Editing Euro (section)

==Economics==
[[File:Euro Monetary Policy.webp|thumb|299px|right|Euro [[Monetary policy]]
{{legend|#0076BA|Euro Zone inflation year/year}}
{{legend-line|#FFD932 solid 3px|M3 money supply increases}}
{{legend-line|#EE220C solid 3px|Marginal Lending Facility}}
{{legend-line|#970E53 solid 3px|Main Refinancing Operations}}
{{legend-line|#F27200 solid 3px|Deposit Facility Rate}}
{{legend-line|#FF95CA solid 3px|[[Euribor]]}}
]]

===Optimal currency area===
{{Further|Optimum currency area}}

In economics, an optimum currency area, or region (OCA or OCR), is a geographical region in which it would maximise economic efficiency to have the entire region share a single currency. There are two models, both proposed by [[Robert Mundell]]: the [[Optimum currency area#OCA with stationary expectations|stationary expectations model]] and the [[Optimum currency area#OCA with international risk sharing|international risk sharing model]]. Mundell himself advocates the international risk sharing model and thus concludes in favour of the euro.<ref>{{cite book|chapter=A Plan for a European Currency |date=1970 |orig-year=published 1973|last=Mundell |first=Robert|editor1=Johnson, H. G. | editor2= Swoboda, A. K. | title = The Economics of Common Currencies{{snd}} Proceedings of Conference on Optimum Currency Areas. 1970. Madrid. | publisher= Allen and Unwin | location = London |pages= 143–172 | isbn= 9780043320495}}</ref> However, even before the creation of the single currency, there were concerns over diverging economies. Before the [[late-2000s recession]] it was considered unlikely that a state would leave the euro or the whole zone would collapse.<ref>{{cite journal |ssrn=1014341 |title=The Breakup of the Euro Area by Barry Eichengreen |date=14 September 2007 |journal=[[NBER Working Paper]] |number=w13393|last1=Eichengreen |first1=Barry }}</ref> However the [[Greek government-debt crisis]] led to former [[British Foreign Secretary]] [[Jack Straw]] claiming the eurozone could not last in its current form.<ref>{{cite news|url=https://www.bbc.co.uk/news/uk-politics-13839381 |title=Greek debt crisis: Straw says eurozone 'will collapse' |work=[[BBC News]] |date=20 June 2011 |access-date=17 July 2011}}</ref> Part of the problem seems to be the rules that were created when the euro was set up. John Lanchester, writing for ''[[The New Yorker]]'', explains it: {{blockquote|The guiding principle of the currency, which opened for business in 1999, were supposed to be a set of rules to limit a country's annual deficit to three per cent of gross domestic product, and the total accumulated debt to sixty per cent of G.D.P. It was a nice idea, but by 2004 the two biggest economies in the euro zone, Germany and France, had broken the rules for three years in a row.<ref>John Lanchester, "Euro Science", ''The New Yorker'', 10 October 2011.</ref>}}

Increasing business cycle divergence across the Eurozone over the last decades implies a decreasing optimum currency area.<ref>{{cite journal | doi=10.1007/s11079-024-09750-z | title=Optimum Currency Area in the Eurozone | date=2024 | last1=Beck | first1=Krzysztof | last2=Okhrimenko | first2=Iana | journal=Open Economies Review | doi-access=free  |issn = 0923-7992 }}</ref>

===Transaction costs and risks===

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 eurozone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (e.g., [[credit card]]s, [[debit card]]s and [[cash machine]] withdrawals).

