It is almost hard to believe that the euro is just over 20 years old. In the short span of two decades, it went from the world's most ambitious financial experiment to its second most important international reserve currency. At 20 percent of the world's global reserve holdings, it trails far behind the U.S. dollar but is quickly becoming its most viable challenger.
The euro matters to all of us because it's here to stay. Since its debut in 1999, the euro has been met with fierce criticism but its survival is its ultimate measure of success. The purpose of the euro is to unify the region through a common currency that would ease cross-border transactions, eliminate exchange-rate uncertainty and promote trade and investment. It has accomplished all of that.
Its membership swelled from an original 11 to 19 nations with 23 countries using the euro as their official currency in 2019. The ease of using the currency for travel and business makes the idea of a common currency more attractive to other nations.
For American businesses, the most important value of the euro is that they no longer need to manage the exchange-rate risk of individual currencies. A U.S. company doing business with Italian, Spanish and German companies does not need to manage the risk of the Italian lira, Spanish peseta and the Deutsche mark. Instead, everything is handled in euros, making life a lot easier for financial and accounting departments. At its most fundamental level, working with a region that has a single currency reduces conversion costs for U.S. businesses and streamlines exchange-rate hedging activities.
For anyone investing in a company with extensive businesses activities in Europe, it also removes the need to follow exchange-rate developments and the monetary policies of multiple countries. So broadly speaking, the euro offers stability for the Eurozone economy and the U.S. economy. It's even more beneficial for a country like the United Kingdom, which does the majority of its trade with continental Europe.
For central banks in other parts of the world, it provides the added benefit of reducing their exposure to the U.S. dollar by providing reserve diversification. The U.S. dollar is no longer the only choice for reserve managers.
However, throughout its 20-year history, there have been many calls to disband the euro. There are anti-euro establishments across the region in EU countries. The greatest disadvantage of the euro is that the one currency represents multiple economies and, when one falters, the rest feel the pain.
Greece, Spain and Ireland have had their share of problems and stronger economies like Germany and France have been left wondering why they are footing the bill. The viability of the euro hinges on its membership. If one country drops the euro, the fear is that more will follow. As a result, bailouts have been the only option.
Stress Test Survivor
Over the next few decades, there will be more economic and political challenges, and European leaders will navigate through them with the euro intact. Disbanding the euro creates an even bigger financial shock for the financial system so they will do everything in their power to avoid that scenario.
This is important for U.S. investors because the euro has become so important that its problems have become the world's. U.S. markets could sell off on global risk aversion. But, when the dust settles and the rest of Europe decides to rescue struggling nations, U.S. markets will settle. In the last 20 years, the euro survived all of these stress tests and the global financial crisis. It will continue to so in the decades to come.
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(This article is sponsored and produced by CME Group, which is solely responsible for its content.)