Example Of Essay On Problems With The Euro And Eurozone

Is the Euro dividing Europe?

1015 Words

Introduction

How the Euro causes Divergence
Inequalities in the Eurozone
Conclusion
Is the Euro dividing Europe?
The European Monetary Union (EMU) was created in the year 1999 with an aim of convergence and economic integration within the Europe countries. Although the first decade of the implementation of Euro, the common currency, proved to be successful the sovereign debt crisis precipitated by Greece and later Ireland, Spain and Portugal from 2008-2011 exposed the structural crisis of the common currency system (Brown& Chambers, 2005). The Euro instead of converging the economies of the European Union countries played a divergent role and created divisions within the countries.
Under the terms of the Maastricht Treaty signed in 1992, the member countries of the European Union guaranteed to bring down their deficit spending and debt levels. But soon after the Euro came into force in the early 2000s some nations could not keep up with the treaty and started securitizing future government revenues. Chambers and Brown (2005) contend that the countries did this to reduce and mask government debt and deficit and used a variety of techniques such as complex currency and derivative structures, shifting accounting and off-balance-sheet transactions. The problem for the Euro is that “the architecture of the EMU lacks an effective macroeconomic stabilization mechanism that would control divergence and limit the size of cyclical fluctuations for the individual member states (Landmann 2011, p.24).” Also politicians from the very beginning flouted all the promises and the guarantees made during the Maastricht treaty. Wyplosz (2006) says that the Eurozone and the adoption of the Euro as a common currency was a political project with political imperatives. The whole Euro project was based on the willingness of Germany to give up its currency and share it with other countries whose economic histories weren’t anything to talk about. This gave Germany an undue advantage in formulating rules and making other countries accede to guarantees. Greece came into the common currency system for political reasons and the fundamental element of the treaty that stated that a country’s budget deficit should not go over 3% of its annual GDP was broken many times. Another reason the Euro faces problems is that it is a monetary union that is not supported by a political and economic union. Each of the EU countries have their own governments, economic policies and bond markets with a weak stability pact which leads to a decrease in cohesion and divergence between the countries; hence the Euro-crisis. Although Lenain and Serres (2002) wrote that the Euro was introduced with the promise of integration and growth and kept its promise for the first few years the disparity between the economies of the countries only increased and did not decrease.
How the Euro causes Divergence
Henkel (2011) says that the "one-size-fits-all" euro turned out to be a "one-size-fits-none" currency and has in itself caused some of the current problems in the Eurozone. This one size fits all policy can never be individually tailored to meet the demands of the member nations. Real growth and a higher inflation rate draws foreign capital to the countries and at “the same exchange-rate risk, a euro put to work in Spain might earn a better return than in slower-growing parts of the euro zone (One Size Fits None 2009).” There is always the risk that capital will accumulate in certain countries and avoid the rest leading to differences in growth. Low interest rates throughout the Zone ensured that countries like Greece could pile up huge debts and countries like Spain had to watch a housing bubble grow. Since the countries from the south (the new members or the periphery European countries) could not devalue their currencies they lost their competitiveness. A common currency also meant that the unemployed and students blamed not their national austerity measures but the policies of the EU. “The public at large, most politicians and many policy-makers are not and, as the rejection of the draft constitution has shown, many are ready to blame Europe in general, and the monetary union in particular, for the hardship that they face (Wyplosz 2006, p.261).” There is also tension among the member nations as their decision making power and sovereignty has come under attack from the conditions of a debt bailout. The Eurozone policies also differs from public commitments of the individual governments and the democratic accountability is weak between the countries. This makes countries to choose policies that would be advantageous to them and not the region as a whole further dividing them.
Inequalities in the Eurozone
“A large number of econometric studies have examined regional inequalities in Europe with a variety of results that mainly depend on the selection of methodology (Combes and Overman, 2004). However, an increasing number of papers (Button and Pentecost, 1995; Fingleton, 1997; Magrini, 1999, Quah, 1996; Rodriguez-Pose, 1999; Canova, 2004; Petrakos and Artelaris 2009) and a simple examination of regional data show that inequalities are increasing (Petrakos 2009)."The gradual transition of the European free trade area into an economic and monetary union, accompanied by the prevalence of a specific policy could be one of the main reasons behind the deepening inequality (Gkagka & Zarotiadis 2010, p.8). Inequalities in the Eurozone has risen with the expansion of EU and inclusion of some eastern European countries. These countries not only show a vast difference in the GDP but also in the development rate and welfare indicators. The most advanced of the Eurozone countries happen to be Luxemburg with a GDP of € 83,400 and the least developed happens to be Bulgaria with a GDP of € 5,500 (Table 1). The difference in GDP between these two countries has remained between 15-22% for the past 7-8 years. Data and studies also show that the most advanced are the northern and western European countries while the least are the Eastern European countries (Map 1).

Map 1 GDP per capita in PPS

The process of expansion and the transition of the European Union with Euro as the common currency for all member states has created a new periphery within the EU akin to the global south. The Euro has been successful in creating divergence, raising inequalities and generating divisions among the member countries. The figure below shows the regional Inequality among the EU countries. The GDP of eastern European countries which were the last to join the EU are some of the lowest while the GDP of the original members are the highest. Greece, Portugal and Spain are other countries where GDP levels are not in par with the western European countries clearly showing that the Euro integration process has not worked equally for all countries.
Thus the Euro which was introduced as a common currency for the integration of Europe has created more divergence than convergence in the Euro region. Income inequalities in individual countries have increased with the rich becoming richer and the poor getting poorer.

List of References

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Gkagka, Aristea and Zarotiadis Grigoris (2010) “Switching from convergence to divergence in the European Union: A case study”, Society for the Study of Economic Equality. No 164, pp 1-12
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“One size fits none” (2009) URL: http://www.economist.com/node/13767363
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Map 1. GDP per capita in PPS. URL: http://ec.europa.eu/eurostat/tgm/mapToolClosed.do?tab=map&init=1&plugin=1&language=en&pcode=tec00114&toolbox=types.