Financial markets on the continent are expected to be far more [[market liquidity|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 eurozone. However, although transaction costs were reduced, some studies have shown that [[risk aversion]] has increased during the last 40 years in the Eurozone.<ref>Benchimol, J., 2014. [https://ideas.repec.org/a/eee/reecon/v68y2014i1p39-56.html Risk aversion in the Eurozone], [[Research in Economics]], vol. 68, issue 1, pp. 40–56.</ref>

===Price parity===

Another effect of the common European currency is that differences in prices—in particular in price levels—should decrease because of the [[law of one price]]. Differences in prices can trigger [[arbitrage]], i.e., [[speculation|speculative]] trade in a [[commodity]] across borders purely to exploit the price differential. Therefore, prices on commonly traded goods are likely to converge, causing inflation in some regions and deflation in others during the transition. Some evidence of this has been observed in specific eurozone markets.<ref>{{cite journal |first1=Pinelopi K. |last1=Goldberg |first2=Frank |last2=Verboven |title=Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market |journal=Journal of International Economics |volume=65 |issue=1 |year=2005 |pages=49–73 |doi=10.1016/j.jinteco.2003.12.002 |citeseerx=10.1.1.494.1517 |s2cid=26850030 }}</ref>

===Macroeconomic stability===

Before the introduction of the euro, some countries had successfully contained inflation, which was then seen as a major economic problem, by establishing largely independent central banks. One such bank was the [[Bundesbank]] in Germany; the European Central Bank was modelled on the Bundesbank.<ref name="bundesbank">{{Cite book|title=The History of the Bundesbank: Lessons for the European Central Bank |last=de Haan |first=Jakob |year=2000 |publisher=Routledge |location=London |isbn=978-0-415-21723-1 |url=https://books.google.com/books?id=EaIV0OWlaokC}}</ref>

The euro has come under criticism due to its regulation, lack of flexibility and rigidity towards sharing member states on issues such as nominal interest rates.<ref>{{Cite journal|last=Silvia|first=Steven J|year=2004|title=Is the Euro Working? The Euro and European Labour Markets|jstor=4007858|volume=24|issue=2|pages=147–168|doi=10.1017/s0143814x0400008x|journal=Journal of Public Policy|s2cid=152633940}}</ref>
Many national and corporate [[bond (finance)|bonds]] denominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in national currencies. While increased liquidity may lower the [[nominal interest rate]] on the bond, denominating the bond in a currency with low levels of inflation arguably plays a much larger role. A credible commitment to low levels of inflation and a stable debt reduces the risk that the value of the debt will be eroded by higher levels of inflation or default in the future, allowing debt to be issued at a lower nominal interest rate.

There is also a cost in structurally keeping inflation lower than in the United States, United Kingdom, and China. The result is that seen from those countries, the euro has become expensive, making European products increasingly expensive for its largest importers; hence export from the eurozone becomes more difficult.

In general, those in Europe who own large amounts of euro are served by high stability and low inflation.

A [[monetary union]] means states in that union lose the main mechanism of recovery of their international [[Competition (companies)|competitiveness]] by weakening ([[Currency appreciation and depreciation|depreciating]]) their currency. When [[wage]]s become too high compared to [[productivity]] in the exports sector, then these exports become more expensive and they are crowded out from the market within a country and abroad. This drives the fall of employment and output in the exports sector and fall of [[Balance of trade|trade]] and [[Current account (balance of payments)|current account]] balances. Fall of output and employment in the tradable goods sector may be offset by the growth of non-exports sectors, especially in [[construction]] and [[Service (economics)|services]]. Increased purchases abroad and negative current account balances can be financed without a problem as long as [[credit]] is cheap.<ref>{{cite web |author1=Ernest Pytlarczyk, Stefan Kawalec |title=Controlled Dismantlement of the Euro Area in Order to Preserve the European Union and Single European Market |url=http://www.case-research.eu/en/controlled-dismantlement-of-the-euro-area-in-order-to-preserve-the-european-union-and-sing |publisher=CASE Center for Social and Economic Research |access-date=19 December 2018 |pages=11 |date=June 2012}}</ref> The need to finance trade deficit weakens currency, making exports automatically more attractive in a country and abroad. A state in a monetary union cannot use weakening of currency to recover its international competitiveness. To achieve this a state has to reduce prices, including wages ([[deflation]]). This could result in high [[unemployment]] and lower incomes as it was during the [[European sovereign-debt crisis]].<ref>{{cite journal |author1=[[Martin Feldstein]] |title=The Failure of the Euro |journal=Foreign Affairs |date=January–February 2012 |url=https://www.nber.org/feldstein/fa121311.html |at=Chapter: Trading Places}}</ref>

