Will the Eurozone Survive - Coursework Example

?“WILL THE EUROZONE SURVIVE?” Purpose of the paper This paper delves in to the issues facing the Euro. It addresses the past, current and future situation of the Euro. It compares the Euro with other currencies and looks into the contribution of the Euro to the current crisis that faces the countries in the Eurozone. It explains the political and economic reasons and aspects for the existence of the Euro. Furthermore, this paper contains an explanation on the why the contagion in Greece spread so fast into the other countries of the union. In addition to that, there is an explanation of the measures that the European Union, the European Central Bank and the have undertaken to solve the crisis. Finally, it stipulates reasons on to whether the Eurozone can survive the crisis and whether it should survive the crisis. Introduction The Eurozone is a constituent of the European Union countries that have adopted the euro as their common currency. The Eurozone is a constituent of many countries including: Austria, Finland, France, Belgium, Cyprus, Germany, Slovakia, Netherlands, Estonia, Greece, Italy, Luxembourg, Ireland, Malta, Portugal, Slovenia and Spain. The Eurozone crisis is a state whereby the countries in the Eurozone have experienced difficulties in paying their debts. The Eurozone countries are experiencing the crisis since they have experienced deficits in their current accounts. That means the capital outflows have exceeded the capital inflows. These countries are located in the continent of Europe. These countries had faced many problems in their countries and wondered how to eliminate. The Euro was adopted first by eleven states in the 1st of January 1999. This happened after the countries decided to use a single currency across the union. The Euro was developed by the European states to be used as a common currency. Some of the complexities that these nations faced before the adoption of the euro include the devaluation of their currencies. This is a situation whereby a countries currency loses value in terms of another currency. This threatened the stability of the countries and they therefore saw it necessary to look for solutions to those problems with the interest of protecting the states from any instability. Furthermore, shift of the exchange rates of the countries was a threat and the countries sought for some Exchange Rate Mechanism (ERM) so as to solve the issue (Ralph, mar 9 2012). The nations experienced inflations at a high rate with the shifting of the exchange rate. They, thus, decided on the Exchange Rate Mechanism so as to solve the issues of inflation and bankruptcy that come with inflexible exchange rates. The countries agreed to the need of a common currency but with various purposes of protecting political and economic interest, in mind. Before entering into the contract of using one currency, the states had experienced many difficulties including the devaluation of the countries’ currencies against other countries’. There were qualifications to be met and the Euro was adopted by those states only after the achievement of the qualifications. Some of the qualifications were for the member countries to have their fiscal deficits under 3% of the country’s Gross Domestic Product (GDP) and for the states’ governments to lower and limit their debts to 60% of the GDP (Peter, & Matt, Mar 15 2012). However, after the adoption of the common currency, it is sad to state that the countries that hoped to get away from the financial crisis are now caught up in it. The countries are caught up in it because they failed to follow some laid down rules and decided to act on what they deemed fitting to them. There are many strategies underway that the countries are trying to implement to see if they’ll get out of the crisis. Analysis of the problem (Past) The European Union was formed with the signing of the Maastricht Treaty by the member states, in the year 1992. The need and means of the formation of the common currency was formulated in the year 1992. It was in 1999 that the common currency, Euro, was adopted by eleven states. The Euro was only formed by the countries that had met the selection criteria. One of the qualification was that the member states had to limit their debts to 60%. However, after the formation of the Euro, it is very unfortunate that some countries especially France and Germany failed to abide by the provisions of the Euro formation. Earlier on, a Stability and Growth Pact (SGP) that ensured the scrutiny of the member countries that violated the debt deficit requirement, was overlooked. The countries like French and Germany took advantage of that situation and exceeded the debt limit. When summoned, the states did not turn up and seeing that happen, other states took the debt limit lightly and all decided to exceed the limit. This was one of the contribution that led to the Eurozone crisis (Jack, April 26, 2013). The design of the Euro differ in various aspects with many countries. The banking system, for example, highly contributed to the crisis in the Eurozone. Compared to U.S, the banks made the Eurozone easily succumb to the crisis since its assets were huge and were estimated to be of a value between 200% and 400%. Furthermore, the Eurozone states had not been given a mandate of processing the Euros in large numbers in times when the banks were troubled so as to save them from any fall. They had to ask for Euro loans to salvage the national banks. U.S on the other hand had its assets’ value not more than 100%. U.S also had given the mandate of printing cash to its member states in an occurrence of any deficits to help save the national banks from any fall. Compared to the