Adoption of the Euro and the European Countries Economies - Essay Example

?Adoption of the Euro and the European Countries’ Economies The Euro, official currency of the eurozone (comprising of 17 member s of the European Union), has been adopted as the currency on December 16, 1995 by the European central Bank. January 1, 1999 onwards it came into effect in the world financial market. Since then it is being used as the second most important accounting currency. The significance and impacts of the adoption of euro on the economies of European countries has always been a debated issue. Some economists and politicians think that the inclusion of the European countries into a single monetary system was a good approach toward the betterment of the states of these economies. But the other group of economists has raised several questions regarding the negative effects of this inclusion, especially the recent European currency crisis and the debt crisis of 2009-2010. This paper tries to answer whether the adoption of the euro as the benefactor or malefactor for the economies of the European countries. Finally the following discussion attempts to show that although adoption of euro has managed to fulfill the goal of stabilizing the economies of the member nations, the impact of the global turmoil cannot be ignored. Reasons behind the adoption: In June 1993, in the Copenhagen criteria, the main needs for the inclusion of the European countries into a single monetary system were discussed. The need to achieve a stable monetary and economic stability for these countries, the need for appropriate rule of law and respect for the human rights and the protection for the minorities, the proper and efficient functioning of the market economy, to enhance the capability of all the countries to work together in the face of economic as well as political crises and pressure of the market forces etc. (Allam, 2009, p. 27). It was also aimed to achieve full cost transparency and price transparency. These were aimed to achieve for the single market for goods and services as well as for labour and capital. They aim was focused on the achievement of the exchange rate stability and economies of scale in the production process and hence on an efficient market mechanism with efficient market allocation and distribution of resources. Among the other major economic goals, the need for an introduction of low inflation and low level of long-term interest rates for the member countries (Tumpel-Gugerell, 2007). Benefits: The benefits obtained from the adoption of the euro can be discussed considering two perspectives. One is from the point of view of the economies of each countries and the other from the perspective of the euro zone as a whole. Considering first the entire euro area it can be said that the adoption has helped all the countries to achieve greater economic and monetary stability. It also helped to achieve greater economies of scale as well as greater economies of scope in the production of goods and services. It also helped in achieving efficient market outcomes with efficient allocation of scarce resources of the economies along with efficient distributions. The biggest benefit from the adoption was the exchange rate stability and the price stability among the member countries. After the adoption, the European countries experienced low rate of inflation and lower rate of long-term interest rates (Tumpel-Gugerell, 2007). There has been a process of convergences with respect to stable long-term interest rates and low inflation rates. After the adoption of the euro, monetary policies became more credible to the markets compared to the pre-adoption period. This was one of the major benefits that the eurozone has acquired from the introduction of a single monetary authority. The monetary policies were initiated with the major goal of reaching price stability and interest rate stability. The targeted inflation rate was mentioned to be within 2 % in the medium run (Schadler, 2005, pp. 106-110). Events, such as oil price shock in the early 1990s, have created great barriers to achieve this price and interest rate stability in the short run. But in the medium and lo run, the introduction of the euro has marked the success of this achievement. The adoption of the euro has made the monetary policies to be actively worked in the face of economic and financial shocks in the medium run. Considering all the financial markets data and the survey data it became easy to conclude that the achievement of the stable inflation expectation became possible in the long run too. With respect to the transparency and communication, the success of the monetary policies was inevitable. With the help of greater transparency and improved quality of communications of the functioning of monetary policies initiated by the central bank, it became possible to increase effectiveness of those policies taken. Monetary policies thus became the major public good for all of these economies and they possibly be used for the entire society in a more efficient way (Trichet, 2005). However, the beneficiary situations with the individual member countries were somewhat different. There occurred a diversification among the countries with regard to their economic circumstances. Inflation rates and interest rates could achieve lower levels for each and every country. Growth differentials were not insignificantly higher among countries within the eurozone, but the growth rate was not enough compared to that US had. But the diversifications do not show that the introduction of the euro was wrong, but instead it shows that the adjustment mechanisms need some more time and analysis. The main benefits of the adoption to the small open economies of the eurozone were the promotion of their trades. Complete price and cost transparencies and elimination of exchange rate volatilities euro has largely enhanced the volume of economic activities across boundaries. This has increased the flow of FDI as well as FPI across the countries. All these have raised incomes of the member countries and the volume of trade across the globe as well. From 1999 to 2006 the percentage of exports and imports as a share of