Euro, Eurozone, currency, EMU Economic and Monetary Union, Europe, currency union, EEA European Economic Area, Brexit, EU European Union, monetary policy
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Abstract
The currency union is frequently lumped up with the European Union itself, which aims to achieve a more political set of objectives. Regardless, the recent upheavals the Euro zone has experienced since the great financial crisis and the ensuing recession in 2008/2009 have brought into question the very existence of the currency union. The rise of nationalism since the Brexit referendum in June 2016, as well as the recent European elections in Mai 2019, have fueled further criticism and rejection of the Euro currency. The purpose of this paper is to assess whether the Euro as a union currency has a future, and whether it would continue to generate benefits to all its members.
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[...] Regardless, experts agree that there is an urgent need for reforms, though there is no clear consensus as to which kind. Germany for instance considers that further fiscal harmonization is a price worth paying by other union members to engage in stimulus-based fiscal policies, as well as the logical next step to achieve a closer union, one that the United States for instance enjoy. Others contend that more flexibility for the fixed exchange rate regime that governs capital transactions between the union members is required. References - Benigno, Pierpaolo. Optimal monetary policy in a currency area. [...]
[...] The net aggregate effects of the Euro currency area on its members are without a doubt positive. Low-interest rates in the Euro area means that business across the union can produce goods and services, and exchange them, thus raising the amount and diversity of goods available to consumers. Countries with high credit market frictions benefit especially: thanks to the Euro, Greek companies can find the liquidity they need to finance their business, and export goods and services to German consumers, whose preference for diversity is satisfied. [...]
[...] They break down the concept of convergence between nominal components, i.e. in terms of inflation and nominal interest rate differential, and real convergence, as measured by income level and productivity growth rate. The authors also look at convergence through the synchronization of economic and financial cycles. The figures below report the nominal convergence, measured in terms of standard deviation of CPI inflation across 12 currency union members between 1990 and 2016. One can observe that as far as inflation convergence goes, the decline pre-dated the introduction of the Euro as a single currency, thanks to the gradual integration of union members into the customs union, as well as the economic & monetary union (EMU) mechanism. [...]
[...] As a result, periphery Euro members find themselves with an overvalued Euro, one that their own levels of productivity and level of unit cost of labor is too high to sustain. III. Conclusions The Euro common currency is a crucial step in a long process that can be traced back to the early 1950. It was by no means rushed: the founding fathers of the European Union took pains to ensure that the earlier members did not face barriers to trade. [...]
[...] As a result, countries like Greece, Spain and Portugal, for various idiosyncratic reasons, have not managed to cope well with. In the case of Greece, there is a permanent damage to its economic infrastructure, as well as its own people. It is not the Euro per se that has inflicted such long-lasting damage, but the policies that have been, in effect, decided by Germany, in exercising fiscal discipline, and applying austerity measures as a result. In fact, the ECB has been more activist side of things, particularly with its expansionary Quantitative Easing. [...]
