its interest rates don’t exceed the interest rates of the area members with the most stable prices for more than 2 percent.

Exchange rate stability. This criteria means that a country takes part in the Exchange Rate Mechanism II for no less than 2 years with no visible problems and no devaluing against the eurozone currency.

Meeting all of the described above criterias may make a country a member of the eurozone.