====Trade====
The euro increased price transparency and stimulated cross-border trade.<ref name="Eichengreen-2019">{{Cite book|last=Eichengreen|first=Barry|url=https://www.jstor.org/stable/j.ctvd58rxg|title=Globalizing Capital: A History of the International Monetary System|date=2019|publisher=Princeton University Press|isbn=978-0-691-19390-8|edition=3rd|pages=212–213|doi=10.2307/j.ctvd58rxg |jstor=j.ctvd58rxg|s2cid=240840930 }}</ref> A 2009 consensus from the studies of the introduction of the euro concluded that it has increased trade within the eurozone by 5% to 10%,<ref>{{cite web|url=http://www.ecb.de/pub/pdf/scpwps/ecbwp594.pdf |title=The euro's trade effects |access-date=2 October 2009}}</ref> and a [[meta-analysis]] of all available studies on the effect of introduction of the euro on increased trade suggests that the prevalence of positive estimates is caused by [[publication bias]] and that the underlying effect may be negligible.<ref>{{cite journal|title=Rose effect and the euro: is the magic gone? |journal=Review of World Economics |doi=10.1007/s10290-010-0050-1 |volume=146 |issue=2 |pages=241–261|year=2010 |last1=Havránek |first1=Tomáš |s2cid=53585674 |url=https://hal.archives-ouvertes.fr/hal-00582634/file/PEER_stage2_10.1007%252Fs10290-010-0050-1.pdf }}</ref> Although a more recent meta-analysis shows that publication bias decreases over time and that there are positive trade effects from the introduction of the euro, as long as results from before 2010 are taken into account. This may be because of the inclusion of the [[2008 financial crisis]] and ongoing integration within the EU.<ref>{{Cite journal|last=Polák|first=Petr|year=2019|title=The Euro's Trade Effect: A Meta-Analysis|url=https://www.econstor.eu/bitstream/10419/174189/1/wp_2016_22_polak.pdf |journal=Journal of Economic Surveys|volume=33|issue=1|pages=101–124|doi=10.1111/joes.12264|hdl=10419/174189|s2cid=157693449|issn=1467-6419|hdl-access=free}}</ref> Furthermore, older studies based on certain methods of analysis of main trends  reflecting general cohesion policies in Europe that started before, and continue after implementing the common currency find no effect on trade.<ref>{{cite web|last1=Gomes|first1=Tamara|last2=Graham|first2=Chris|last3=Helliwel|first3=John|last4=Takashi|first4=Kano|last5=Murray|first5=John|last6=Schembri|first6=Lawrence|title=The Euro and Trade: Is there a Positive Effect?|url=http://www2.dse.unibo.it/soegw/paper/GomGraHelKanoMurrayS.pdf|publisher=Bank of Canada|date=August 2006|url-status=dead|archive-url=https://web.archive.org/web/20150903222409/http://www2.dse.unibo.it/soegw/paper/GomGraHelKanoMurrayS.pdf|archive-date=3 September 2015}}</ref><ref>{{cite journal|last1=H.|first1=Berger|last2=V.|first2=Nitsch|title=Zooming out: The trade effect of the euro in historical perspective|journal=Journal of International Money and Finance|volume=27|issue=8|pages=1244–1260 |doi=10.1016/j.jimonfin.2008.07.005|year=2008|hdl=10419/18799|s2cid=53493723|url=https://www.cesifo.org/DocDL/cesifo1_wp1435.pdf|hdl-access=free}}</ref> These results suggest that other policies aimed at European integration might be the source of observed increase in trade. According to Barry Eichengreen, studies disagree on the magnitude of the effect of the euro on trade, but they agree that it did have an effect.<ref name="Eichengreen-2019"/>

