Effects of Euro Integration and Political Reasons Why Euro Currency Shouldn't Survive

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First of all, I will explain the effect of its integration, followed by the political reasons why the Euro shouldn’t survive, along with the monetary, the fiscal, the economical reasons, by business cycles differences, foreign trade, and by concluding why it just cannot work.

Let’s start off looking at the effects of the integration. When officially used in 2001, the euro was the only currency you were able to exchange in the whole of the Eurozone, and remains as of now the most integrated economic area in the world. Yet, the euro zone may be on an equal footing currency wise, but politics have changed also since then. Indeed, we have seen a rise of extreme parties which opposed to the current system, which isn’t directly the cause of the currency, but because of an increase in income inequality in each individual country.

The states who benefitted at first of the common currency were Greece, Portugal and Spain as they witnessed a rise in disposable income. Moreover in Germany, real disposable decreased, which is a fair situation because they transfer wealth from higher income countries to lower income countries in the EU. The problem was that nationalism started to kick in, as germans saw that their money was being used to raise another country’s standard (Greece when going into crisis and waiting for ages to declare default). Because there were rising inequalities within the richer countries, while the EU was overall getting richer, wasn’t the objective of the currency. Nationalism and extreme parties rose and nowadays have an increasing power over their citizens, which they manipulate with fear.

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Moreover, demographics of the euro zone are such that free movement is the ultimate way for more developed countries to grow in the medium turn thanks to migration. But is this idea compatible with the rise of the extreme parties? Not sure. And even though the situation for Greece bettered, now is a critical juncture for the Euro in which the EBS has to work better, real income fell 40% over 6 years and people expect it to be acceptable. The rise in income disparities is definitely a problem for the EU, caused by the Euro. Which brings us to the monetary issues of the Euro. First of all, the biggest problem of all is the single monetary policy. Indeed, the various eurozone economies are indeed different, they react to external stimuli differently. This is all covered in the idea of “optimal currency areas” and the eurozone isn’t one.

Furthermore, It’s this difference which triggered the Irish and Spanish property booms – Germany needed low interest rates around the introduction of the euro, those two countries definitely didn’t. From that non-optimality of the currency area came the later collapse in those two countries. (when talking about the difference of sensibility of an economy to a change in interest rates). These interest rates are set by the ECB, a bank to which all 18 countries have banking systems attached to. This is the biggest fiscal mistake ever doable, making you realize that this institution was designed by politicians, not economists. Indeed, instead there should be one single banking system for the EU, in the case of a fiscal union. In this case, Germany would’ve been beneficiary of fiscal aid, not only giving it out. Now let’s look at the economical reasons why the Euro shouldn’t survive.

While financial crises can be weathered in nation-states such as the United States or Japan, cases of incomplete political development, such as the 19th-century Scandinavian Monetary Union (made up of Sweden, Denmark and Norway) and the Latin Monetary Union (France, Italy, Belgium, Switzerland and eventually, Greece) disintegrated in the face of crisis. While showing a promising adaptation and future once installed, the EU developed a financial bubble which came from the US and weakened the unstable Euro zone’s groundrocks, as they may be political or institutional. Furthermore, in order to recover from any downfall of the 2008 crisis, the EU implemented Quantitative Easing, which was brought to an end in 2017.

How will the Euro countries survive going from 16 billion € of bonds bought a day to 0$? This is a big question mark. This way, Euro could be holding back growth and job creation, which divides Europe. Let’s now talk about business cycles. The EU countries are at different points of business cycles and thus overall guidelines for economic development at a continental scale never benefit all the countries. Moreover, countries could rely on foreign trade to boost employment, yet here it is standardized and all of the countries benefit of the same tariffs.. Furthermore, most of the countries don’t respect the guidelines regarding deficit and debt, so ultimately the aimed economic prosperity of the union cannot be fulfilled with outliers, putting mostly the creditors at risk, instead of the debtors. There’s an extent where the EU should be controlling countries going in to default at precise moments of their business cycles which are all different for the countries of the european union. And for the countries having the Euro and greece going into debt, these countries had to finance the costs of the country going into default when it should’ve taken the decision itself before the situation gets too critical.

To conclude, there are many reasons why the Euro shouldn’t survive, but mainly the point is that there are now economic interest over political interest for the Union, whereas it it’s been founded by politicians. The euro is an experiment in making a currency without a government. That’s why it’s in trouble. Markets need political authority to stabilize it, and it is this lack of governance that may sink the euro, not its economic failure. The unfinished political development of the EU is the biggest brake to progress, which can be seen through full integration, and could be a best case scenario, or by the dissolution of the currency. But is it a reasonable environment to go back in time? And would people be ready for it after so many years?

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Effects of Euro Integration and Political Reasons Why Euro Currency Shouldn’t Survive. (2021, February 22). WritingBros. Retrieved June 25, 2024, from https://writingbros.com/essay-examples/effects-of-euro-integration-and-political-reasons-why-euro-currency-shouldnt-survive/
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Effects of Euro Integration and Political Reasons Why Euro Currency Shouldn’t Survive [Internet]. WritingBros. 2021 Feb 22 [cited 2024 Jun 25]. Available from: https://writingbros.com/essay-examples/effects-of-euro-integration-and-political-reasons-why-euro-currency-shouldnt-survive/
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