A:

On January 1, 1999, the European Union introduced its new currency, the euro. Originally, the euro was an overarching currency used for exchange between countries within the union while people within the countries continued to use their own currencies. Within three years, however, the euro was established as an everyday currency and replaced the domestic currencies of many member states. Although the euro is still not universally adopted by all the member states as the main currency, most of the holdouts peg their currency in some way against the euro.

The euro provided several economic advantages to the citizen of the EU. Travel was made easier by removing the need for exchanging money, and more importantly, the currency risks were removed from European trade. Now a European citizen can easily identify the best price for a product from any company in member nations without first running each price through a currency converter. This makes prices across the EU transparent and increases the competition between members. Labor and goods can flow more easily across borders to where they are needed, making the whole work more efficiently.

Of course, the euro is not without controversy. Many smaller member nations believe the system is tilted in the favor of large nations. While this may be true, the benefits of being a member outweigh the negatives, and there is no shortage of nations seeking membership. The biggest benefit of the euro is that it is managed by the European Central Bank. The ECB has to balance the needs of all the member nations and therefore is more insulated from political pressure to inflate or manipulate the currency to meet any one nation's needs. The problem with Europe before the euro, specifically with the European Exchange Rate Mechanism meltdown, was countries altering their own currencies to meet short-term economic needs while still expecting foreign nations to honor the increasing unrealistic exchange rates. The euro has removed much, but not all, of the politics from the European currency markets , making it easier for trade to grow.

For more, read How Did George Soros break The Bank of England?, Forex: Making Sense Of The Euro/Swiss Franc Relationship and Using Currency Correlations To Your Advantage.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. How do you make money trading money?

    How someone makes money in forex is a speculative risk: you are betting that the value of one currency will increase relative ... Read Answer >>
  2. Why doesn't England use the euro?

    Understand why the United Kingdom has opted to not join the eurozone in adopting the euro over the pound sterling as its ... Read Answer >>
  3. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ... Read Answer >>
  4. Are eurodollars related to the currency called the euro?

    Eurodollars have little to do with the official currency of the European Union, the euro (EUR). In 1999, the euro was implemented ... Read Answer >>
Related Articles
  1. Investing

    Buying Euros as a Long-Term Investment: Risks and Rewards

    Learn about the potential risks and rewards of long term investing in the euro and the current status of the European Union's financial markets.
  2. Trading

    Why the Euro Failed to Become the World's Reserve Currency

    Examine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
  3. Trading

    Behind The Euro: History And Future

    The euro was designed to create economic parity among eurozone nations. Discover where it's going and where it's been.
  4. Trading

    How Do You Make Money Trading Money?

    Making money in the foreign exchange market is a speculative process. You are betting that the value of one currency will increase relative to another.
  5. Insights

    What Are The Advantages Of Not Adopting The Euro?

    European Union countries that do not use the euro have a few advantages over eurozone countries. Investopedia explores how.
  6. Trading

    The Impact Of Currency Conversions

    Will a rising or falling dollar hurt you or your company? In this article we explore the impact of currency converisons on consumers, comanies, and countries.
  7. Trading

    How Are International Exchange Rates Set?

    International exchange rates show how much one unit of a currency can be exchanged for another currency.
  8. Insights

    Disbanding The Euro - A Worst-Case Scenario

    What would the fallout be if the world's second-largest currency disappears?
  9. Tech

    How Would The Euro Trade If If A Grexit Occurs?

    In the event of a Grexit, the euro could head towards parity with the USD.
  10. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
RELATED TERMS
  1. Currency Pair: EUR/USD (Euro/U.S. Dollar)

    The abbreviation for the euro and U.S. dollar (EUR/USD) pair ...
  2. Currency

    Currency is a generally accepted form of money, including coins ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank ...
  4. European Monetary System - EMS

    A 1979 arrangement between several European countries which links ...
  5. Counter Currency

    The currency used as the reference or second currency in a currency ...
  6. Soft Currency

    A currency with a value that fluctuates as a result of the country's ...
Hot Definitions
  1. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  2. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  5. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  6. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
Trading Center