Evolution of the Euro, the Current Economic Crisis - Research Paper Example

Evolution of the Euro Introduction During the late 1980s, the European Commission was headed by Jacques Delors, who tenure in the governing body is considered to be the most successful in the history of the European Union. Delors assumed office in the aftermath of the acceptance among member nations for a common system within Europe that would provide for better monetary cooperation. Further, six of the EEC countries that had agreed to the formulation of a single European act also has mutual consensus for better political cooperation. However, the period during 1988-89 saw an intense period of sclerosis, where Europe was undergoing a different change in comparison to the United States (Amy Verdun, 2006). While the United States had just come out of a recession and was growing in line with the countries in Europe, the latter was unable to increase the level of employment as the fraction of unemployed individuals began to rise despite a marked increase in economic growth. The European Commission was itself facing severe criticism for its inability to enhance the pace of enlargement and tackle the economic problems being faced by the EU members. One of the first issues that was uncovered by Delors was that EU member states were relatively slower in responding to the demanding situations and issues despite coming to an understanding that there was a widespread agreement over the need for a single market where business could be conducted without any inherent trade and tax barriers (Yoon Park, 2007). One of his first steps to realize the dream of a single market was to convince leaders within the European parliament to utilize a new system of voting that was aimed at thwarting any attempts to put any reform efforts to halt. Known as the ‘Qualified Voting Majority’, the new ruling helped Delors draft a new legislation that could outline the specifics of the European single market system with the help of the Internal market commissioner, Lord Cockfield. This uninterrupted and detailed effort led to the creation of a highly precise market system in the subsequent years. The completion of a plan for creation of an internal market paved the way for further integration within Europe and also laid the initial foundations for an common European currency. The Economic and Monetary Union was constituted through constant and yielding persuasion on the part of Delors that led to the creation of the Single European Act in 1986 (Lucrezia Reichlin, 2004). Later, as the subsequent paragraphs will highlight, the Treaty of Maastricht was also instrumental in the adoption of Euro as a standard currency. The Delors commission is also credited with initiating the reforms towards accepting the countries from Eastern Europe into the proposed single monetary system. The Treaty of Maastricht The ‘European Union’ as we know it today is a result of the signing of the Treaty of Maastricht in 1992, which based the existence of the Union on three primary foundations namely the European Community (EC), the Justice and Home affairs (JHA) and the Common Foreign and Security Policy (CFSP). Of these, the European Community was meant to serve as a future progression to the European Economic Community (EEC). The importance of the Maastricht treaty in the context of the Euro arises from the fact that is provided a clear time based strategy for the adoption and implementation of a common monetary system throughout all the signatories of the treaty. To affect this, the Economic and Monetary Union (EMU) was to adopt the Euro as a single currency and planned to implement it through a three phase plan (Chris Mulhearn, 2008). Up to the end of 1993, the objective of the EMU would be to ensure the total free circulation amongst all capitals while the next stage that would extend for 5 years would help member states coordinate their monetary and economic policies. To guide countries in achieving this, a standard set of convergence criteria were devised that allowed member states to work on reducing the interest rates, curb inflation, restrict the level of budget deficit as also debt and keep a check on the fluctuations in the exchange rates within the European Monetary set up. The second phase was extremely important as member countries were considered as business entities where they were supposed to achieve the targeted results in order to progress into the third phase. Until the beginning of 2002, the European Council conferred in Madrid and named the new single currency as the Euro. The third phase is also credited with helping establish the European Central Bank (ECB) as well as setting the requisite exchange rates with respect to major outside currencies. The ‘Euro land’ as the region where the Euro had been adopted was called began with the formal introduction of the Euro in 11 countries (Yoon Park, 2007). Countries including the United Kingdom, Denmark and Sweden opted out of the Euro system for diverse reasons. In order to help economies and businesses and to reduce the disparities between regions on the basis of social and economic criteria, the Maastricht Treaty further outlined the creation of a Cohesion fund in 1994, which was a way of providing lesser developed regions within the EU (European Commission) with financial capital that would be used for specific purposes such as the development of the infrastructure and environment. To qualify for aid from the Cohesion fund, the candidate state would have to have a GDP per capita that was below 90% of the average figure for the entire Union and must have also complied with the provisions of the Convergence criteria. Countries such as Spain, Greece and Portugal benefited immensely through the Cohesion fund as the business economy boomed in these places during the years of the second phase (Lucrezia