GDP of the entire eurozone has increased from 27% to 32%. The flow of FDI within the eurozone has increased from 14% in 1999 to 28% in 2006 (Tumpel-Gugerell, 2007). The volume of trade between the intra-European countries has increased. Also the volume of trade between all the nations of the world has increased largely because of the adoption. The percentage ratio of the exports and imports with respect to GDP has increased from 24% in 1999 to more than 32% in 2006. The sustained growth in the world economies and the sustained growth in global trade integration have marked increase in the levels of trade among the nations. The adoption of euro gave these small open economies a great protection from the global financial disturbances. This adoption has given all the member nations to implement their economic and financial policies in a much efficient ways than other nations of the world, because these economies, with the help of the adoption of the euro, earned enough confidence regarding the power and weaknesses of each other. Again another small but important benefits were obtained by the travelers and tourists who were willing to visit Europe. This is because, with the adoption of the single currency, it became easier for them to spend without even facing any problem with regard to the conversion of currencies. The most important success with regard to the adoption of the euro has been improvement in the resistance from the problems such as crises in the financial markets of the European markets and of the world. High exchange rates volatility and inflation rate volatility between late 1970 and start of 1990 have caused many European countries to face economic and financial turmoils. But the introduction of the single currency actually helped these diversely featured economies to face the problems as the united and dependent group. This property has actually helped the economies to fight against the financial crisis of 1998 and from the large, sudden swings in the global financial markets after the terrorist attack of 9/11. The extension of the European Union has increased the market for labour services and the increased migration of skilled labour from the non-European countries (due to improvements in the information and communication technology) has helped these nations to grow their productivity and income. This has also improved the prospects of education, research and development, competition, good governance within the economies (Tumpel-Gugerell, 2007). Challenges: The adoption of the euro has introduced several challenges to the economies of the member nations. Some of the challenges were very much common with regard to the world economic and political problems, but some of them were mainly related to the adoption of euro. The major challenge that evolved with the adoption was that, these member economies were not at all similar in terms of the business cycle and they were showing some divergences regarding the economic challenges that they were facing at times. They had different economic and political structures and hence they were facing problems in terms of implementing monetary and fiscal policies and getting positive feedbacks from those policies being implemented. Although these member countries have agreed to maintain price stability and interest rate stability, but different economic and political structures of these economies could not help them to achieve those goals. Hence, they were facing problems with regard to implement sound and effective public finance policies as well as taking employment generational policies. The adoption of euro has changed the nature of the global economic problems facing each of the member countries. With the adoption of the euro, in the face of the interlinkage of each of the member nations’ economies, global economic and financial problems started affecting all the economies starting from the single economy. These global economic problems started affecting each country’s GDP growth rates as well as the short-term values of interest rates, prices, costs of productions etc. Hence, the livelihood and the future economic and financial prospects of these nations also get affected. The adoption has also increased the competition in every respect of trade among the member nations. This has also increased effects of business cycle ups and downs. The high correlation of the business cycle among the member nations has increased the problems trade integration and effects on wage rates and nominal and real prices. In relation to the productivity gains and losses, all the countries were equally sharing and getting benefitted (Tumpel-Gugerell, 2007). One of the major reasons for adaptation of the euro was the establishment of the proficient and flexible labour markets and product markets (Lavrac, 1999, p. 24). Establishments of these types of markets are possible to achieve only when there are free market conditions in both domestic and international markets. That was why the adoption of the euro was so important to achieve this free market condition. But with the adoption of the euro actually has made all the markets more dependent on external and internal conflicts, such as political and economic decision making conflicts within the countries and also within the members of the European Unions. These conflicts have basically lowered the pace of economic growth and financial growth of these nations. These conflicts have caused more differences in terms of the nature of the currency prices and in terms of the adjustments of demand and supply in the domestic markets. Thus those conflicts have raised inefficiencies in the product and labour markets. Another major problem with the adoption of the euro came up with the problems associated with the establishment of inflation and exchange rate stability in the long run. These were became impossible to achieve completely because of the fact that some of the small countries were going under the phases of economic changes where the economic and financial factors actually were undergoing some adjustment phases (both upward and downward, but mainly upward) and hence the stability became very difficult to achieve. This instability has caused other