====Investment====
Physical investment seems to have increased by 5% in the eurozone due to the introduction.<ref>{{cite web |url=http://www.eu-financial-system.org/fileadmin/content/Dokumente_Events/second_conference/Dvorak.pdf |title=The Impact of the Euro on Investment: Sectoral Evidence |access-date=2 October 2009 |url-status=dead |archive-url=https://web.archive.org/web/20130831043539/http://www.eu-financial-system.org/fileadmin/content/Dokumente_Events/second_conference/Dvorak.pdf |archive-date=31 August 2013 }}</ref> Regarding foreign direct investment, a study found that the intra-eurozone FDI stocks have increased by about 20% during the first four years of the EMU.<ref>{{cite web |url=http://www.afse.fr/docs/congres_2005/docs2005/Sousa.pdf |archive-url=https://web.archive.org/web/20061210053621/http://www.afse.fr/docs/congres_2005/docs2005/Sousa.pdf |archive-date=10 December 2006 |title=Does the single currency affect FDI? |publisher=AFSE.fr |access-date=30 May 2010 |url-status=dead }}</ref> Concerning the effect on corporate investment, there is evidence that the introduction of the euro has resulted in an increase in investment rates and that it has made it easier for firms to access financing in Europe. The euro has most specifically stimulated investment in companies that come from countries that previously had weak currencies. A study found that the introduction of the euro accounts for 22% of the investment rate after 1998 in countries that previously had a weak currency.<ref>{{cite web|url=http://www2.wu-wien.ac.at/rof/papers/pdf/Bris-Koskinen-Nilsson_Euro%20Effects.pdf |title=The Real Effects of the Euro: Evidence from Corporate Investments |access-date=30 May 2010 |url-status=dead |archive-url=https://web.archive.org/web/20110706085845/http://www2.wu-wien.ac.at/rof/papers/pdf/Bris-Koskinen-Nilsson_Euro%20Effects.pdf |archive-date=6 July 2011 }}</ref>

====Inflation====
[[File:Euro inflation.webp|thumb|Euro Zone inflation]]
The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices, but this impression was not confirmed by general indices of inflation and other studies.<ref>{{Cite journal|author = Paolo Angelini |author2=Francesco Lippi | title = Did Prices Really Soar after the Euro Cash Changeover? Evidence from ATM Withdrawals | journal = International Journal of Central Banking | date = December 2007 | url = http://www.ijcb.org/journal/ijcb07q4a1.pdf | access-date =23 August 2011}}</ref><ref>{{cite web| url = http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Publikationen/Querschnittsveroeffentlichungen/WirtschaftStatistik/Preise/EuroBargeldeinfuehrung,property=file.pdf| title = Fünf Jahre nach der Euro-Bargeldeinführung&nbsp;–War der Euro wirklich ein Teuro?|trans-title=Five years after the introduction of euro cash&nbsp;– Did the euro really make things more expensive?| author = Irmtraud Beuerlein| publisher = Statistisches Bundesamt, Wiesbaden| language = de| access-date =23 August 2011}}</ref> A study of this paradox found that this was due to an asymmetric effect of the introduction of the euro on prices: while it had no effect on most goods, it had an effect on cheap goods which have seen their price round up after the introduction of the euro. The study found that consumers based their beliefs on inflation of those cheap goods which are frequently purchased.<ref>{{cite journal|url=http://www3.interscience.wiley.com/journal/121658067/abstract |archive-url=https://wayback.archive-it.org/all/20171011040045/http://onlinelibrary.wiley.com/doi/10.1111/j.1538-4616.2008.00189.x/abstract |url-status=dead |archive-date=11 October 2017 |title=The Euro Changeover and Its Effects on Price Transparency and Inflation |access-date=12 November 2010|doi=10.1111/j.1538-4616.2008.00189.x|volume=41|journal=Journal of Money, Credit and Banking|pages=101–129|year=2009 |last1=Dziuda |first1=Wioletta |last2=Mastrobuoni |first2=Giovanni |issue=1 }}</ref> It has also been suggested that the jump in small prices may be because prior to the introduction, retailers made fewer upward adjustments and waited for the introduction of the euro to do so.<ref>{{Cite journal|doi=10.1162/qjec.121.3.1103 |title=Quarterly Journal of Economics&nbsp;– Abstract |journal=Quarterly Journal of Economics |volume=121 |issue=3 |pages=1103–1131 |year=2006 |last1=Hobijn |first1=Bart |last2=Ravenna |first2=Federico |last3=Tambalotti |first3=Andrea |url=https://www.econstor.eu/bitstream/10419/60548/1/477453724.pdf }}</ref> Based on the [[Croatia and the euro|introduction of the euro as the official currency in Croatia]] in 2023, the ECB argues that inflation due to a change of currency is a one-time effect of limited impact.<ref>{{Cite web |url=https://www.ecb.europa.eu/press/blog/date/2023/html/ecb.blog.230307~1669dec988.en.html |title=Has the euro changeover really caused extra inflation in Croatia |date=2023-03-07 |access-date=2024-05-05 |website=ECB |last1=Falagiarda |first1=Matteo |last2=Gartner |first2=Christine |last3=Mužić |first3=Ivan |last4=Pufnik |first4=Andreja}}</ref>

