The birth of the European Union also gave birth to a new currency called the euro, which is a very important currency right now. However, not all members of the EU are using the euro, thus, there exist the eurozone, which refers to the group of countries using the euro.
But why do other countries, such as the UK, Sweden, and Hungary, prefer not to use the common currency? Here are their reasons.
Monetary Policy Independence
The European Central Bank, which serves as the central bank for all eurozone members, sets the economic and monetary policies to eurozone nations.
That means there is no independence for an individual state to create policies that fit its own conditions. For instance, the UK managed to survive the 2007-2008 financial crisis after it quickly cut interest rates in October 2008.
It also kicked off a quantitative easing program in March 2009. For comparison, the ECB did not start its own quantitative easing program until 2015.
Overcoming Country-Specific Challenges
Each country has its own specific downsides and challenges. For instance, Greece is very sensitive to changes in interest rates. That’s because more of its mortgages are floating and not fixed.
On the other hand, the ECB has its regulations and Greece needs to follow those. That means Greece isn’t independent when it comes to managing interest rates that may benefit its people and economy.
The UK economy, meanwhile, is also highly sensitive to changes in interest rates. But because it doesn’t belong to the eurozone, the country is able to keep its interest rates low using its own central bank.
Lender of Last Resort
Every country’s economy is also highly sensitive to Treasury bond yields. In this case, not being a member of the eurozone is an advantage.
Since they have their own independent central banks, these banks are able to serve as a lender of last resort for the country’s debt.
When bond yields rise, the central bank can start buying bonds. In the process, it increases the liquidity in the financial markets.
Eurozone countries’ ECB does not buy bonds from specific member-nations in that situation. As a result, eurozone countries like Italy have battled with huge challenges because of the higher levels of bond yields.
When the inflation rate is rising in a country, the go-to solution is raising interest rates. Countries that are not members of the eurozone can do that through the monetary policies of their central banks.
The members of the eurozone do not always get that. For instance, after the economic crisis, the ECB raised interest rates because of the high inflation in Germany.
The decision managed to help Germany. However, that wasn’t the case for other members. So, some countries like Italy and Portugal suffered under the high interest rates.
Countries can experience economic challenges in the cycles of high inflation, high wages, lower exports, or decreased industrial production.
These situations can be properly handled by devaluing the country’s currency. A cheaper currency translates to cheaper exports, which would be more competitive. In the process, this encourages foreign investments.
Non-eurozone countries are able to devalue their currencies as needed. But the eurozone cannot do this as any change in the value of the euro affects all the members.