What is the Euro?

Feb 10 08:39 2012 Steven Hart Print This Article


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The Euro is the world’s second most important currency after the US dollar. Unlike most currencies which are issued by national governments the Euro is issued by a regional body called the European Union. The Euro is issued by the European Central Bank which has the same role as the Federal Reserve Bank in the United States. The Euro has taken the place of national currencies in 17 of the 27 European nations that make up the European Union.

 

The Euro was created in 1999 and it has taken the place of a number of European currencies including the German Deutschmark, the French Franc and the Italian Lira. Some observers consider the Euro as an extension of the now defunct German currency or Deutschmark. Germany is the largest and richest nation in the European Union.

 

European nations can decide whether to use the Euro or not. The most important nation not adopt the Euro is the United Kingdom or Great Britain. Britain still uses its traditional national currency the pound sterling. Some other European countries including Switzerland and Sweden remain outside the Euro system which is sometimes called the Euro Zone.

 

Why the Euro is So Important

The Euro is considered to be one of the world’s most important economic indicators because it is the main currency in the world’s largest and richest trading area: Europe. The value of the Euro reflects the economic health of Europe and the amount of commerce being conducted there.

 

If the value of the Euro falls it can be seen as an indicator of poor economic health. That could mean that Europeans are buying less which can hurt the United States which relies heavily on European trade for its economic success. It can hurt the US in another way because other nations that trade with Europe such as China will have less money to spend on US goods if they get less from Europe.

 

The Euro is also one of the lynchpins of the international currency trading system or Forex which determines the value of currency. It is widely used in international business so the volume of Euro trading and the currency’s value can be seen as an indicator of global economic health.

 

European Debt Crisis

Between 2009 and 2012 the Euro’s reputation was badly damaged by the European debt crisis. This occurred because a number of European nations including Greece, Italy, Portugal, Spain and Ireland had accumulated national debts that they could not pay off. This undermined the value of the Euro and threatened the European system.

 

Part of the reason why the crisis had such repercussions was that it was widely expected that wealthier European nations like Germany would have to spend part of their money to bail weaker nations out. Another problem was that the crisis bred social unrest in some nations.

 

The inability of European nations to resolve this country made it appear that the European Union and some of its member nations were dysfunctional. This undermined faith in the Euro and its value.

 

Despite the crisis the Euro continues to be widely used and accepted. Part of the reason it is so widely accepted is that the Euro is seen to be backed by Germany which is considered to be one of the world’s most prosperous and fiscally sound nations. Therefore the only way the Euro could collapse or disappear is if Germany would pull out of the European Union or abandon the Euro. That is not likely even though some nationalists in Germany have demanded it.

 

A more likely outcome of the debt crisis would be for Germany to become more powerful in Europe and the strength of the Euro to increase. The demise of the Euro is unlikely because there appears to be no alternative to it.

 

 

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Steven Hart
Steven Hart

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Definition, Annuity Rate, and Best Annuity Rates.

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