Current crisis of the European single currency (Essay Sample)

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The EURO Crisis
Introduction
Economic crisis has on numerous occasions hit the world and the factors that have contributed to the crisis either directly or indirectly. It is worth noting that financial crisis is as a result of a combination of complex factors which include internal trade imbalances, high risk lending as well as borrowing among others. However, one of the financial crisis that shocked the EUROZONE and has had profound impact is the EUROZONE crisis; various scholars as such have come forth with different schools of thoughts concerning the crisis.
One such scholar is Martin Feldstein argues that "the current crisis of the European single currency was an accident waiting to happen". To him he argued that the development of such economic structure was a ruthless, politically motivated experiment. Similarly the present problems facing member countries as a result of leaving country-specific economic policies and individual exchange rates were predictable by economists politicians chose to ignore them (Feldstein, 2010). The paper will give the views of the researcher whether he agrees or not with Martin Feldstein argument. In doing so, the researcher will critically look into arguments for and against adopting a single currency economy. Additionally the major factors deemed to be responsible for the crisis of confidence in the EURZONE.
Martin Feldstein argument and my views
With regards to EUROZONE crisis Martin Feldstein strongly believed that indeed the adoption of a single currency was an accident waiting to happen. The unpleasant cost of adopting a single currency on a incongruent group of countries were at first concealed by the short-run advantages that the weakest countries enjoyed when they adopted the euro in 1999 and by the favorable global economic conditions that prevailed until 2008 (Feldstein, 2010). In order to support or refute the claim, it is important to first examine the pros and cons of adopting a single currency economic structure. However it is important to understand the beginning of the crisis. The crisis in the zone started immediately the financial markets lost confidence in the creditworthiness of Greece and other periphery countries; this resulted in interest rates on government bonds going higher to levels that compelled the affected governments to ask for bailouts from international community, the European Community and the IMF.
EUROZONE adopted single currency back in 1999 with the aim of empowering the member countries economically as well as politically. This is after the region tracked greater financial integration since 1957. There are two main categories of the advantages that come with the adoption of a single currency in the EUROZONE both leading to gains in economic efficiency. One important importance of such a concept is that the transaction cost will be eliminated. Usually transaction costs are manifested in several ways for instance fixed commission as well as the spread between the buying and selling prices of any given currencies. It is worth noting that for the member countries which operate business with others in the same region, then the currency conversion cost is done away with for the member countries which are vital for both individuals as well as firms doing business with foreign partners (Rose & Wincoop, 2001).
On the same note a single currency ensures that there is a ground to compare prices, making price differences more noticeable as well as equalization across the borders. Scholars in the field of economy have held that the absence of transaction costs as well as transparency in prices creates a deep and more integrated financial market. This type of integration makes it possible for member countries to have various channels used to share risks. For instance when a member country is hit by negative shock, firms definitely make losses which result in lowered stock prices, on the other hand when there is an economic boom in a another country, the stocks of firms in that country will go up contributing to profit making investors from the country hit by negative shock a new lease of life. Thus single currency allows country to share the risks of negative shocks.
It has been argued that the justification for adopting single currency in EUROZONE is to avert the negative effects of exchanges rates. There is no doubt that uncertainty in changes in exchange rates hinders the flow of trade as well as investments. Thus in situations where business people are faced with trade opportunities or investment, they will be more attracted to countries where the risks of currency and interest rate changes are minimal (Artis, Hennessy & Weber, 2000). However Feldstein, 2010 argued that a common currency means that every EUROZONE country has the same exchange rate, stopping the natural rate of adjustments that maintain national competitiveness when there are different trends in productivity and demand. As such he posits that this denies some countries the opportunity to raise the real incomes of her employees. In fact this is what EUROZONE is trying to discourage a scenario where some countries are extremely richer than others.
Despite the advantages mentioned above, single currency has a number of disadvantages. First the system brings costs to firms, individuals and other institutions to adjust to the new currency. Usually these parties have to incur huge costs in changing the invoices, price lists, office forms, payrolls, databases, bank accounts, and meters for postage as well as parking among other things (Rose & Wincoop, 2001). For countries which had weaker financially, they have to engage in excessive borrowing in order to carter for these expenditures. This as explained by economists is a recipe for economic crisis (Artis, Hennessy & Weber, 2000).
Secondly single currency economy means that there is no national monetary policy which has been a vital tool for states to adjust the economic equilibrium in situations where it faces economic shock. Usually economic shocks are unpredictable and unexpected and it characterized with disparity in production, consumption, investment as well as government expenditure (Feldstein, 2010).
Factors responsible for the current crisis of confidence in the EURO zone
There are a number of factors that played substantial role leading to the present crisis of confidence in the EUROZONE. Top on the list the inability of the government to service their debts. The debts resulted in heavy government spending and the desire to help those countries in problem to get out of the economic crisis. A typical example is Greece who received numerous loans for the pu...