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European Monetary Union without Banking or Fiscal Union Cannot Succeed - Term Paper Example

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The writer of this paper attempts to find whether the causes of the European Central Bank failure lie in the absence of appropriate fiscal and banking union without which the European Central Bank is unable to exert full control on its member countries…
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European Monetary Union without Banking or Fiscal Union Cannot Succeed
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Download file to see previous pages Before going into detail as to why and how fiscal and banking union can facilitate the success of monetary union, it will be prudent to delve deeper into the aspects that are responsible in creating a state of financial instability in the European Union. It is worth noting that unlike the United States, fiscal measures are not exercised by the EMU and that is where the major crux of the issue lies. The genesis of Crisis EU witnessed a sovereign debt crisis and an unprecedented banking crisis in recent years. It is important to note that both did not surface in isolation but they were interrelated. Sovereign debt crisis had its genesis in poor fiscal management over several years violating the Maastricht Treaty. A fairly large number of Spanish banks are afflicted with their own sovereign debt and because of that have lost their substantial Tier I capital. Thus, the banking crisis has its roots, albeit in an indirect way, to the fiscal mismanagement. It is also true that the US subprime crisis did contribute to the woes of the European banks. When seen in terms of the fiscal mismanagement, the genesis of a debt crisis is old. ...
The irony was that much of the borrowing was not revealed because each successive government had to meet the euro norm that restricted borrowing at 3% of GDP. Everything was fine until the global financial crisis surfaced in 2008 that exposed many EU countries for their imprudent fiscal policies. Debt levels went so high that it was impossible for the country to repay them. While providing the rescue package, the European Union attached several conditions that further compounded Greece's woes. In May 2010, Greece was provided with funds of 110bn Euros so that the government could pay its creditors. It was soon realized that given funds were not enough and another tranche of 130bn euro was planned. Maastricht Treaty among the member states specifies that total debt should not exceed 60 percent of GDP. Even this norm was flaunted by the member countries considerably. For example, in 2000, Greece had a total debt of 103.4% as a proportion of GDP that rose to 145% and 165% in 2010 and 2011 respectively. Italy too had the total debt-GDP ratio of 108% in 2000 that rose to 120% in 2011 (BBC News, 2012). Fiscal Discipline – A Necessity In the above perspective, it is quite obvious that monetary union cannot achieve desired results in the eurozone area as far as the financial stability is concerned. Fiscal discipline is extremely necessary; however, monetary union has no control on fiscal imbalances created by the member states.  ...Download file to see next pagesRead More
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