The importance of the euro

Taylor Reynolds, BridgeTower Media Newswires

You may think the euro has been around for many decades; however, that is not true. The euro was first introduced to the financial markets in 1999 and banknotes began circulating in 2002. The Eurozone consists of 19 countries in Europe that use the euro as their official currency. In contrast, the European Union is broader with 28 countries, consisting of all the countries in the Eurozone plus a handful of other European nations. The European Union was created to provide economic growth and political cohesiveness to the region.

Ultimately, the euro helped create a single financial market across Europe, which was highly desirable to maximize the flow of capital across the area’s many countries that had previously operated with multiple different currencies. The creation of the euro was also desirable because of the high number of political agendas across each country. Thus, the single currency homogenized the region and resulted in monetary efficiency across the Eurozone countries.

Today, if you drive across Europe, you can put a charge on your debit card with minimal problems. This was not easily done 20 years ago. Twenty years ago, the euro did not exist and countries like Germany and France had their own currencies. In order to complete the transaction there would be costly currency exchange fees that lacked transparency. Or, even worse, you might not have been able to make the transaction. This is one of the many barriers the euro took down.

The euro has also removed cross-border boundaries. Capital is free to flow from one nation to the next more freely, there is more capital to allocate as well. When the European countries combine their capital, it is advantageous because it keeps borrowing costs low. Entrepreneurs are able to take out a bank loan at a competitively low interest rate.
Cheap borrowing causes companies to invest more, creating more employment and economic growth.

The euro also creates competition between financial intermediaries. For example, more banks accept euros and because they want deposits to incentivize depositors into opening accounts with them. If one bank is charging to have a checking account and another bank offers free checking, many consumers will choose the free option. The existence of the euro causes this competition between the banks.

In 2016, “Brexit” happened. The United Kingdom of Great Britain voted to leave the European Union. This caused cross-border transactions and currency exchange rates to be less transparent and more costly. It will also make it more difficult for capital to flow between Great Britain and the euro nations. This is just one of the reasons why the euro was created in the first place — to tear down the walls and allow for cross-border capital to flow more freely.

The Eurozone may not be perfect, but it has helped to create a strong financial market across Europe and has spurred economic growth. Although Brexit was a surprise to some, it represents what could happen if political tension arises and irrational human behavior is present.

As the old adage goes: “United we stand, divided we fall.” Europe is stronger together than separated. The European Union is a unique relationship among European nations, and the euro is a strong foundation to further economic growth and prosperity in the region.

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Taylor Reynolds is an equity analyst for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, (585) 586-4680.

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