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The euro is the official currency of the Eurozone, which is a monetary union consisting of 19 of the 28 member states of the European Union. The euro was introduced in 1999 as an accounting currency, but physical coins and banknotes entered circulation in 2002. The currency is managed by the European Central Bank, based in Frankfurt. Its international code is “EUR”.

Since it is the currency of the second largest economy in the world, the euro gained its position as an international reserve currency. Indeed, it is the second most widely held currency, after the U.S. dollar. However, the European sovereign-debt crisis questioned the soundness of the euro. The problem with the Eurozone (and its currency) is that it consists of several independent governments and one common central bank. Such a unique structure leads to the tragedy of the commons: each Eurozone member can externalize part of the costs of its deficit and make the whole euro group carry the burden of the costs of irresponsible policies. Therefore, the euro is another case of fiat money, just like the greenback, but with a flawed and unstable institutional background.

Euro and Gold

The euro is one of the most important alternatives to the U.S. dollar among fiat currencies (the EUR/USD currency exchange rate is one if the most often traded pairs in the world). This is why there is often a positive link between the euro and gold: both assets are negative correlated with the greenback. However, the relationship is far from being a perfect correlation, as one can see in the chart below. This is because gold is not merely an alternative against the U.S. dollar, but also against the current monetary system based on fiat currencies. Therefore, in some cases the euro and the dollar both lose (or gain) ground against gold.

Chart 1: Euro (EUR/USD) exchange rate (blue line, left axis) and the price of gold (red line, right axis, London P.M. Fix) from 2006 to 2016.

Euro and Gold

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