====Exchange rate risk====
One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates.<ref name="Eichengreen-2019"/> It has been found that the introduction of the euro created "significant reductions in market risk exposures for nonfinancial firms both in and outside Europe".<ref>{{cite journal |title=The impact of the introduction of the Euro on foreign exchange rate risk exposures |journal=Journal of Empirical Finance |doi=10.1016/j.jempfin.2006.01.002 |volume=13 |issue=4–5 |pages=519–549|year=2006 |last1=Bartram |first1=Söhnke M. |last2=Karolyi |first2=G. Andrew }}</ref> These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-euro firms with a high fraction of foreign sales or assets in Europe".

====Financial integration====
The introduction of the euro increased financial integration within Europe, which helped stimulate growth of a European [[securities market]] (bond markets are characterized by [[economies of scale]] dynamics).<ref name="Eichengreen-2019"/> According to a study on this question, it has "significantly reshaped the European financial system, especially with respect to the securities markets [...] However, the real and policy barriers to integration in the retail and corporate banking sectors remain significant, even if the wholesale end of banking has been largely integrated."<ref>{{cite web|url=http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp139.pdf |title=The Euro and Financial Integration|date=May 2006 |access-date=2 October 2009}}</ref> Specifically, the euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the eurozone.<ref>{{cite journal |title=The geography of asset trade and the euro: Insiders and outsiders |journal=Journal of the Japanese and International Economies |doi=10.1016/j.jjie.2008.11.001 |volume=23 |issue=2 |pages=90–113|year=2009 |last1=Coeurdacier |first1=Nicolas |last2=Martin |first2=Philippe |s2cid=55948853 |url=http://www.cepremap.fr/depot/docweb/docweb0701.pdf }}</ref> On a global level, there is evidence that the introduction of the euro has led to an integration in terms of investment in bond portfolios, with eurozone countries lending and borrowing more between each other than with other countries.<ref>{{cite journal |last1=Lane |first1=Philip R. |title=Global Bond Portfolios and EMU |journal=International Journal of Central Banking |date=June 2006 |volume=2 |issue=2 |pages=1–23 |url=https://www.ijcb.org/journal/ijcb06q2a1.htm |citeseerx=10.1.1.365.4579 }}</ref> Financial integration made it cheaper for European companies to borrow.<ref name="Eichengreen-2019"/> Banks, firms and households could also invest more easily outside of their own country, thus creating greater international risk-sharing.<ref name="Eichengreen-2019"/>

====Effect on interest rates====
[[File:Long-term interest rates of eurozone countries since 1993.png|thumb|upright=1.35|Secondary market yields of government bonds with maturities of close to 10 years]]

As of January 2014, and since the introduction of the euro, interest rates of most member countries (particularly those with a weak currency) have decreased. Some of these countries had the most serious sovereign financing problems.

