The Argument for and Against a European Single Currency - Essay Example

 The Argument for and Against a European Single Currency 1. Introduction The establishment of successful unions of states requires the adoption of policies that can secure these unions’ integration. Monetary union is one of these policies, as the example of USA reveals. However, before such plan is launched it is necessary to check whether the achievement of such integration is feasible. The strong financial turbulences that have been developed in the states of European Union that joined the Euro zone prove that in Europe the plan applied in USA was not feasible, a fact related rather to the important cultural and economic differences between member states. Current paper presents the arguments that have been stated for and against a single European currency. The review of the relevant literature leads to the conclusion that the establishment of a single currency zone across Europe was not carefully planned; as a result, inequalities in the economic development of member states have been unavoidable. In addition, for certain member states, such as Greece, Italy, Spain, Portugal and Ireland the entrance in the euro zone resulted to severe economic crisis; this phenomenon has been related to the decision of these countries to leave their national currencies and to adopt euro. In general, if compared, the arguments for and against a single European currency seem to verify the negative impact that euro had on the national economies of most member states; the above risk should have been predicted in advance by developing appropriate tests and plans of emergent exit, in case of unexpected failures. 2. Arguments for a single European currency The European Monetary Union was established in 1999 (Arestis et al. 2001). The preparation for the establishment of EMU has started about 10 years before, in 1989 (Arestis et al. 2001). It was during the Madrid Summit that the European Council set the issue of monetary union, as a requirement for the full liberalization of capital movement across the European Union (Arestis et al. 2001). While reviewing the potential effectiveness of EMU, the members of the European Council realized that such Union would not be feasible unless specific mechanisms and bodies were introduced for controlling its various parts and activities (Arestis et al. 2001). The establishment of the ‘European Monetary Institute in 1994’ (Arestis et al. 2001, p.29) was considered as a necessary step for promoting the creation of a single currency zone. In the years that followed, the arguments for the single European currency have been quite strong. More specifically, it was supported that a single currency could result to ‘lower prices and better resource allocation’ (Stivachtis 2013, p.329). In such case investment in the Union would be highly increased, a fact that could result to the significant increase of productivity and the limitation of unemployment in European Union (Stivachtis 2013). In addition, having its own currency would make the European Union a key player in the global market which is dominated by dollar (Stivachtis 2013). At the next level, the establishment of a single currency zone could lead to the important limitation of transaction costs between member states, a fact that would favour the economies of all member states, a benefit that was never achieved though (Stivachtis 2013). Moreover, the need for the introduction of a currency that would be able to face pressures from other currencies and to set barriers to important fluctuations in exchange rates globally was emergent (Arestis et al. 2001). Particular emphasis has been given to the following fact: by joining the Euro zone, a member state could secure the stability of its economy: its currency would not be exposed to the fluctuations of exchange rates, a common phenomenon in the global market (Shuibhne and Gormley 2012). In other words, a single currency could secure that a member state would not have to worry for unexpected turbulences in the international market since these turbulences would be absorbed and controlled by the single currency which is quite strong to face such pressures (De Haan and Oosterloo 2009). The recession of 2008 proved though that euro is not as strong as believed and that its potentials to protect the economies of the member states that have adopted it are quite limited (Shuibhne and Gormley 2012). Through a similar point of view it has been noted that a single currency could enhance the power of European Union to intervene in critical political and economic decisions related to the international community (Mulhearn 2008). Indeed, up to 1999, i.e. up to the establishment of EMU the European Union was considered as rather a union of states with similar political interests; the establishment of EMU indicated the potential of the Union to represent all its members, a power that allowed the Union to take critical political and economic decisions in behalf of its members (Mulhearn 2008). In other words, the monetary union was considered also as a verification of the Union’s power to take initiatives in behalf of its members, a power which is a prerequisite for pressing the international community in regard to critical economic and political issues. The above view is verified in the study of Auerbach and Kotlikoff (1998). According to the above researchers, the key reasons behind the introduction of euro have been political (Auerbach and Kotlikoff 1998). Since its establishment, the European Union have been always depended on USA; the latter have been presented as having the unique power to take critical economic and political decisions in the context of the international community, a practice that could not be tolerated by the European Union (Auerbach and Kotlikoff 1998). For this reason, the European Union has promoted EMU in an effort to create a ‘United States of Europe’ (Auerbach and Kotlikoff 1998, p.373). 