How the Eurozone’s History Challenges Common Fears About the Single Currency

The eurozone stands as both a geographical and economic region made up of European Union member states that have adopted the euro as their official currency. Its foundation was laid in 1992 with the Maastricht Treaty, which formally established the European Union and set the stage for a common economic and monetary union. This union includes a central banking system, a single currency, and an integrated economic area.

By 2025, the eurozone will encompass 20 EU countries, including Austria, Belgium, Germany, Greece, and others, home to around 340 million people. Despite this expansion, not all EU members are part of the euro area; some prefer to keep their own currencies to retain financial sovereignty.

To join the eurozone, countries must meet strict criteria involving price stability, responsible public finances, sustainable economic convergence, and stable exchange rates. This ensures that new members align closely with the economic performance of existing members, maintaining the overall stability of the zone.

The Maastricht Treaty was a milestone, marking the official creation of the EU and pushing for deeper cooperation in policy areas such as citizenship, security, defense, and notably economic policy. It introduced the goal of a single economic and monetary union governed by the European Central Bank (ECB) and the euro currency. The treaty also encouraged free movement of capital among member states, paving the way for close coordination of national central banks and economic policies, culminating in the euro’s introduction and the ECB’s control over monetary policy.

Some EU members have opted out of the eurozone, such as Denmark, while others have yet to meet the criteria to join. Additionally, a few non-EU countries - Vatican City, Andorra, Monaco, and San Marino—use the euro under special monetary agreements with the EU, allowing them to issue euro coins within certain limits.

To meet eurozone entry requirements, countries must demonstrate stable prices with inflation no more than 1.5% above the three best-performing member states. Their budget deficits must not exceed 3% of GDP, and public debt must stay below 60% of GDP. Long-term interest rates must also remain close to those of top-performing states, and nations must participate in the Exchange Rate Mechanism II for at least two years without major currency fluctuations.

The ECB plays a crucial role in managing the eurozone’s monetary policy. It sets key interest rates and regulates the euro’s supply with the primary objective of maintaining price stability - aiming for about 2% inflation over the medium term to avoid deflation. The ECB’s Governing Council, consisting of six Executive Board members and a rotating group of 15 national central bank governors, makes these policy decisions. The ECB president, elected for a single eight-year term, represents the bank internationally. Since its inception, the ECB has been led by Wim Duisenberg, Jean-Claude Trichet, Mario Draghi, and currently Christine Lagarde.

Despite some hesitation among countries about adopting the euro, the currency offers a safeguard against economic collapse. Yannis Stournaras, governor of the National Bank of Greece, argued that leaving the eurozone during Greece’s financial crisis would have devastated the country’s economy, possibly reducing it to conditions like Syria’s.

The eurozone’s membership has grown steadily since its launch in 1999, starting with countries like Austria, Belgium, Germany, and others. Greece joined in 2001, followed by Slovenia in 2007; Cyprus and Malta in 2008; Slovakia in 2009; Estonia in 2011; Latvia in 2014; Lithuania in 2015; and most recently Croatia in 2023. This steady enlargement reflects ongoing efforts to build a more unified economic space across Europe.

Source: BGNES