Research and Discuss The Success And Failures Of Euro (Essay Sample)

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The Euro
The Euro is the currencies used by the nineteen members of the European Union that together comprise the euro region. Despite the currency being used by more than 337.5 million EU citizens, some members of the Union, for example, Denmark and the United Kingdom do not utilize the Euro. The recently acceded EU members such as Sweden are yet to meet the conditions (European Commission 1). The formation of EU in 1957 had one of its objectives as the establishment of a single market, single currency and a single monetary policy. Therefore, closer financial and economic cooperation is needed to be achieved for the internal market to flourish and develop.
The currency was introduced in 1999 and marked the beginning of European integration. There is an extensive political and historical background of the creation of Euro. The idea of having an economic and monetary union in Europe was first raised in 1929 before the establishment of European communities. However, a more historical impact on the creation of the Euro began in 1971. In 1971, there were several devaluations and currency floats after President Nixon removed the U.S. from the gold standard. This breakdown led to aspirations to have a European monetary union (Taylor 1). In 1973 EMCF (European Monetary Cooperation Fund) was formed to aid in the stabilization of the exchange rates. The EMS (European Monetary System) was established in 1979 to assist in fixing the rates of exchange onto the ECU (European Currency Unit). The unit performed its role through the ERM (European Exchange Rate Mechanism) to control inflation and ensure the exchange rates are stabilized.
During the 1988 European Council Summit, a monetary cooperation outline started with Italy, France, and the European Community leaders backing the establishment of a full monetary union and a central bank. In 1992, the signing of the Maastricht Treaty occurred to elevate the idea of a European monetary union to a more ambitious and achievable level and the latest date set for January 1999. This financial cooperation was to replace the national currencies by a single currency shared by members who would meet the entry criteria. The Maastricht criteria which are also known as the Euro convergence criteria are the original obligations of the EU states to adopt the Euro. However, in 2009, the International Monetary Fund ordered for countries to be permitted to partially select the currency but not have seats on the ECB (European Central Bank).
The Euro convergence criteria stipulate that a country’s inflation rates need not exceed a point’s percentage of one and a half compared to an average of the best three productive EU countries. Under the finances of a government, the analysis of entry is based on the government debt and annual government deficits. The ratio of the overall GDP and the annual deficits of the government need not exceed three percent at the closure of the preceding fiscal year. On the other hand, the ratio of the GDP and the gross government debt must not exceed sixty percent at the closure of the previous financial year. Moreover, the exchange rates criterion requires countries to have had a two-year membership at ERM II, and their currency not to have been devalued during their membership. Furthermore, the nominal and long-term rates of interest of a country should not exceed two percent points greater than the rates in the three lowest inflation members (Taylor 1). This criterion was established to maintain price stability within the Eurozone even with the entry of new members. In 1994, the European Monetary Institute was formed to foresee the creation of the Euro but was dissolved with the establishment of ECB in 1998. The ECB has its headquarters located in Frankfurt, Germany.
The ECB (European Central Bank) plays the role of establishing the monetary policy of the Eurozone. The central banks of the Euro members and ECB form the Euro system. However, the fiscal and structural policies are responsibilities of the individual national authorities. These authorities need to coordinate these policies to ensure the achievement of common objectives in growth, stability, and employment. For instance, there is a primary coordination structure referred to as the Stability and Growth Pact that stipulates the accepted rules on fiscal discipline. ECB and national supervisors have been entrusted with the role of supervising financial entities within the Euro area. They work as an integrated system for checking the compliance of banks with the EU banking rules. The establishment of the Euro implied smooth coordination of activities such as trade among its member states. The framework under which the currency works underpins its stability promotes sound public finances and low inflation. The currency was established because a single currency would be a logical complement to the single market that would be more efficient. The market would eliminate costs incurred in currency exchange, increase price transparency, facilitate trade internationally and give the EU a strong voice worldwide.
Furthermore, the strength and size of the Euro would offer protection to the euro area particularly from exterior shocks to the economy, for example, the turbulence experienced in the currency markets and unexpected increases in oil prices (European Commission 1). The Euro would also make traveling easier and cheaper within the EU. Eventually, it would act as a tangible symbol of the European identity. Following the debt crisis that has been experienced, the EU has put measures to improve the EU particularly the Euro area. It has strengthened the Stability and Growth Pact; a new mechanism has also been introduced to correct or prevent the macroeconomic imbalances. The EU member states have also increased the coordination of structural policies.
The Euro’s success
The Euro has been a success to the Euro area in various ways. First, there are no transaction costs in the exchange of currencies. The Euro eliminates costs that may be incurred by firms and tourists in carrying out trading activities within the Euro area. This benefit has been estimated to result in a one-percent increase in the GDP (gross domestic product) hence quite significant. Previous studies on the Euro’s benefits have found the currency to have led to a six-percent increase in tourism. Notably, the Euro has promoted price transparency since various European countries have been able to compare prices in Euros (Posen 5). Firms have benefitted through sourcing for cheaper raw materials and consumers buying cheaper goods and services. For instance, the Euro has significantly reduced the car prices within the Eurozone compared to the higher car prices in the UK following the price differentials.
Furthermore, the Euro has eliminated the uncertainty in the exchange rates. Sometimes the exchange rates may experience volatile swings that end up affecting the profitability of exports. For example, a rapid appreciation or depreciation may affect export profitability. As a result, the confidence of businesses in investment is undermined. The Euro has, therefore, promoted business confidence leading to more trading activities and economic growth. Also, the single currency has improved inflation performance within the Eurozone. The ECB sets the interest rates for the Euro area and strives to keep inflation rates low. States with a high inflation history benefit from this higher inflationary discipline. Arguably, the Euro has significantly led to a decrease in the interest rates.
Membership of the Euro was projected to reduce the bond yields since a country would belong to a greater security owned by a stronger currency. For instance, the bond yields in Ireland, Greece, and Spain converged on the German bond yields. Nonetheless, the crisis of 2008 to 2012 might have led to the claims of the Euro being quite disestablishing for the interest rates. Additionally, the Euro has substantially augmented the level of inward investment. Firms have taken advantages of the low costs of the transaction within the EU area (Posen 7). Therefore, companies will tend to have a preference for investing in the Eurozone area. Eventually, the Euro has had a substantial effect on the sector of finance. The single currency has decreased the costs incurred in the trading of equity, the banking assets, and bonds in the Euro area.
The Euro’s failures
Despite the numerous benefits of this single currency, the Euro crisis has depicted some of the weaknesses in the structure of the single currency. One of the problems of this currency is that the interest rates are not suitable for all the members of the Euro system. Having a standard monetary policy implies a similar interest rate within the Eurozone (Pettinger 1). However, the ECB may develop unsuitable interest rates for either the fast or slow growing regions compared to the average of the Eurozone. For instance, the ECB set high-interest rates in 2011 following fears of inflation in Germany. Nevertheless, in the same year, the southern Eurozone members headed for a recession because of the austerity packages. ECB’s increase of interest rates was inappropriate for nations such as Italy, Portugal, and Greece. Notably, the Euro is not the ideal currency area. The Euro has barriers to capital and labor movement within a broad area. For example, if New York experienced a recession, a worker could move freely to New England for work while an unemployed Greek may not move to Germany for work. The Euro also limits the fiscal policy (Pettinger 1). A common monetary policy becomes effective if countries have similar national debt levels for countries to quickly attract buyers of this debt. Greece, Italy, and Spain are some of the nations with significant national debts and increasing bond yields making it a serious g...