Can the Eurozone Survive - Case Study Example

Can the Eurozone survive? Contents Contents 2 Background 3 Past 3 Present 4 Future 6 Future Prospects 9 References 11 Appendix 13 Appendix 13 Background The Eurozone is an economic and monetary union (EMU) that comprises of 16 European Union countries. The Eurozone has adopted an independent currency, the euro as their only trading currency. The Eurozone presently consists of 16 member countries which are Belgium., Austria, Slovakia, Spain, Luxembourg, the Netherlands, Italy, Ireland, Greece, Germany, Finland, France, Cyprus, Malta, Portugal, and Slovenia. Currently, the Eurozone is in the midst of a threatening and profound financial and economic crisis which raises valid questions regarding the survival and sustainability of the Eurozone member countries and also over the future viability of the most ambitious aspect of the European integration process, the Euro (McCormick, 2001). This report is prepared with the aim of analysing the past, present and future conditions of the Eurozone as studied from different aspects like political, macroeconomic and microeconomic and financial conditions so that the answer to the question of the survival of the Eurozone among these debt and financial crises can be found out through proper analysis and evidences. Past The blueprint of the Eurozone has remained significantly different from that of the other countries in the world. The political, economic as well as the monetary system constructs of the Eurozone have been established in different terms as compared to the other economies of the world and these constructs are followed till date in the Eurozone member countries (Golub, 2007). Earlier the Euro was regarded as one of the strongest currencies in the world. The prominence of the Euro was further enhanced by the peaks experienced in the global economic cycles. However, with time, it was recognised that the Eurozone economies have primary been characterized by systems which could lead to diverse credit risks, liquidity risks and break up risks and challenges in the long term scenarios. There have been dwindling capital flows, cross border financing problems, bank runs, exorbitant bond return deficits and collapsing Gross Domestic Products (GDPs) and high levels of unemployment faced in the Eurozone countries in the past as well. It can be noted that with time, the issues related to the Euro and the economic structure and macroeconomic policies of the Eurozone member states have increased rather than being resolved (Brunnermeier, Crockett, Goodhart, Hellwig, Persuad and Shin, 2009). These issues along with the political frictions in the union have created an economic platform that caused a shaky monetary, micro and macro-economic future for the states of the Eurozone. Present The debt crisis and the contagions in Greece are currently the major threats that are being faced by the Eurozone members. The contagion of Greece is fast spreading in the other member countries of the Eurozone, thereby adding to the complexities and instabilities of the economic, political and monetary systems of these countries (Kannan, Rabanal and Scott, 2009). The immediate threats to the Eurozone lie in the Sovereign Debt Crisis and the recent contagion in Greece. The issues like sharp budget deficit in Greece, large external debts and government debts in almost all the Eurozone member countries, downgraded credit ratings of the economies, surging interest rates on the government bonds, increasing rates of interest and high credits are making the economy more and more susceptible to threats and instabilities. Due to this the Eurozone had to access external aid from the international authorities like the International Monetary Fund (IMF) and the European Union (EU) (Bauby and Varone, 2014). The contagion effect is majorly noted in the economies of the Eurozone member countries. The recent debt crisis that started in Greece has led to concerns among the investors in the economy about investing their money in the governments of these countries by buying the government bonds. Additionally, the surging interest rates on the government floated bonds have made the investor groups in the country more wary of putting in their money in these financial instruments. These factors are fast leading to the reduction of the economic wealth in these nations which are also affecting the take home pay of the citizens because the incomes are being eroded by the sharp increase in the tax rates and interest rates in the countries (Tavlas, 2004). The present situation of the Eurozone member countries depicts a high level of diverse political and economic problems. These coupled with the inefficient monetary and financial systems of the zone make the Eurozone more and more susceptible to the economic downturns making the Eurozone go weak day by day which is raising significant questions regarding he ability and future scopes of the Eurozone to survive as an independent economic and monetary union. These factors not only impact the economies of the member countries but also have far reaching negative consequences for the private individuals in the Eurozone. The combination of