How the Euro Works

Advantages of the Euro

The euro is fundamentally a tool to enhance political solidarity. This political motivation began when the idea of the European Union and a single currency was first conceived. While it also has the economic effect of unifying the economies of participating countries, it ultimately does much more for the European Union.

Economically, the euro's advantages include:


  • Elimination of exchange-rate fluctuations - Any time either a consumer or a business made a commitment to buy something in a different country in the future (at future prices), they stood the chance of paying much more (or less) than they had planned. The euro eliminates the fluctuations of currency values across certain borders.
  • Price transparency - Being able to easily tell if a price in one country is better than the price in another is also a big benefit, both for consumers and businesses. With price equalization across borders, businesses have to be more competitive. Pricing still varies, but consumers can more easily spot a good deal -- or a bad one.
  • Transaction costs - This is particularly helpful for tourists and others who cross several borders during the course of a trip. Before, they had to exchange their money as they entered each new country. The costs of all of these exchanges added up significantly. With the euro, no exchanges are necessary within the Euroland countries.
  • Increased trade across borders - The price transparency, elimination of exchange-rate fluctuations, and the elimination of exchange-transaction costs all contribute to an increase in trade across borders of all the Euroland countries.
  • Increased cross-border employment - Not only can business be conducted across borders more easily, but people are more easily employable across borders. With a single currency, it is less cumbersome for people to cross into the next country to work, because their salary is paid in the same currency they use in their own country.
  • Simplified billing - Billing for services, products, or other types of payments are simplified with the euro.
  • Expanding markets for business - Business can expand more easily into neighboring countries. Rather than having to set up separate accounting systems, banks, etc. for transactions in countries other than their native one, the euro makes it simple to operate from a single central accounting office and use a single bank.
  • Financial market stability - On a larger scale, the financial and stock exchanges can list every financial instrument in euros rather than in each nation's denomination. This has further ramifications in that it promotes trade with less restriction internationally, as well as strengthens the European financial markets. Banks can offer financial products (loans, CDs, etc.) to countries throughout Euroland.
  • Macroeconomic stability - Because of the European Central Bank (ECB), introduction of the euro also helps to lower (and control) inflation among the EU countries.
  • Lower interest rate - Because of the decreased exchange-rate risk, the euro encourages lower interest rates. In the past, additional interest was charged to cover the risk of the exchange-rate fluctuation. This risk is gone with the introduction of the euro.
  • Structural reform for European economies - The participation requirements of the euro pushed many EU member states who wanted to participate to get their economies in shape and improve their economic growth. With the requirements of the Stability and Growth Pact, they will also have to maintain that control in the future, or face fines.