Reichlin, 2004). The introduction of the Euro The Euro began to be used as the currency beginning 1st January, 1999. With this implementation, the Euro succeeded in becoming the common currency for as many as $300 million and was adopted across 11 countries in the initial phase of implementation. People and businesses from different countries, speaking varied languages and coming from diverse cultures and traditions became united in a single monetary system and the introduction of the Euro is often considered to be one of the most defining moments in the history of the integration that Europe has sought to achieve in terms of the financial, monetary, political and economic aspect. As such, the introduction of the Euro is an event that assumed world significance. Since then, the process of enlarging the extent of the Euro has been an ongoing process. the Euro was adopted by more and more members with each passing year and new members have been included as part of several enlargement processes. Among the ten member states that have joined since the fifth enlargement, the latest country to join the Euro zone is Slovakia, which adopted the Euro formally on 1st January, 2009 alongside 4 other members. This also made it the first among the members of the Soviet bloc to have embraced the Euro. By adopting the euro, a country within the European Union have sought to rein in the much needed stability in a macroeconomic sense and has been possible only through the adoption of a coherent framework that has provided for macroeconomic policies that have provided for stability. In this framework, the European Central Bank has played the role of maintaining stability over prices in the medium term and has also sought to coordinate the economic policies among nations. These policies have sought to work in conjunction with economies based on open markets that encourage free competition and are considered to be the best environment for helping businesses grow in a sustainable manner (Chris Mulhearn, 2008). During these 10 years, the eurozone has witnessed inflation at an average of 2% as defined by the governing council on price stability. Excluding the year 1999, given the transitions required to be affected by the economies and the ECB in general, the inflation has been at around 2.2%. much of this inflation has been contributed by the developments in the prices of commodities and crude oil. By excluding the rise in prices of energy as well as food grains, the average rate of inflation stands at 1.8%. in this context, the ECB is regarded to have ensured a steady rate of inflation and weathered any undesired fluctuations. Further, any expectations have remained unaffected by temporary movements in price that have been able to impact both long term and short term forecasts. In this context, the precision and quality with which the ECB has been working has been received with much appreciation, especially upon considering that it was a new organization with no track record. The year 2002 witnessed a cash hangover which raised the inflation temporarily by another 0.3% thereby creating a disconnect between forecasts and the actual figures. However, the forecasts of the ECB have always been received with a great sense of trust by the public owing to its ability to deliver stable price levels (Amy Verdun, 2006). Evidently, the success of the Euro can be explained only in part by the stability in price levels during this decade long period since its inception. Over this period, most nominal variables such as the short and long term interest rates have been relatively stable when compared with the fluctuations during the preceding 10 year period. Further, the volatility that once existed in real variables such as the output has also been moderated. However, the Euro has been unable to cause any surge in the growth of real GDP, which has remained stagnant at an average 2% and has led to the creation of nearly 20 million additional jobs during the same period (Donald Methieson, 2005). While it is not totally justified to attribute the Euro for the increase in the number of jobs, the ensuing macroeconomic stability as also the reforms within the labor market have led to the latter becoming more flexible. Thus, integration dynamics have played an influential role in the pace of monetary unification. Apart from being tested with time, the Euro has also been assessed in terms of its place within the macroeconomic set up of the European Monetary Union that continues to function on the basis of a common monetary policy despite in the midst of a decentralized set up for fiscal policies. In this scenario, there were concerns if the removal of the possibility to enter into the euro zone would lead to the creation of fiscal policies that were opportunistic in nature. In contrast, there were questions whether relying on growth and stability would achieve stability in the fiscal sense. The answer to both these questions is that none of them has been achieved with the introduction of the Euro. In 2007, the deficit in the public sector fell to a staggering 0.6% of the real GDP, which is significantly lesser than the 4% that was a common phenomenon between the 80s and 90s. the reforms as part of the Stability and Growth pact since 2005 have led to further fiscal discipline (Serge Gunye, 2004). In fact, efforts by several member countries over the past few years has allowed the fiscal play to adopt an expansionary approach in response to the current economic crisis, which will be discussed later. Business cycles in Europe The determination of business cycles within the Eurozone is a highly contested topic and owing to a large number of institutional changes during the 90s, the amount of data that can be studied from the perspective of the EMU has been less than desired. However, it must be pointed that analyzing a consensus in business