Critical Analysis on European Sovereign Debt Crisis

Euro

The euro (sign: €; code: EUR) is the official and sole currency of the euro zone: 17 of the 27 member states of the European Union i.e. Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. These countries comprise the "euro zone", some 326 million people in total. It is also the currency used by the Institutions of the European Union and also used in a further five European countries. The euro was introduced to world financial markets as an accounting currency on 1st January 1999. Euro coins and banknotes entered circulation on 1 January 2002.

The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks in the euro zone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (e.g., credit cards, debit cards and cash machine withdrawals).The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones. Companies that hedge against this risk will no longer need to shoulder this additional cost. This is particularly important for countries whose currencies had traditionally fluctuated a great deal, particularly the Mediterranean nations.

Financial markets on the continent are expected to be far more liquid and flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the euro zone.

Another effect of the common European currency