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Euro

 The euro is the official currency of the Eurozone (also known as the Euro Area or the Euro Land), which consists of 13 European states (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, and Spain) and will extend to include Cyprus and Malta from 1 January 2008. It is the single currency for more than 320 million Europeans. Including areas using currencies pegged to the euro, the euro directly affects more than 480 million people worldwide.

see also:  European Banking Industry

Good things:

• more stability (less volatility)
• more international confidence
• leads to more international trade
• some economists claim that a common currency area, such as the Euro has led to lower levels of inflation, and lower interest rates (the lower inflation claim is highly debated...is it cause and effect?  or, pure coincidence?)

Bad things:

• In a free floating regime, there is no way for a country to have a balance of payments crisis because the Currency will adjust.  But when the currency fixed, or pegged to another currency, it is possible to have a BOP crisis (think "tequila crisis" in Mexico).
• the Euro zone has seen lower GDP growth than the UK  (which did not join the Euro) since its adoption.  Also, the UK has seen lower levels of unemployment.  Did the adoption of the common currency lead to a lower growth and higher unemployment?  This topic is highly debated by economists. 

Challenges for the Euro 

One weakness of the Eurozone as compared to the USA, is that Europeans are less likely to move to where the new jobs are.  In the US, if jobs are moving from Michigan to South Carolina, then families move.  But if European jobs move from Germany to Poland, the Germans are less likely to move.  They want jobs locally, and care less about jobs or growth in other parts of Europe.   The euro is underpinned by the Stability and Growth Pact, which is designed to ensure even fiscal policy across the Eurozone. The SGP has been criticised for removing the ability of national governments to stimulate their own economies to a certain extent, in the only way left to them now that monetary policy is determined supranationally. 

Up until now, the Euro has not been tested by a major crisis.  If there were suddenly a major recession in Germany, and if the German government wanted to cut interest rates to spur growth, but if they were not "allowed" because the EU was worried about inflation in Spain...I dont think most Germans would care.  And, since the membership of the Euro-club is optional, then it makes sense that one day a major country like Germany or France will opt out of the agreement. 

some facts vs the Euro:

• The UK has done better than all EU since the Euro was adopted
• Note:  convergence of Euro-zone inflation occurred before the adoption of the Euro, so it can not be accredited with taming inflation
• but, interest rates did go down as a result of Euro adoption  (UK interest rates are higher)
• There has been a convergence of grown rates...but not as expected...instead of being higher...it has been lower (compare vs. UK)
• Also, unemployment has been higher (compare again with UK).
• So, Euro adoption has led to lower growth, and higher unemployment.  Yikes, not good.

Also note that no currency regime has ever lasted longer than 60 years ...so, history says that the odds are against a long-running fixed currency regime.  But, only time will really tell...

Benefits of the Euro

there has been a 3x increase in the volume of trade.

Transaction costs and risks

The most obvious benefit of adopting a single currency is removing from trade the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. On the consumer side, banks in the Eurozone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments (e.g. credit cards, debit cards and cash machine withdrawals).

The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals looking to invest or trade outside their own currency zones. Companies that hedge against this risk will no longer need to shoulder this additional cost. The reduction in risk is particularly important for countries whose currencies have traditionally fluctuated a great deal, particularly the Mediterranean nations.

Financial markets on the continent are expected to be far more 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.

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. speculative trade in a commodity between countries purely to exploit the price differential, which will tend to equalise prices across the euro area. Similarly, price transparency across borders should help consumers find lower cost goods or services. In reality, the effects of the euro over the level of the prices in Europe are disputable. Many citizens cite the strong perceived increase in prices in the years after the introduction of the euro, although numerous empirical studies have failed to find much real evidence of this.  It is speculated that the reason for this perception is that the prices of small, everyday items were rounded up significantly. For example, a cup of coffee that once cost two German Mark might now cost €1.50 or even €2.00—a 50–100% increase, although wages in many countries have also increased. At the same time, a large appliance or rent payment rounded up to the next obvious euro level would be a negligible proportional increase. The fact that the prices people see every day were affected more strongly might explain why so many people perceive the "euro effect" as being significant, while official studies—which look at the breadth of expenditures, in proportion—would downplay it

Macroeconomic stability

Low levels of inflation are the hallmark of stable and modern economies. Because a high level of inflation acts as a highly regressive tax (seigniorage) and theoretically discourages investment, it is generally viewed as undesirable. In spite of the downside, many countries have been unable or unwilling to deal with serious inflationary pressures. Some countries have successfully contained them by establishing largely independent central banks. One such bank was the Bundesbank in Germany; as the European Central Bank is modelled on the Bundesbank, it is independent of the pressures of national governments and has a mandate to keep inflationary pressures low. Member countries join the bank to credibly commit to lower inflation, hoping to enjoy the macroeconomic stability associated with low levels of expected inflation. The ECB (unlike the Federal Reserve in the United States of America) does not have a second objective to sustain growth and employment.

National and corporate bonds denominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in legacy 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.

Future of the Euro in Global Markets:

A new reserve currency?

The euro is widely perceived to be a major global reserve currency, sharing that status with the U.S. dollar (USD), albeit to a lesser degree. The U.S. dollar continues to enjoy its status as the primary reserve of most commercial and central banks worldwide.

Since its introduction, the euro has been the second most widely-held international reserve currency after the U.S. dollar. The euro inherited this status from the German mark, and since its introduction, has increased its standing somewhat, mostly at the expense of the dollar. The possibility for the euro to become the first international reserve currency in the near future is now widely debated among economists. Former Federal Reserve Chairman Alan Greenspan gave his opinion in September 2007 by stating that the euro could indeed replace the U.S. dollar as the world's primary reserve currency. He said that it is "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency."

Additionally, there has been some suggestion that the recent weakness of the US dollar might encourage various parties to increase their reserves in euro at the expense of the dollar.

http://en.wikipedia.org/wiki/Euro