What is Eurozone?
The idea of what is eurozone may sound a bit strange to you. After all, you are probably thinking that a currency zone refers to the area around the world where currencies are issued and traded. In the case of the eurozone, the monetary union is actually a set of 19 country members that are in effect exchange markets. The common currency of the eurozone consists of the euro, the single most common currency in the world. You may not understand the significance of this currency, but you probably recognize it by its official symbol, the Euro.
The concept of what is eurozone is not as strange as it sounds. Just like any other group of countries in the world, there are many different things going on with each member of this common pool of humanity. One of these things is price stability. For a long period of time, the price level of a single currency never changes. That is until a new government comes into office or an economic or financial report indicates that the central bank will raise interest rates or that some form of monetary stimulus is being released.
The term “monetary union” is what is used to designate the eurozone. In addition to the low level of interest rates, there are also several other factors that contribute to the maintenance of a balanced trade within the eurozone. One of these is budgetary deficits. If a country’s government deficit exceeds the budgeted surplus, a member state has to choose what is called a “conventional course”. This means raising interest rates and other charges to offset the difference between the deficit and the level of total debt.
However, there is a way to make sure that the equilibrium is maintained. This is through the mechanism called a “scenario-specific cross-balance rule”. The European Central Bank can use one of its own funds to offset the effects of any increases in the budget deficit of a member state. For example, in order to maintain the Stability, Growth, and Debt Forecasting (GDF) forecast, the ECB can add a forward adjustment made within its own policy interest rates. In this way, the risks of market turbulence are reduced since the outcome of any increase in the deficits of various countries is largely dependent on the condition of their respective bond markets.
The second risk is related to the possibility of an exit from the eurozone by some of its member states officially called the “peripher countries”. Some of them have special agreements with the European Central Bank that allow it to finance the governments of its members. Such agreements are usually backed by a large majority of votes at the next regular European Council meetings. If the need for emergency funds is felt by some of these peripheral countries, the ECB can decide to use its own money in order to finance the government of such a country. The effect is that in case the need arises, it will be free to use its own money in order to overcome any difficulties arising out of an exit from the eurozone.
On the other hand, the threat that has been mentioned above is the risk of an exit from the eurozone, which may lead to a break up of the currency union. The main reason why a break up of the eurozone would be triggered is that one or more of its member states might start trying to re-establish a common economic policy. This can only come about if there is a need to regain competitiveness against the UK, which is considered to be the most important factor behind the introduction of the Common Market in the aftermath of the global financial crisis. The introduction of a Common Market was meant to stimulate competitiveness between member states, giving rise to a more liberal monetary policy. The introduction of the eurozone has actually made things worse for the UK economy because it has forced the country into a tighter credit squeeze.
One of the reasons why the possibility of a break up of the eurozone seems to be very high is that many of its member states are in a negative balance of their national debt. The common charges for borrowing money from fellow member states are considered to be an unfair system since they force the countries to pay more than they would like to. The countries that are in negative balances have to rely on external sources of finance just to pay for their deficits, leading them to struggle even harder against the backdrop of a failing economy. In addition, it is possible that the cost of insuring the financing of the debts of a peripheral country will rise above what it costs for the creditor countries to insure their own debt.
The core elements of what is eurozone comprise a common currency and a common financial supply. It also has the European Central Bank as a member and the European Stability Mechanism as a governing body. It should be noted that although the eurozone itself is not a legal tender and is not under the authority of a European Court, it is widely considered to constitute a legal body within the meaning of EU law. This means that if one or more member states ever feel that they are being pressured by their neighbour to join the eurozone, they can bring proceedings before the European Court of Justice.