The effect of declining interest rates, combined with excess liquidity continually provided by the ECB, made it easier for banks within the countries in which interest rates fell the most, and their linked sovereigns, to borrow significant amounts (above the 3% of GDP budget deficit imposed on the eurozone initially) and significantly inflate their public and private debt levels.<ref>{{cite web|url=http://www.investmentweek.co.uk/investment-week/opinion/2076100/redwood-origins-euro-crisis |title=Redwood: The origins of the euro crisis |publisher=Investmentweek.co.uk |date=3 June 2011 |access-date=16 September 2011}}</ref> Following the [[2008 financial crisis]], governments in these countries found it necessary to bail out or nationalise their privately held banks to prevent systemic failure of the banking system when underlying hard or financial asset values were found to be grossly inflated and sometimes so nearly worthless there was no liquid market for them.<ref>{{cite web|url=http://www.ip-global.org/2011/02/01/farewell-fair-weather-euro/ |title=Farewell, Fair-Weather Euro &#124; IP&nbsp;– Global-Edition |publisher=Ip-global.org |access-date=16 September 2011 |url-status=dead |archive-url=https://web.archive.org/web/20110317161013/http://www.ip-global.org/2011/02/01/farewell-fair-weather-euro/ |archive-date=17 March 2011 }}</ref> This further increased the already high levels of public debt to a level the markets began to consider unsustainable, via increasing government bond interest rates, producing the ongoing European sovereign-debt crisis.

====Price convergence====
The evidence on the convergence of prices in the eurozone with the introduction of the euro is mixed. Several studies failed to find any evidence of convergence following the introduction of the euro after a phase of convergence in the early 1990s.<ref>{{cite web |url=https://www.ecb.eu/events/pdf/conferences/emu/sessionV_Angeloni_Paper.pdf |title=Price setting and inflation dynamics: did EMU matter |access-date=13 March 2011 |archive-url=https://web.archive.org/web/20110725112443/http://www.ecb.eu/events/pdf/conferences/emu/sessionV_Angeloni_Paper.pdf |archive-date=25 July 2011 |url-status=dead }}</ref><ref>{{cite web|url=http://opus.zbw-kiel.de/volltexte/2009/7575/pdf/200906dkp.pdf |title=Price convergence in the EMU? Evidence from micro data |access-date=2 October 2009}}</ref> Other studies have found evidence of price convergence,<ref>{{cite web|url=http://faculty.london.edu/hrey/IMRRtele.pdf |title=One TV, One Price? |access-date=17 July 2011}}</ref><ref>{{cite web|url=http://mpra.ub.uni-muenchen.de/835/1/MPRA_paper_835.pdf |title=One Market, One Money, One Price? |access-date=17 July 2011}}</ref> in particular for cars.<ref>Gil-Pareja, Salvador, and Simón Sosvilla-Rivero, [http://www.fedea.es/pub/Papers/2005/dt2005-22.pdf "Price Convergence in the European Car Market"], FEDEA, November 2005.</ref> A possible reason for the divergence between the different studies is that the processes of convergence may not have been linear, slowing down substantially between 2000 and 2003, and resurfacing after 2003 as suggested by a recent study (2009).<ref>{{cite web |url=http://www.wiso.uni-hamburg.de/hepdoc/macppr_4_2009.pdf |first1=Ulrich |last1=Fritsche |first2=Sarah |last2=Lein |first3=Sebastian |last3=Weber |title=Do Prices in the EMU Converge (Non-linearly)? |publisher=University of Hamburg, Department Economics and Politics Discussion Papers, Macroeconomics and Finance Series |date=April 2009 |access-date=28 December 2010 |url-status=dead |archive-url=https://web.archive.org/web/20110719105515/http://www.wiso.uni-hamburg.de/hepdoc/macppr_4_2009.pdf |archive-date=19 July 2011 }}</ref>

====Tourism====
A study suggests that the introduction of the euro has had a positive effect on the amount of tourist travel within the EMU, with an increase of 6.5%.<ref>{{cite journal|last1=Gil-Pareja|first1=Salvador|last2=Llorca-Vivero|first2=Rafael|last3=Martínez-Serrano|first3=José|title=The Effect of EMU on Tourism|ssrn=983231|journal=Review of International Economics |volume=15 |issue=2 |pages=302–312 |date=May 2007|doi=10.1111/j.1467-9396.2006.00620.x|s2cid=154503069}}</ref>