Eurozone, also known as the euro area, is a group of 20 European Union (EU) nations that have adopted a common currency, the euro. The EU was formed in 1992, when 12 countries signed the Treaty on European Union (also called the Maastricht Treaty). That treaty also called for establishing a central bank and adopting a single currency. European Union members hoped that sharing a currency would help them create a more efficient and unified European economy. The Maastricht Treaty established a set of economic and political requirements, called convergence criteria, for EU countries adopting the euro. In 1998, the European Central Bank began operating.
By Jan. 1, 1999, 15 nations belonged to the EU. Eleven of those nations met the convergence criteria and formally adopted the euro. Of the 12 original signers of the Maastricht Treaty, Denmark and the United Kingdom chose not to adopt the common currency, and Greece adopted it two years later. The United Kingdom withdrew from the EU in 2020.
The countries that joined the eurozone in 1999 first fixed (coordinated) the exchange rates of their national currencies. An exchange rate is the rate at which the currency of one country is converted into the currency of another country. In 2002, the national currencies were retired and replaced with the euro. Today, 20 EU countries belong to the eurozone. The other 7 EU members continue to use their national currencies.
The governments of eurozone nations do not set their own monetary policy and exchange-rate policies. Monetary policy is the process by which a central bank controls a nation’s money supply. These policies are set by the European Central Bank, based in Frankfurt, Germany. Eurozone countries are, however, able to pursue independent economic policies through their fiscal policy and labor-market policy. Fiscal policy involves a country’s tax and spending programs. Labor-market policy includes such programs as aid for the unemployed.
The Maastricht Treaty did not establish procedures for a country to leave the eurozone and return to its own currency. The lack of such a mechanism created significant stress during the worldwide economic crisis that began in the first decade of the 2000’s. Several eurozone nations, including Greece, Italy, and Spain, struggled under policies that were set for the good of the eurozone as a whole. Those policies resulted in severe hardships for individual nations.
See also Euro; European Central Bank; European Union (EU).
