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 are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Answer >>
  2. Why do forex traders use a currency converter?

    All currencies are quoted in pairs - one country's currency against another country's currency. A currency converter is used ... Read Answer >>
  3. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
  4. How does inflation affect the exchange rate between two nations?

    Countries attempt to balance interest rates and inflation, but the interrelationship between the two is complex and can influence ... 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. Investing

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  4. Trading

    How You Can Benefit From A Weak Euro

    Things can change quickly in the foreign exchange market, so consumers might want to act quickly to take advantage of the falling euro.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Investing

    3 Strategies to Mitigate Currency Risk (EUFX)

    Discover the often overlooked risk known as currency risk, and learn three strategies to mitigate or eliminate it in your portfolio.
  10. Trading

    How to Calculate an Exchange Rate

    Struggling to get a grasp on exchange rates? Here's what you need to know.
RELATED TERMS
  1. Euro

    The euro is the official currency of 19 members of the European ...
  2. Currency Union

    A currency union is where more than one country or area shares ...
  3. Currency Pair: EUR/USD (Euro/U.S. Dollar)

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

    Currency is a generally accepted form of money, including coins ...
  5. Conversion Rate

    The ratio at which one currency can be exchanged for another. ...
  6. European Monetary System - EMS

    A 1979 arrangement between several European countries which links ...
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present values of cash inflows and outflows. Used in capital budgeting ...
  2. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
Trading Center