The formation of the European Union (EU) paved the way for a multinational financial system integrated under a single currency, the euro. Most EU member states agreed to adopt the euro, but a few, such as Denmark and Sweden, decided to continue using their own traditional currencies. This article explains why some EU countries are shunning the euro and how this could benefit their economies.
Important points
- There are 27 countries in the European Union, eight of which are not in the euro area and therefore do not use the euro.
- Eight countries have chosen to use their own currencies as a way to maintain financial independence on certain important issues.
- These issues include setting monetary policy, dealing with country-specific problems, dealing with national debt, adjusting for inflation, and choosing to devalue currencies in certain situations.
understanding the european union
There are currently 27 countries in the European Union, but eight of these countries are not part of the Eurozone, the unified currency system that uses the euro. Denmark is legally exempt from adopting the euro. All other EU countries must meet certain criteria to join the eurozone. However, countries have the right to postpone meeting the euro area standards and thereby postpone the introduction of the euro.
EU countries are diverse in culture, climate, population and economy. Each country has different fiscal needs and challenges to address. A common currency imposes a uniformly applied central monetary policy system. But the problem is that what's good for one eurozone country's economy can be terrible for another. Most EU countries that avoid the eurozone do so to maintain their economic independence. Here we take a look at the issues that many EU countries would like to address on their own.
Monetary policy planning
Since the European Central Bank (ECB) determines the economic and financial policies of all euro area countries, there is no independence for individual countries to develop policies tailored to their own circumstances.
The UK, a former EU member state, may have managed to recover from the 2007-2008 financial crisis by lowering domestic interest rates from October 2008 and launching a quantitative easing program in March 2009. be. In contrast, the European Central Bank waited until 2015 to start its quantitative easing program (which generates money to buy government bonds to stimulate the economy).
Addressing country-specific issues
Every economy has its own challenges. Greece, for example, is highly sensitive to changes in interest rates, as historically many mortgages have had variable rates rather than fixed rates. But Greece, bound by European Central Bank regulations, lacks the independence to control interest rates in the best interest of its people and economy.
On the other hand, the UK economy is also very sensitive to changes in interest rates. However, as a non-Eurozone country, it has been able to keep interest rates low through its central bank, the Bank of England.
8
Number of EU countries that do not use the euro as their currency. The target countries are Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, and Sweden.
lender of last resort
A country's economy is very sensitive to government bond yields. Non-euro countries have an advantage here too. They have their own independent central bank and act as the lender of last resort for the country's debt. If bond yields rise, these central banks will start buying bonds, thereby increasing market liquidity.
Eurozone countries have the ECB as their central bank, but in this situation the ECB does not purchase member country-specific bonds. As a result, countries like Italy are facing greater challenges due to rising bond yields.
A common currency offers advantages for euro area member states, but it also means that a central monetary policy system applies across the board. This uniform policy means that economic structures that are beneficial to one country may be introduced that are of little use to another.
Inflation control measures
When inflation rises in an economy, an effective response is to raise interest rates. Non-euro countries can do this through the monetary policy of independent regulators. Eurozone countries don't always have that option. For example, after the economic crisis, the European Central Bank raised interest rates due to concerns about high inflation in Germany. This move helped Germany, However, other euro zone countries such as Italy and Greece suffered under high interest rates.
currency devaluation
Countries may face economic challenges due to cyclical cycles of high inflation, high wages, declining exports, and declining industrial production. This situation can be effectively dealt with by devaluing the national currency, making exports cheaper, more competitive, and encouraging foreign investment. Non-euro countries can devalue their respective currencies if they wish. However, the euro area cannot change the valuation of the euro on its own. The euro's valuation affects 19 other countries and is managed by the European Central Bank.
Why do some EU countries choose not to take advantage of EU policies?
Some EU countries choose not to take full advantage of EU policies for a variety of reasons. Sovereignty concerns often play an important role, as some countries prefer to maintain greater control over the decision-making process. Some countries have different national interests, economic considerations and cultural factors that may not align with the EU's priorities and preferences.
What alternatives are there for a country to withdraw from full membership of the EU?
A country that withdraws from full membership of the EU may pursue an alternative relationship, such as an association agreement. You also have the option of joining certain EU programs.
How can countries participate in EU decision-making without full membership?
Countries can participate in EU decision-making without being full members through mechanisms such as observer status, consultative processes and strategic partnerships. What usually happens is that countries seek some degree of cooperation while maintaining a certain legal level of autonomy.
What economic advantages do countries see in maintaining their own currencies over adopting the euro?
Countries that maintain their own currencies rather than adopt the euro cite advantages such as greater control over monetary policy, the ability to independently respond to economic shocks, and flexibility in managing currency valuations. After all, countries may prefer to have more control over their responses to macroeconomic events.
conclusion
Eurozone countries initially prospered under the euro. A common currency eliminated exchange rate volatility (and associated costs), provided easy access to a large, monetaryly unified European market, and provided price transparency.
However, the financial crisis of 2007-2008 exposed some of the euro's pitfalls. Some eurozone economies were hit harder than others (such as Greece, Spain, Italy, and Portugal). Lacking economic independence, these countries were unable to set the best monetary policies to promote their recovery. The future of the euro depends on how EU policy develops to address national financial problems under a single monetary policy.