indiscipline and inefficient economies and high debts has led to economic issues, instabilities and vulnerabilities as well as political unrests in the respective Eurozone member countries. The fast spreading of the sovereign debt crisis in Greece to the other Eurozone countries has also become a pressing concern for the government of the Eurozone and the European Central Bank (ECB). It can be identified in this respect that since the Eurozone is basically a monetary union which has no fiscal backups, therefore, the vulnerabilities of the union towards the global economic conditions is already very high (Krok-Paszkowska, 2005). Due to this fact the Eurozone was one of the regions which was most affected by the Great Financial crisis of 208-2009. Also, the highly inflexible and stringent labour markets in the Eurozone countries, makes the zone much susceptible to the pressure of adjusting in the economies. The soaring levels of unemployment, debt inflation and collapsing economies presently signal that the Eurozone needs immediate reforms and steps to revive the economy or else it is likely to face dissolution in the very near future. The economic data for the Eurozone from 2010-2014 is given in the table below. Figure 1: Economic data for Eurozone from 2010-2014 (Source: Council of Foreign Relations, 2014). Future Currently, the Eurozone is fading a number of challenges and crises which are seriously threatening the existence and survival of the member countries of the zone. In this situation, only two possibilities have been clearly identified by economists and analysts across the world. These are that either the Eurozone should take immediate steps to reform and integrate the economic policies existent in its member countries or it would collapse and disintegrate in the face of severe economic, political and financial problems (White, 2012). The collapse of the Eurozone can have major negative consequences for the global economic system because this would lead to many British, American, French and German banks and investor groups to lose thousands of billions that have been invested in the economies of the Eurozone. Also, in such a case of disintegration and dissolution, the economies of the main member countries would be devalued to a great extent leading to major disturbances and imbalances in the global economic landscape. Due to this, the international regulatory authorities like the World Bank and the International Monetary Fund (IMF) are focusing one extending adequate monetary support to bail out the troubled economies in the Eurozone (Wyplosz, 2014). Currently, the International Monetary Fund (IMF) and the European Union (EU) have agreed to support the revival and recovery of the Eurozone by providing it with adequate financial support. The implementation of the different regulatory measures by the International Monetary Fund (IMF), the European Union (EU) and the European Central Bank (ECB) are expect to resolve the macro and micro economic and financial crisis situations in the Eurozone countries to a great extent. However, in addition to these external support systems and aids, the correction of the inherent flaws in the economic, monetary and fiscal system designs of the Eurozone is also necessary to ensure that the zone can recover from the crisis situation and emerge as a politically, economically and financially stable union (David, 2011). In order to survive through the imminent crisis, the member countries of the Eurozone should focus on taking up more innovative and globally competitive reform strategies like increasing and balancing the wages, increasing the economic productivity, cutting down on the spending, increasing the taxes, enhancing economic and national wealth, developing and establishing transparent banking systems and financial systems in the economy and also find out suitable strategies to ensure management of the austerity drives in the economy in the coming years. Though, there are many imminent and inherent complexities that are acting as giant threats to the survival and sustainability of the Eurozone, yet it can be found out that there are some very useful potential ways of survival for the Eurozone The survival strategy of the Eurozone countries can be mapped on the basis of three key dimensions, which are Reform, Reflation and Redistribution (Council of Foreign Relations, 2014). Reform: It can be identified that there are basis issues in the financial and economic constructs of the Eurozone. As such, the policies and regulatory system in the Eurozone, needs to be revamped and redesigned so that the instabilities and insufficiencies existing in the economic systems can be reformed in a timely manner. Also, the establishment of suitable reforms like supply side reforms and structural reforms can help to stimulate the economic and financial growth in the countries. Both the micro and macro level reforms are needed in this respect. The micro level reforms like liberalization of the labour markets and product markets and the macro level reforms like conservative direction setting of the public sector can add to the stability of the economies of these countries (Dammann, 2013). Reflation: The economic policies of the Eurozone are said to be too controlled and tightly regulated which have traditionally created limited scopes for the zone to integrate its functioning with the rest of the economies in the world. These policies have been unsustainable and derogatory in the long term because it made the Eurozone countries susceptible to the economic conditions in the other nations but at the same time restrained its capability to tap in the economic opportunities arising in the global platform., the loosening up of the macroeconomic policies existent in the Eurozone can help to improve the monetary aspects of the member countries (Akerlof and Shiller, 2009). The thrust of the policies can be loosed from both the monetary aspects i.e. through the quantitative easing or creation of competitive devaluation and through the fiscal aspects, especially in the core countries like the Netherlands and Greece and the secondary members like Spain and Italy. This can help to prevent the contagion of Greece to spread into the other member states and impact their economies as well. Redistribution: The burdens faced by the Eurozone member countries can be reduced to a certain extent by transforming the economic pressures to economic constructs in the core of the economy These types of transparency can be created through European Central Bank (ECB) funding, explicit revenue transfers, central funding, progressive taxations and floating of the common Euro bonds in the capital markets of the Eurozone (Roscini and Schlefer, 2013). The use of the strategies to solve the impossible trinity by the Eurozone is given in Appendix 1. Future Prospects Thus, it can be identified that here have been major controversies regarding the basic financial constructs and economic policies existent in the Eurozone. Over year, the number of crises situation faced by the Eurozone member states s have depend these criticisms and controversies related to the policy formulation and implementation in the Eurozone. However, in the current situation, the access of external support from international intuitions like the International Monetary Fund (IMF) would not be sufficient to help the Eurozone overcome the giant crisis. Ina addition to the external support systems, the Eurozone has to employ suitable internal reforms that can help the countries to resolve the internal economic and political problems, In this aspect, many ancillary factors like the scale of policy change required, the direction for implementing the policy changes, the sequence and timing of the political and economic reforms and the burden sharing and challenges related to the prospects of establishing new economic and political systems should be adequate accounted for (Bruce, 2014). References Akerlof, G. & Shiller, R., 2009. Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism. New Jersey: Princeton University Press. Bauby, P. & Varone, F., 2007. Europeanization of the French electricity policy: four paradoxes Journal of European Public Policy, 14, 7, pp. 1048-1060. Borio C., 2003. Towards a macro prudential framework for financial supervision and regulation? CES of Economic Studies, 49, 2, pp. 181–216. Bruce, A., 2014. Analysis: Euro zone survival? [Online]. Available at http://www.reuters.com/article/2013/07/03/us-economy-eurozone-forecasting-analysis-idUSBRE9620B320130703. . [Accessed on 4 June 2015]. Brunnermeier, M., Crockett, A., Goodhart, C., Hellwig, M., Persuad, A. & Shin, H., 2009. The fundamental principles of financial regulation. Geneva Reports on the World Economy 11. Preliminary Conference Draft. Council of Foreign Relations. 2014. Why the Euro will survive? [Online]. Available at https://www.foreignaffairs.com/articles/europe/2012-09-01/why-euro-will-survive. . [Accessed on 4 June 2015]. Dammann, J., 2013. The Right to Leave the Eurozone.  Public Law Research Paper, 48, 2, pp.400-402. David, J E., 2011. WORLD FOREX: Euro Falls As Debt Crisis Trumps US Data: Dow Jones News Wires. [Online]. Available at http://online.wsj.com/article/BT-CO-20111202- 712552.html. . [Accessed on 4 June 2015]. Golub, J., 2007. Survival Analysis and European Union Decision-making. European Union Politics, 8, 1, pp. 155-179, Kannan, K., Rabanal, P. & Scott, A., 2009. Macroeconomic Patterns and Monetary Policy in the Run-Up to Asset Price Busts. IMF Working Paper, 9, p. 252. Krok-Paszkowska, A., 2005. How Much Diversity Can the European Union Withstand? [PDF]. Available at http://www6.miami.edu/eucenter/krok-paszkowskafinal.pdf. . [Accessed on 4 June 2015]. McCormick, J., 2001. European Union Politics. New York: Palgrave Macmillan Foundations. Roscini, D. & Schlefer, J., 2013. Can the Eurozone Survive? [Online]. Available at http://www.hbs.edu/faculty/Pages/item.aspx?num=43111. [Accessed on 4 June 2015]. Tavlas, G., 2004. Benefits and Costs of Entering the Eurozone. Cato Journal, 24, 2, pp. 89-106. White, W., 2012. Procyclicality in the financial system: do we need a new macro financial stabilisation framework? BIS Working Papers, 193, p.45-46. Wyplosz, C., 2014. Fiscal Policy: Institutions versus Rules. National Institute Economic Review, 191, 2, pp.80-82. Appendix Appendix 1 Read More