nations of the European Union to differ from the establishment of inflation and exchange rate stability. All these have made grave problems for the nations of the European Union to achieve sustained convergence and also to maintain smooth functioning within the single monetary system. Hence, inflation rates fluctuate within times and stable exchange rates could not be achieved, in the presence of the free capital mobility in the world (Tumpel-Gugerell, 2007). Another problem related to the adoption relates to the time lag for the citizens of the nations, mainly the older people to get addicted with the new monetary systems and with the new exchange and purchasing conditions, discarding the use of the old currency and adopting the new currency. In this respect it became very difficult for the citizen to judge the price of the commodities in terms of the new currency compared to the old currency. Hence, the producers got tempted to raise the prices of the products and to take advantage of the situation. Hence, the problem of the consumers with respect to their purchasing power and the adjustments toward their expenditure became very difficult. Hence, unless and until consumers fully understand all the price-setting behaviours very closely, they were bound to the most detrimental section of the economic system. This problem has been the debated issue for a long time (Trichet, 2005). There are various future challenges, being pointed out by the European Union. Among those problems the most important one relates to the achievement of the stable long-run inflation rate and interest rates, especially in the face of the frequent global financial crises. In this respect the achievement of a sustained path for public finances will be very much difficult to achieve. Again it will be very difficult to maintain long-run competitiveness in the markets for goods and services by these nations. The volatilities in the flows of FDI and FPI around the world will make it more difficult to achieve (Weber, 2011). Again the functioning of the labour market, with huge migration of labour force from the outside of the Europe, will cause more voluntary unemployment and joblessness, by affecting the divergences in the demand and supply of labour force. Another major problem with regard to the adoption of the euro will be regarding the inequality in developments of the financial sectors of the countries. This is one of the most important problems in the sense that the unequal growth will eventually lead to the problems associated with the unstable price and exchange rate systems. The currency mismatch among several countries within the same group is the indication of the fact that the countries are now facing problem in regard to the internal and external borrowings of funds and resources. Again the lack of creation of adequate institutional frameworks among the nations will actually raise the volume of public deficits and macroeconomic imbalances. According to some critiques, the adoption of euro has undermined the sovereignty of the state and their culture. This has been the major political issue for the European politicians for a long time (Tumpel-Gugerell, 2007; Trichet, 2005). Conclusion: The answer to the question asked in the introduction is very much difficult o give. In light of the analysis of the benefits and challenges of the introduction of the euro as the single currency for the nations of the European Union it can be said that the benefits are in a much better position compared to the challenges, with respect to most of the issues. Hence, it can be said that the adoption of the euro has been benefactor for the economies of the European nations, if we consider only the major macroeconomic variables as important measuring variables. If we consider inflation rate stability and interest rates stability, for both the medium run and long run, then it can be said that the adoption was efficiently beneficial. Again with respect to the resilience against local and global financial crises it can also be said that after the introduction of the single currency European nations became more capable to protect their economies from those shocks. The introduction has been beneficial in terms of the exchange rate stability and in augmenting the growth processes for these economies. But in some cases the problems have largely been dependent upon the world economic aspects, such as global crisis of 2007-08, when the economies of European nations are not only been disturbed, but also the internal integration been criticized. Hence, a need for more integration has been suggested by the economists. With respect to this it can be said that few necessary changes in the nature of the functioning of the euro has to be made in order to convert those challenges into benefits. Some economists have suggested that the structural reforms of the macroeconomic policies and of those economies are needed to make these changes. An introduction of a dynamic economic environment will also accelerate this process. Lisbon agenda (Trichet, 2005) is expected to fulfill all these goals. References: Trichet, J. C. (2005), The euro: successes and challenges, European Central Bank, retrieved on December 2, 2011 from http://www.ecb.int/press/key/date/2005/html/sp050114.en.html Tumpel-Gugerell, G. (2007), The euro: benefits and challenges, European Central Bank, retrieved on December 2, 2011 from http://www.ecb.int/press/key/date/2007/html/sp071126.en.html Weber, A. A. (2011), The euro – opportunities and challenges, Bank For International Settlements, retrieved on December 2, 2011 from http://www.bis.org/review/r110208a.pdf?frames=0 Allam, M. (2009), The Adoption of the Euro in the New EU Member States: Repercussions of the Financial Crisis, EIPASCOPE, retrieved on December 2, 2011 from http://aei.pitt.edu/12377/1/20090709111740_Art4_Eipascoop2009_01.pdf Lavrac, V. (1999), Inclusion of Central European Countries in the European monetary process, In Inclusion of Central European Countries in the European Monetary Union, ed. Grauwe, P. D. & Lavrac. V., Norwell: Kluwer Academic Schadler, S. (2005), Euro adoption in Central and Eastern Europe: opportunities and challenges, USA: IMF Read More