3. Arguments against a single European currency According to MacDonald and Al Faris (2010) the establishment of EMU has been a wrong decision since the first instance. This view is based on the following fact: at the moment that member states joined EMU their currencies were not equal, in terms of existing exchange rates. There were member states, such as German, the currency of which were much stronger compared to the currency of other states, such as Portugal. Entering a single currency zone would result to the further increase of the distance between these member states, in regard to their economic power, a threat that become reality (MacDonald and Al Faris 2010). This risk was already highlighted by researchers and political/ economic analysts before the establishment of the single currency zone. Indeed, Gedmin (1997) had noted the risks involved for countries with unstable economies to enter a single currency zone where countries with quite strong economies would also participate. At the same time, Mundell and Clesse (2000) have supported that the key target of euro, i.e. the stabilization of exchange rates in the global market, was difficult to be achieved. This view was explained as follows: even before the introduction of euro the mark – dollar rate have been quite unstable, being reduced from ‘4.0 in 1968 to 1.73 in 1997’ (Mundell and Clesse 2000, p.78). Since mark, the Union’s stronger currency, had been unable to secure stabilization in the exchange rates how another currency, euro, which is based mostly on mark, could achieve such target? (Mundell and Clesse 2000). The concerns of Mundell and Clesse have been fully verified: euro not only failed in securing stabilization in exchange rates but increased risks for the economies of the member states that adopted it. The inability of euro to face fluctuations in exchange rates has been also highlighted in the study of Pentecost and Van Poeck (2001). In the above study reference is made to the findings of a research that focused on the comparison of USA and EU currencies in regard to their power to face fluctuations in exchange rates. It was proved that in USA asymmetric shocks in regard to exchange rates are less compared to EU where such shocks are common (Pentecost and Van Poeck 2001). This fact reveals the high volatility of EU’s currency towards global market pressures. The specific problem has led to the assumption that ‘EU countries do not form an optimum currency area’ (Pentecost and Van Poeck 2001, p.74). Particular reference should be made to the study of Roy and Gomis-Porqueras (2007). These researchers noted that the establishment of EMU was related to important risks, the most important of which seems to be the following: by joining a single currency union a state looses its control over its currency; in the case of euro, ‘all powers for the development of EMU’s monetary policies were transferred to the European Central Bank’ (Roy and Gomis-Porqueras 2007, p.29). This practice prevents a state from ‘choosing an optimal policy mix’ (Roy and Gomis-Porqueras 2007, p.29). In this way, when having to face severe financial pressures a member state that has joined the euro zone does not have options; it has, necessarily, to pass most of its powers in regard to the management of its economy to the European authorities, a fact that threatens severely the independency and the national identity of the member state (MacDonald and Al Faris, A., 2010). The weaknesses of EMU were mostly revealed in the years that followed the 2008 recession. When the particular recession first appeared the concerns in European member states, especially those participated in EMU, were limited, believing that euro was strong enough to absorb any turbulence caused because of the recession (Shuibhne and Gormley 2012). However, the years that follow proved that euro is also volatile to turbulences in the global market (Shuibhne and Gormley 2012). Moreover, the members of EMU were found exposed to the global crisis despite their participation in EMU (Shuibhne and Gormley 2012). 4. Conclusion The introduction of the single European currency in 1999 has been initiated because of a series of reasons. In fact, as proved through the literature presented above, the adoption of euro by member states was considered as the only strategy available for facing a series of problems, such as the strong fluctuations in exchange prices, the high transaction costs between member states, the lack of the Union’s power to negotiate for critical political and economic issues related to its member states and so on. On the other hand, the establishment of EMU did not lead to the benefits expected, a problem though that appeared with important delay. It could be stated that the 2008 recession that started from USA forced EMU to reveal its weaknesses: EMU has never been a fully integrated union; rather it has managed to secure its power to decide in behalf of its members for a series of critical economic issues but without prioritize the needs or potentials of each of its members. In other words, EMU has tried to develop its power in the international community so that it could secure its role in influencing politics and markets worldwide. In its internal severe communication and cooperation problems have been always existed which were not given the necessary attention simply because they were not visible to the Union’s rivals. The recession of 2008 created turbulences in the economies of all member states; in regard to this problem, EMU proved to be effective in protecting only certain of its members, a practice that also revealed an issue of inequality within the EMU. The literature published in regard to this subject verifies that EMU has resulted to the radical increase of EU’s power as a member of the international community; however, when crisis appeared in certain of its member states EMU just tried to secure its position in the global market and not to respond to the needs of its members. From this point of view, EMU has never met all terms of a monetary union. Thus, the arguments against the single European currency, as presented above, should be preferred as reflecting the actual status and implications of EMU. References Arestis, P., Brown, A. and Sawyer, M., 2001. The Euro: Evolution and Prospects. Cheltenham: Edward Elgar Publishing. Auerbach, A. and Kotlikoff, L., 1998. Macroeconomics: An Integrated Approach. Cambridge: MIT Press. De Haan, J., Oosterloo, S., 2009. European Financial Markets and Institutions. Cambridge: Cambridge University Press. Gedmin, J., 1997. A Single European Currency? Washington: American Enterprise Institute MacDonald, R. and Al Faris, A., 2010. Currency Union and Exchange Rate Issues: Lessons for the Gulf States. Cheltenham: Edward Elgar Publishing. Mulhearn, C., 2008. The Euro: Its Origins, Development and Prospects. Cheltenham: Edward Elgar Publishing. Mundell, R. and Clesse, A., 2000. The Euro As a Stabilizer in the International Economic System. New York: Springer. Pentecost, E. and Van Poeck, A., 2001. European Monetary Integration: Past, Present and Future. Cheltenham: Edward Elgar Publishing. Roy, J. and Gomis-Porqueras, P., 2007. The Euro and the Dollar in a Globalized Economy. Aldershot: Ashgate Publishing, Ltd. Shuibhne, N. and Gormley, L., 2012. From Single Market to Economic Union: Essays in Memory of John A. Usher. Oxford: Oxford University Press. Stivachtis, Y., 2013. The State of European Integration. Aldershot: Ashgate Publishing. Read More