Europe's Economy - Assignment Example

Has the Euro actually benefited Europes economy? Discuss It may be reasoned in many terms and forms that the Euro may be the most impressive development in the history of this world over the last twenty-five years. It was definitely the evolution of the European Union and the transformation of Greece. Since then the European Union has employed extraordinary measures to strengthen and extend its integration. Now the Union has 27 Member States, all of them enjoying an economic peace, stability and prosperity. It made headway in economic and political realm by establishing monetary union in 1999 and introducing the single currency, the euro (Menil et al, 2005). Concurrently, the economy and society of Greece underwent a markedly significant change after it officially joined the Community. The structural transformation introduced in the economic sphere has boosted efficiency, there is now financial deregulation, and there is market liberalization and greater openness. Macroeconomic stability has also made a progressive improvement. Greece adopted the euro as its currency in 2001, which entailed innumerable benefits. The economy also viewed improved performance due the economic adjustments both nominal and real implemented on a large scale. Lately, fiscal consolidation and structural reforms have augmented the economy’s efficiency and stability. Greece can now boast of a booming and prosperous economy with pride and confidence, and a living standard on the rise with each passing day. Alongside, we also observe some important challenges have risen partly due to constraints imposed on economic policy and functioning of the economy when euro was adopted by it. These limitations must be analyzed in detail and steps taken for their eradication to ensure sustained growth and to maintain the increasing living standards (Menil et al, 2005). There are concerns raised about the viability of European monetary union - to have a single currency representing 13-15 sovereign states? There is a European Central Bank that formulates and implements a single monetary policy for the euro area as a whole, but unlike United States of America, European Union is not a European political entity that would resemble a nation-state. The practicality and credibility of ‘currency without a state’ in the long run is undefined yet (Vachudova, 2005). In the first eight years of its existence euro was a total success and it has been able to dispel some of the doubts about its credibility. How Economic monetary Union was able to secure this success? First it settled the contrast between a supranational single monetary policy and economic policies such as fiscal, structural or employment policies - which have remained the responsibility of the member countries. This dichotomy was achieved by creating appropriate institutions that managed to achieve solid results. In addition to suitably designed institutions another building block required for sustained and successful performance of the monetary union is a strong policy framework, which should state clear policy objectives, intelligent and practical rules, effective policy instruments delegated to achieve those objectives, and credible commitment to objectives and rules (Vachudova, 2005). The independence of the ECB (European Central Bank) is the foundation of the institutions thus created and it is the mainstay of EMU. It is preserved in the Treaty and safeguarded by the public’s support. Similarly, the monetary policy framework is also clearly oriented to the preservation of price stability. Both the factors are time tested and have yielded towards increasing economic growth rate regardless of alternative views occasionally expressed. The outcome of the reforms may be translated into price stability along with very healthy financing conditions (Menil et al, 2005). The institutions are functioning well, there is price stability and favourable financing conditions. These conditions have lead to economic growth and a way of increasing the number of jobs in Europe. Inflation rates have been brought down to ideal level i.e. less than 2% corresponding to the ECB’s definition of price stability, together with medium and long-term inflation expectations within tolerance. These facts and figures are indicative of the current position of euro, that it has won the confidence of the markets and the public who also have faith in the capacity of the ECB to maintain price stability (Richardson, 2005). The European Union had set two very difficult objectives on its agenda - the attainment of price stability and the long-term functioning of the monetary union. The creation of resourceful institutions is one reason for the success of monetary union, the other being the ECB’s monetary policy strategy and the ingenious execution of the policy. A deep and comprehensive assessment of the factors linked with the risks governing the tenet of price stability was made (Richardson, 2005). All available information was gathered and its analytical framework employed both economic and monetary analyses to develop a faultless estimation. This review, thus provided a solid basis for monetary policy decision-making. Transparent communication has further made the monetary policy more effective, credible and comprehendible. Eventually, to continue with its effectiveness and credible image, the single monetary policy will depend on the consistency of objectives, on its ability to maintain price stability, corresponding with its medium and long-term objectives (Richardson, 2005). The ECB may describe the initial years of the Euro as having a strong influx on success and potential for development. The achievements so far are working like guidelines for the Euro to deal with the policy challenges that lie ahead. Even the countries that have still not