European Union that did nothing like expanding the fiscal policies and increasing the government expenditure and cutting down on taxes during the times of recession, U.S deployed an all-encompassing fiscal poly and increased its expenditure to the member states during the recession period. U.S also reduced its taxes by a large amount during the recession period. This brings out a great contrast between the Euros with the Dollar. The Euros lacked any unifying symbols on the. U.S’s currency had the portraits of the unifying fathers. Not having any symbol of unity or even soothing that could remind the nations of working together as one did not bring out the weight that it ought to have had. A currency unifying more than ten nations required to carry lots of weight something that the Euro did not. The Europeans did not view their selves as Europeans but rather as Greeks, French, and British. The European Union states recognized each other by the country they originated from. This made the members feel like the union was not as important and strong as such. It could only be interpreted that the union was majorly entered for the purpose of political and economic gain. They felt they did not belong together. In U.S, the states barely noticed who is who. Everyone viewed each other as the same and it was hard to even note that there was a shift of any resource of anything to any place. They all viewed everywhere as U.S (Zhang & Schwaab, 2011). The economics were influenced by the politics during the Euro creation. The major political interest for the formation of the European Union was that the countries intended to keep their selves at peace. The countries were not interested in any fights among them. A country like French was pro the Euro with Germany because she felt that the instability that had occurred before eroding the calm relationship between them would be once again cemented. The adoption of the Euro by the European states implied that the nations could now trade freely. It also meant that movement from one state to the other would be free as the barriers of trade were be eliminated. Inflation was also curbed as the interest rates of loans were kept stable. Prices of goods and services were kept stable in effect inflation ceased (Mathias& Dina, Jan 14, 2012). The political push of sternness by the countries in the Eurozone largely contributed to the euro crises. The austerity by these nations implied that expenses were cut so as to increase the revenue. This contributed to the crises since the nations were unable to make taxes out of the small amounts of the expenditure. Furthermore, due to less expenditure, investors lost confidence in those nations and moved out into other countries. Again, austerity led to severe public protests by the citizens for example in Greece and in Spain. In other nations like Italy and Portugal, it led to parties in leadership being kicked out of power. This prevented the implementation of other policies that had been stated hence the crisis persisted (Mathias, & Dina, Jan 14, 2012). Financial markets have contributed to the crisis by a large extent. European financial markets have contributed to a large extent the occurrence and persistence of the crisis. This is because, the money that the markets provide to the nations already facing the crisis is seen as a bail out. The money just settles the debt but does not provide a solution that is long term to the European nations. Furthermore, these markets are the ones that lend money at a given interest rate and are the ones that received money from the governments and individuals paying for anything that they had bought. By the financial markets lending too much money without analyzing the viability of the investments, they risked losing a lot of money in case the borrowers were not able to pay the money back. The financial markets like the banks also received a lot of deposits from people and the governments. These banks lent the money back to the people at a high interest rate which led to a lot of money creation (Stephen, & Stephen, October 6 2011). (Present) A contagion is the spread of a panic situation. Greece was the first nation to experience the financial crisis. Greece had gone through a series of crisis because of its poor policies. It had to depend on monetary support from IMF since the member countries of the union could not help. Helping Greece out of it was rather hard since not all nations in European Union have unlimited resources. Thus, it was easy for the crisis to spread. Other nations in the union have investments in form of banks in Greece. Since Greece opted to cut down on the spending and increase the tax cuts. This will make the bank investments of the other nations to gain no profit. Instead, in the long run, the states will be forced to call off the investment. Another issue is that since the currency is the euro, the Greek’s money devalues since prices escalate and the money gains very little interest from the countries that had lent to investors that invested in Greece. Even so, with the high interest rates held by the foreign investors, it gets difficult paying the loan since the interest is high (Zhang & Schwaab, 2011). The Eurozone is a constituent of many countries including: Austria, Finland, France, Belgium, Cyprus, Germany, Slovakia, Netherlands, Estonia, Greece, Italy, Luxembourg, Ireland, Malta, Portugal, Slovenia and Spain. The countries have undertaken various strategies in solving the crisis. One of it is one whereby Portugal and Ireland formed a body that lends money to states that are experiencing financial difficulties. The body is called European Financial Security Funds (EFSF). They have asked for loans from IMF and from ECB (Ralph, & Tracy, Dec 21 2011). The EU countries that are not the members of the Eurozone are benefiting from the current conditions since are not liable to any debt that they cannot pay at the moment. Furthermore, these countries are able to trade with other nations well as they are not restricted by any debt that they must pay before paying the other back. Moreover, they have no liability against any country for example the liability of helping bail out a country that has difficulties in payment of the debt. They are becoming more competitive than these other states, thus, dominating the market. (Future) Several measures have been undertaken by the European Union, European central bank and the IMF, into solving the crisis. Some of the measures undertaken by the IMF in conjunction with the European Union is the huge bailouts to the nations such as Greece. These bailouts have been used to pay debts and to settle other liabilities in those nations. Moreover, countries such as Portugal and Ireland have undertaken an initiative of forming a body that has been used to fund the nations caught up in the crisis. The body is called European Financial Security Fund (EFSF). Another measure has been by the European nations who have decided to buy bonds from the people or institutions selling them to tame the prices of the bonds from rising to a point would be unaffordable to the nation to pay (Rachel, FEB 9 2012). Another measure has been the provision of the provision of cash to banks facing troubles of collapse. This has been done majorly by the ECB. This has helped solve the crisis to some point. Another measure by ECB has been boosting the banks’ balance sheets to avoid the banks holding on to their reserves. It has helped resolve the conflict. Nations hold on to reserves when they find they have lots of debts to meet. This is not a good way of avoiding getting bankrupt since using reserves only sluggish the loan growth which slows the country’s growth generally (Patrick, Mary & James, March 1 2012). Austerity is another measure, this involves cutting down on expenses so as to boost revenue. This measure is not good as the nations that do this lower taxes and it means that the revenue does not grow. It has also led to protests in some European nations leading to difficulties in the implementation of other policies. This has also influenced the number of investors into a nation has led to recessions. To some extent, it would be best if the countries experiencing the crisis were provided with tangible solutions. These countries need to push towards making changes on the policies and having structural reforms on many sectors of the economy. They need to also improve the environment of investment so as to attract investors. The countries could also do away with policies that are inefficient in the economy (Zhang & Schwaab, 2011). The euro should survive. The euro is of great significance to the member states. First of all, the economies of the states are improved since traders can trade freely across the states, the interest rates are curbed from fluctuating insanely to a point that cannot be met by the borrowing state. Again, politically, the member nations have a good relationship among them. They respect each other and that is the reason for the persistent stability that has existed among the Eurozone states. The euro will survive. Given the measures that the nations together with the IMF are taking, there great chances that the euro will survive. However, the bail outs should not be tolerated for a long time if the nations facing the crisis are not willing to transform their policies and are not willing to implement changes where necessary. It is a shame for a country to be declared bankrupt, these nations should therefore strive hard to ensure that all the loans it has is paid back. It should also strive to limit the amount of debt to a very minimal amount and largely depend on domestic borrowings. Countries helping each other with the bailouts should not be the only option. It is possible for the crisis to end only if good and excellent economic policies are undertaken by the states. Though the process of saving Europe may take long (Jack, February 12, 2012). References Jack, E., April 26, 2013. “Southern Europe’s recession threatens to spread north”. New York Times. Jack, E., February 12, 2012. Economists Warn of Long Term Perils in Rescue of Europe’s Banks. New York Times. John, M., DEC 9 2011. “Is this enough to save the Eurozone?” Alphaville blog, financial times. Martin, w., Dec 13 2012. The disastrous failure at the summit. Financial times. Mathias, S. & Dina, k., Jan 14, 2012. S&P downgrades nine Eurozone countries. Reuters. Nicholas, K. & Jack, E., November 18 2011. Seeing in crisis the last best chance to unite Europe. New York Times. Patrick, J. Mary W & James W., March 1 2012. ECB Banks Boost take injections past 1trillion euros. Financial Times. Peter, S. & Matt, S., Mar 15 2012. Eurozone fiscal pact encounters headwinds. Financial times. Rachel, D., FEB 9 2012. Greece reach deal to austerity to meet condition of bailout. NewYork Times. Rachel, D., Jan 17 2012. “Greek say creditors may be forced to take losses”. New York Times. Ralph, A. & Tracy, A., December 21 2011. ECB unleashes a wall of money. Financial Times. Ralph, A., mar 9 2012. Draghi sees restoration of faith in Eurozone. Financial Times. Stephen, C., October 12 2011. “Europe tells its banks to raise new capital”. New York Times. Stephen, E. & Stephen, C. October 6 2011. Europe agrees to basics of plan to resolve euro crisis. New York Times. Zhang, X., & Schwaab, B., 2011. Conditional Probabilities and Contagion Measures for Euro Area Sovereign Default Risk. Amsterdam: Tinbergen Institute. Read More