cycles has not been consistent even in the prior periods. Prasad (2003) has found the existence of a prominent business cycle between 1974 and 1993 while the works of Helbling (2006) has shown the very little synchronism that has existed amongst the G7 members between the 1970s and early 2000s. However, there are strong correlations amongst sets of countries in this regard especially during periods of recession. There have been no visible business cycles within Europe in the period before the 1980s in contrast to the emergence of a cycle within the EU when studied for the period beginning the 90s. on the basis of their GDPs, the countries have been segregated into two distinct groups. The ‘core’ group consists of countries that have a similar level of GDP per capita with a highly synchronized rate of growth. In the non-core group, both these conditions were found to be relatively heterogeneous. In the cases of both groups, the introduction of the Euro was not found to have stimulated any significant growth in the level of fluctuations within the business cycle, a fact which is corroborated by the lack of any credible growth in the real GDP levels during this period. The current economic crisis The stability of the Euro and its increasing acceptance among states within the EU has led most observers to term is as a step forward for the union towards achieving economic stability. However, in the quest to achieve this, much has been overlooked in terms of the original challenges. The current financial crisis has truly assumes gigantic and global proportions. With its origins in Wall Street, the current financial turmoil soon spread its impact to other developed economies including the countries in the EU. The worst affected were Germany, the United Kingdom and France, where a general recession was witnessed during the latter half of 2009 and the first half of 2009 (Thierry Vissol, 2009). Despite the recent news of France and Germany coming out of recession, the story cannot be considered to be over. there are significant challenges ahead and much needs to be done in terms of restoring confidence into the financial markets and the consumers, two main sources of ensuring stability and continuance for the Euro. In the case of the Euro area. the current financial crisis has brought to focus the challenges of maintain stability in terms of finance and macroeconomics. All along, the European Central Bank and the member states have been vigilant to maintaining adequate levels of liquidity in an effort to maintain an orderly condition in the markets. Further, the euro has been used as a tool to mitigate the risks posed by the outcomes of the crisis and associated disturbances. In this regard, much of the actions by the ECB have minimized the impact of economic activity. Countries that have been a part of the Eurozone have remained insulated from many of the adverse effects of the crisis, which other countries such as the United States and Japan have had to deal with in the absence of such a cover. Conclusion As such, it can be assumed that the current economic crisis has led to a greater cooperation among European nations at unprecedented levels. This can be witnessed through several examples such as in the case of the working between the US Federal reserve and the European Central Bank, which have been able to provide liquidity on a global scale. However, the crisis has also highlighted the need to maintain greater oversight over the entities that are responsible for managing some of the largest financial institutions. As such, crisis prevention, has come to be the single keyword, which is seen to have been well understood by the members of the union as the best way to ensure overall regulation and maintain supervision over related bodies. Since December 2007, the United States has officially been declared to have been in a recession. The Euro had also recorded four to five consecutive quarters of receding economic activity and a relative slowdown in the level of economic activity (Thierry Vissol, 2009). Over a short period, it has assumed global proportions and has come to create a high notion of uncertainty. As such, the crisis has certainly challenged the euro area in a major way. As such, these past 10 years have truly represented a period between two significant challenges. It is therefore worth noting that the current crisis has provided an opportunity to strengthen the level of governance with Europe as well as the entire world. it has often been the case where uncertainty and crisis have broke free from previous resistances and thus provided new and unexpected opportunities for the future. References 1. Amy Verdun (2006), The euro: European integration theory and economic and monetary union. New York: Rowman & Littlefield. 2. Yoon Park (2007), The Euro-bond market: function and structure. University of Michigan. 3. Lucrezia Reichlin (2004), The Euro area business cycle: stylized facts and measurement issues. Centre for Economic Policy Research. 4. Thierry Vissol (2009), The Euro: consequences for the consumer and the citizen. New Yor: Springer. 5. Chris Mulhearn (2008), The euro: its origins, development and prospects. London: Edward Elgar. 6. Serge Gunye (2004), The Euro : a currency of 300 million peple. Boston: Nova. 7. Colin Crouch (2004), After the Euro: shaping institutions for governance in the wake of European monetary union. Oxford University Press. 8. Donald Methieson (2005), International capital markets: developments, prospects, and key policy issues. International Monetary Fund. 9. Helbling (2003), Are they all in the same boat? The 2000-2001 growth slowdown and the G-7 business cycle linkages. International Monetary Fund. 10. Prasad (2003), Identifying the Common Component of International Economic Fluctuations: A New Approach. Economic Journal, 113, 101–127.    Read More