Euro: Definition, Advantages & Disadvantages

Instructor: Grant Maynard

Grant is a practicing corporate attorney and serves as an adjunct professor at various universities.

The euro is a common currency used by many members of the European Union and other countries in Europe. Learn about the benefits and drawbacks of the euro's introduction and use.

Introduction to the Euro

Imagine if each state in the U.S. had its own currency. Taking a cross-country road trip could require you to change money multiple times and constantly monitor exchange rates so you would know how much items you bought cost in your home currency. It would be wildly inefficient. That's the situation Europe found itself in just a few decades ago. In an attempt to limit inefficiencies, many European countries developed a common currency--the euro. In this lesson, we'll discuss this common currency and the euro's advantages and disadvantages.

What is the Euro?

After years of planning, 12 European countries began using the euro on January 1, 2002 and stopped using their existing national currencies. The step is actually just one part of the greater consolidation of European politics and economics that has seen the development of the European Union (EU).

Although each of the initial countries using the euro were members of the EU, not all EU members use the euro; likewise, there are some non-EU countries that use the euro as their official currency as well. Use of the euro has expanded since its introduction, as you can see from the map below (dark blue countries are original members, light blue countries are later members, and brown countries are EU members that do not use the euro).

eurozone map

Advantages of the Euro

The switch to the euro has many advantages for tourists and residents of the eurozone (the countries that use the euro). Two of the most obvious pros of a common currency are:

  • Lower transaction costs
  • Price transparency

Remember our example about changing currency every time you crossed into another state? Each time you changed money, the bank or changer would take a portion of the funds, leaving you with less after every exchange. The costs associated with those exchanges are called transaction costs.

When traveling, we also discussed that you'd also need to constantly remember or calculate exchange rates in order to know how much something priced in a foreign currency cost: in other words, there was no price transparency. In the eurozone, there is now no need to change currencies when crossing borders, and there is complete price transparency because everything is priced in the same currency.

There are several other related benefits to a common currency as well, including reduced interest rates as a result of lower transaction costs and increased international trade.

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