entered the euro dominion are attracted by the benefits of sharing the single currency. Attractiveness and popularity of euro extends beyond the boundaries of the European Union and is indicative of its credibility. Several economic factors and agents have relied on the Euro and these uses have been extended out of the region of Europe (Petrakos, 2000). The currency has been successfully adopted by many individual consumers, corporations and businesses, financial investors and stock traders. The Euro has become an integral part of many public organizations in terms of functioning as rugulation standards for the function of money. The Euro has made its place as one of the most widely used international currencies in the world- and has been ranked as number two on its scope of use. Here is a bird’s eyeview of euro’s impressive role on international front since 1999 (Petrakos, 2000): The role of the Euro has been expanded as an influential currency as a huge share of the international debt securities were held in its denomination by the end of the year 2006. The exchange rates of many important countries around the world have been linked ot the Euro- which has made another function for the Euro to provide as a fundamental base for trade. Over 25% of global foreign exchange reserves are held in euro. The point many researchers want to make is that the fact that the use of euro widely by economic agents outside the euro area signifies the trust they place in its stability and credibility. This trust gives distinctive value to euro. At the same time, we consider the global use of the euro as a market-driven process. Therefore, the ECB maintains a neutral stance on the international position of euro, it doesn’t express any comments on the extent of its global utilization (Rosecrance, 2002). Inspite of an outstanding position on the international level and its anticipatory dynamic growth in the coming future, there are two key economic policy issues that need to be addressed to ensure long-term performance of the euro area economy. First, how to raise the potential for higher sustained non-inflationary growth in the euro area as a whole. Second, how to achieve this in a reasonably balanced way so as to optimize the benefits of all participants in monetary union and preserve its cohesion (O’Brennan, 2006). It is a big challenge for the European Union to maintain its economic expansion rate in the face of increasingly competitive globalized economy. The thinking tanks suggest strengthening the two basic requisites of long-term growth, viz. labour utilisation and productivity. One method of doing it is by effectively manipulating the built in factors of the European economy that will create more employment and higher efficiency. Though recent years have witnessed an increasing growth rates for both labour utilization and productivity, but still we see scope and need for continued profits and expansion. I wish to throw light on the scenario and further explain the means available with the EU (O’Brennan, 2006). Ever since its inception in 1999, euro has generated economic activity; there is a significant and steady increase in employment and the unemployment rate has dropped to the lowest level (7%). The positive effect of these developments has surfaced in the form of rising rate of participation by the labour force and a relatively stable number of hours worked per employed person, following a decline in hours worked in previous years. As a result, the overall rate of labour utilisation has increased and we expect it to continue to rise, partly in response to the labour market reforms implemented in many euro area countries that have increased the incentives to work and the employment opportunities. Even so, we still can improve upon some aspects of the euro area labour markets (Menil et al, 2005). Currently, we are virtually seeing a high employment rate in all euro area countries. It is a very positive trend that has also improved the productivity performance of the euro area. Though we are not sure whether this is a permanent or temporary improvement, but there is substantial proof that many euro countries have reaped the benefits of structural reforms and corporate restructuring. Their economies are experiencing higher productivity and potential output growth. Two major conclusions can be drawn from the labour market and productivity developments: first, they have seen the rewards of reforms implemented. And, second, further reforms must be formulated to promote higher growth in productivity and labour utilisation which will ensure a rapid long-term economic growth (Menil et al, 2005). Whatever the future may holds for Euro and the EU, it can always count on two factors at play. First, the innate dynamics of the European integration process have been active throughout and will remain functional in the positive direction. One good instance is the Intergovernmental Conference currently being held to elaborate the details of the new Reform Treaty for the European Union. And, second, the European future depends on the core components of solid foundations of Economic and Monetary Union and the euro, which is our common currency and symbol of our shared identity. Works Cited: Menil. G. et al. 2005. Economic Policy. Wiley-Blackwell. O’Brennan, J. 2006. The Eastern Enlargement of the European Union An Empirical, Conceptual and Institutional Analysis, Routledge. Petrakos, G. 2000. Integration and Transition in Europe: Economic Geography of Interaction, Routledge. Richardson, J. 2005. European Union: Power and Policy-Making. Routledge Rosecrance, R. N. 2002. Great Power Coalition: Toward a World Concert of Nations, Rowman & Littlefield Publishers, Inc. Vachudova, M. A. 2005. Europe Undivided: Democracy, Leverage, and Integration after Communism, Oxford University Press. Read More