Eurozone

What Is the Eurozone?

The Eurozone is the group of European Union countries that use the euro as their official currency. Its formal name is the euro area. Membership is open to EU members that meet the economic conditions set out in the Maastricht Treaty and adopt the euro. EU members that have not joined, and countries outside the EU, keep their own currencies. The euro was introduced for electronic and accounting use in 1999 and as physical banknotes and coins in 2002.

Because member countries share one currency, they also share one monetary policy, set by the European Central Bank. The bank aims to keep inflation low and stable across the whole area. Individual member governments cannot set the area's interest rates or issue their own currency.

How It Works

The Eurozone is a form of currency union. Members give up their national currencies and the independent tools that came with them, such as adjusting the exchange rate against the euro. Each member still controls its own fiscal policy, meaning its taxes and spending, although shared rules such as the Stability and Growth Pact limit government deficits and debt.

Because all members use the same currency, prices and debt issued in euros are measured in one unit across the area. Sovereign bonds issued by member governments trade in the same currency, but their yields can still differ widely, since markets assess each government's ability to repay.

Why It Matters to Investors

For investors, the Eurozone shapes returns in several ways. Exchange-rate risk is lower for euro-denominated holdings within the area but still applies to investors based elsewhere. Stock and bond markets across member countries are closely linked to decisions by the central bank and to the economic health of the largest members. Financial strain in one member's public finances can affect the whole area, as the sovereign debt crisis of the early 2010s showed.

Supporters point to easier cross-border trade and price comparison. Critics note that members cannot use currency devaluation to adjust to a downturn, which can make recovery harder for individual countries.