What are the roots of the present crisis of the euro - Essay Example

There are good promises about integrating the euro zone into one currency policy. One of the reasons why there are many countries engaged themselves into this one-currency policy is to substantially address the need of their economy to rise up above any other. However, behind all of these promises are some limitations that need to be taken into consideration (Provopoulos, 2010). One of the limitations is the substantial loss of the ability of a participating nation to set its individual domestic monetary policy.

Another is losing its ability to change the nominal exchange rate of its currency. It is therefore clear that with the optimum currency area policy; there could be no significant contribution of uniting the euro especially with the presence of weaker economies because the euro’s market strength would eventually be dragged down (McGuinness, 2010). Another main reason why the euro crisis comes into a significant issue in the euro zone is the failure of Stability and Growth Pact to ensure fiscal discipline (Provolous, 2010).

This is clear in the case of Greece in which its debt to GDP ratio had risen to 12.6 per cent which is extremely above the required maximum of only 3 per cent. This resulted to the bail-outs of Greece and Irish Republic which has become the major topic in the recent euro crisis (BBC News, 2011). The Greek government is promising a good opportunity for everyone. This entices investors to invest in its economy and in return the government substantially does its best in the process. However, this led to increase in government spending which made it highly covered with debt.

Tax is an important financial source of the government. However, it would be impractical to increase tax rate because this would only encourage investors to go to countries with low taxation rate. The worst case scenario is that this would just only encourage investors to falsify financial information just to save them from paying high tax rate. This is the reason why the Government especially in the case of Greece to result to borrowing just to meet its obligation. In reality, it is hard to redistribute wealth by increasing tax.

This would only result to other complex problems that would help aggravate the situation. However, in reality it is not only Greece doing this same strategy but it includes Portugal, Italy, Greece, and Spain. These countries are also known for overspending and borrowing for many decades just like Greece. Considering that these countries would be unable to pay their debt, and then the present crisis of the euro will be persistent and could hardly challenge the US dollar as the leading currency in the world.

Government expenditure therefore is the leading driving force allowing the rise in the share of government spending. This is evident in the case of some European countries in which government spending increased from 43 percent to 50 percent (Provolous, 2010). It is therefore important that investments in high-value added sectors should be maintained and this can only be realised by the reduction of bureaucracy and rigidities in the labour, product and service markets (Provolous, 2010). Another root cause can be traced to the problems underlying a one-size-fits-all monetary policy.

One significant problem is the issue of political and cultural differences among participating European countries (Hughes, 2010; Provolous). Unlike with the United States, there is no central fiscal authority in the euro area. This central fiscal authority is viewed to significantly contribute to redistribute fiscal resources. Furthermore, unlike in the United States, cultural differences particularly in the language make labour a less mobile in euro area. Labour is particularly important in the euro area.

However, this is continuously challenged by the cheap labour in China. This significantly increases the chance of investors to gain more in China. Thus, this leaves behind the euro area. Specifically, it was very clear that it reduced its employment