Adoption of the Euro: Pros and Cons - Special Academic Support

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As the official currency used by the 27 member states of the European Union (EU), the euro is one of the main currencies traded by market participants and has an influence on global markets. Although it was launched since January 1, 1999, physically the euro was used on January 1, 2002. Since its introduction, only 19 member of European Union countries have directly used the euro as official currency and 8 other countries still use their local currency. Why don’t all EU countries use the euro? Does the euro really fulfil its purposes for EU? Of course, there are certain reasons and policies that will affect each country. This paper will discuss the pros and cons of the euro adoption from an economic point of view.

The formation of the euro currency and the Maastricht Agreement were related to an agreement at the meeting of European countries in Rome in 1957, which planned the formation of a common market and military unification. This plan is expected to have multiple functions; increase trade and safeguard against European countries from losses of dollars in the international monetary system. The euro is the currency used in 19 member states of the European Union. On an official basis, this currency began to be used on January 1, 1999, but was physically used started on January 1, 2002. The euro from one country may be used in any European country that joins another single euro currency.

There are nineteen member states of the European Union that use the euro as currency. The area where this currency is used is known as the Eurozone. The first eleven countries started using it in early 1999. Greece is the 12th user since early 2001. Starting January 1, 2007 Slovenia has joined. Cyprus and Malta have been using since January 1, 2008. Slovakia followed by using the euro in 2009. Estonia adopt euro in 2011, Latvia in 2014 and most recently Lithuanian in 2015. The countries using this currency are: Germany, Ireland, The Netherlands, France, Luxembourg, Austria, Finland, Belgium, Italy, Portugal, Spain, Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia, Lithuania. In addition, several small countries also use the euro: Andorra, Monaco, San Marino, The Vatican. Some regions are also allowed to use the euro as currency: Montenegro and Kosovo.

It is hoped that the presence of the euro as a cross-border trade transactions in the European region for European Union countries is expected to reduce dependence on the US dollar. This is due to the dominance of the circulation of the US dollar not only in the European region but also in the international world. This situation underlies the leaders to form a new currency as a competitor to the US dollar in international trade.

To coordinate monetary policy, the Eurozone formed the euro-system. It consists of the European Central Bank (ECB) and the central banks of member countries. The main objective of the monetary authority is to maintain price stability, maintain financial stability and promote financial integration.

The ECB is chaired by a president and a board, which consists of the heads of the central banks of the member countries. One of the main tasks of the ECB is to keep inflation in eurozone countries under control. The inflation rate target is around 2% as November 2020. In the context of economic reforms after the 2008 global financial crisis, the eurozone set provisions to provide loans to member countries in times of emergency.

The economy is one of the most important factors in every country, because if a crisis occurs in a country, it will have a negative impact on the country’s economic and financial stability. Therefore, financial and trade issues that can worsen macroeconomics globally must be addressed as soon as possible.

Member countries coordinate economic policies to achieve sustainable economic growth rates and high employment opportunities. The scope of economic coordination includes fiscal, monetary, single market operations and supervision of financial institutions.

Meanwhile, the national governments of member countries still have control over elements such as: the government budget, tax, pension system, labor regulations and capital market regulations.

In fiscal management, the Stability and Growth Pact (SGP) requires fiscal discipline among members. The requirement is countries in eurozone should maintain a fiscal deficit less than 3% of GDP and a fiscal debt of less than 60% of GDP.

Even though it has been inaugurated as the official currency for more than 20 years in the European Union, it turns out that there are still 8 countries that have yet to make the euro as an official currency. Of course, there are certain reasons why the country still maintains its official currency. Economic factors are taken into consideration in this decision. Some of them do not want to move to the eurozone to maintain economic independence.

Macroeconomic Point of View

As the currency used in most of Europe, the euro has good credibility as one of the world’s currencies and is even one of the main currencies of foreign exchange reserves. According to the International Monetary Fund (IMF), the euro is used as the highest global currency reserves after USD. In addition, the stability of the euro makes transaction costs and currency hedges lower. With the existence of a single currency, transactions in the eurozone have much lower nominal exchange rate uncertainty.

When the euro serves as the currency in international trade, the transaction costs between countries will decrease. The flow of goods, services, capital and labor will be more efficient and integrated. Broader market access, domestic companies can sell goods and services freely to other countries with less risk from the currency point of view. Productivity between countries in the eurozone can increase. Including when there is an investment flow between member countries, there will be no risk of currency differences.

A relatively stable euro currency can help countries with a tradition of inflation, for example Italy. However, the stability and integration of trade in the eurozone does not have a significant effect on economic growth. Since the crisis that hit in 2008, economic growth in the Eurozone has not reached an average of 3%, even decreasing drastically in 2020 due to the effects of the Covid-19 pandemic.

Microeconomic Point of View

From the trade side in meeting people’s needs, the euro opens wider opportunities and increases competition. Companies from one eurozone country can meet the needs of another eurozone country. Demand increases and supply can be obtained from a wider range. The company not only competes with local competitors but also other member countries. Under these conditions, there will be price transparency, reducing monopolies, and increasing innovation.

Euro Crisis

On 2008, several years after the euro was launched, there was an economic crisis in a number of European countries such as Greece, Portugal, Ireland and Spain which was marked by sluggishness and large budget deficits. Along with that, the euro exchange rate also weakened compared to other currencies. This condition makes a number of countries such as Germany, which supports the provision of aid funds to save debt-ridden European countries, to worry about this funding overflow. On the other hand, the economic rescue program implemented by means of economic tightening has caused upheaval and popular protests.

The crisis storm experienced by European countries had a domino effect on other European countries. Ireland, Portugal, Hungary and Spain were dragged into the storm of the domestic economic crisis and even Ireland had to receive an injection of funds from the European monetary authority and the International Monetary Foundation (IMF) as a step to save Ireland into a further crisis. For this reason, a bailout is needed for financial stability in Europe, especially maintaining the value of the euro currency.

On the one hand, the Eurozone brings benefits and adds to the bargaining position of European countries. On the other hand, the countries of the Eurozone pose problems, such as a lack of adaptation from one country to another. This happens because not all countries agree on the monetary system in the economy following the eurozone system.

In the global economic order, especially in non-eurozone countries, there was no direct impact of the crisis and it does not mean that it does not exist. The biggest impact occurs on the people of non-eurozone countries who have difficulty accessing currency values and pressure on the banking sector. In addition to pressure from monetary and financial policies, these countries experience difficulties in importing countries, including Asia, because the level of multinational trade among European countries is very high.

Conclusion

Discussing currency is like the philosophy of a coin, there are two opposing sides. The existence of the single euro currency offers various conveniences in trade, investment, financial integration, and even tourism. Exchange rate risk has also decreased for all countries in the eurozone. However, in reality there are other countries in the EU that have not adopted the euro.

Countries that have not adopted the euro, apart from not meeting EU requirements from an economic point of view, also have other considerations. Turning to the Euro can be a tumultuous process if the economy is unstable from the start. Inflation is the risk and most worrying problem for countries in the transition process. In addition, a major change in the banking system is required. Countries that have their own currency have a national banking system that has the power to regulate the value of the currency and the number of banknotes printed, based on the country’s needs for various reasons, such as fighting inflation. After becoming part of the European Union, the country agreed to be managed by the European Central Bank.

Adopting the euro can also trigger a country’s stability including weak political commitment, various views on economic priorities within the country, and turmoil in international markets.

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