The euro area
Nineteen European Union member states are part of the euro area, or Eurozone. These countries use the euro as their national currency. They are:
Andorra, Monaco, San Marino and Vatican City also use the euro as their national currency, although these small countries are not part of the EU or euro area.
The euro currency was physically launched in 2002, but the idea of the monetary union of the member states of the EU was agreed earlier in the Treaty of Maastricht in 1992.
This document explains how the euro area works, the role of the European Central Bank and the other mechanisms that are in place to protect the currency.
Economic and Monetary Union
The Maastricht Treaty set the EU on the path to a single currency when it enshrined the Economic and Monetary Union (EMU).
EMU applies to all member states of the EU, including the countries that are not part of the euro area. This means that monetary policy in the EU is co-ordinated. EU countries decide their own economic policies and set their own budgets, but they must follow the rules set out in the Stability and Growth Pact.
In the euro area, monetary policy is managed by the European Central Bank (ECB). The ECB is independent of the EU. For the countries outside the euro area, monetary policy is co-ordinated by the ECB through the central banks of each member state.
The European Central Bank (ECB)
The European Central Bank (ECB) is the central bank for the euro area and acts independently from the EU. The ECB has a number of important functions:
- It sets interest rates for the euro area
- It manages the euro area’s foreign currency reserves
- It watches over central banks and payment systems in the euro area to make sure that they are working properly and fairly
- It authorises the production of euro banknotes in euro area countries
- It acts to keep prices from going up to sharply
The ECB is the ultimate banking supervisor for all banks in the euro area and is directly responsible for supervising the largest banking groups (117 in total). Other banks are supervised by their national central banks in close cooperation with the ECB.
The ECB and the central banks of the countries in the EU make up the European System of Central Banks (ESCB).
The ECB and the central banks of the countries in the euro area make up the Eurosystem.
Euro summits are held at least twice a year and include:
- The heads of state or government of all the euro area countries
- The president of the Euro Summit
- President of the European Commission
The purpose of the summits is to decide on the strategic economic direction of the euro area, and to help euro area countries to co-ordinate their economic policies.
The President of the Euro Summits is elected at the same time as the President of the European Council. Since the Fiscal Stability Treaty was signed in 2012, the Euro Summits’ role has been set out in law.
The Eurogroup brings together the finance ministers of the countries in the euro area. It is responsible for:
- Preparing the Euro Summit meetings and their follow up
- Help coordinate the economic policies of the euro area member states
The Eurogroup usually meets every month. Meetings are also attended by the commissioner for economic and financial affairs, taxation and customs, and the president of the ECB.
The European Stability Mechanism
The European Stability Mechanism (ESM) provides assistance to countries in the euro area that are having severe financial problems. It gives assistance if the financial problems of the country concerned threaten to damage the financial stability of the euro area as a whole.
Countries can only receive help from the ESM if they have ratified the Fiscal Stability Treaty.
Ireland received financial assistance from the EU and others in 2010. This was referred to as ‘the bailout’, EU financial assistance was provided by the European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM). The ETSF has been replaced by the ESM.