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Sustaining The European Monetary Union Essay

2806 words - 12 pages

Since the beginning of this century, the first monetary union in history has become one of the most criticized economic experiments with multiple complications.1 The Eurozone, a group of countries that share the Euro currency, form this controversial monetary union. Participants include Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Many of these countries have become dependent on financial assistance after adopting the Euro, leading to the popular belief that the European monetary union (EMU) is destined to fail.2 Furthermore, debt and illiquidity have crippled the Eurozone with no relief in sight. Despite these problems, the European monetary union can be conserved and improved to maintain stability and establish an evolving model for countries around the world.
To begin, a lot of problems with the Euro have developed in the past ten years, causing many people to question the effectiveness of the Euro. The major problems include a debt crisis in many participating countries, fundamental flaws of European banks, and problematic monetary policy. The debt crisis exists because member countries are issuing debt in a currency they do not control, leading to overpowered financial markets and government failure.3 The European Central Bank (ECB) faces a similar fundamental problem with the inability to handle asymmetric shocks with indiscriminate monetary policy.4 Economist Jean Jacques Rosa notes that these problems occur because the Eurozone is not an “optimal currency area” – a region lacking synchronized economies and inflation rates.5
The first underlying problem of debt crisis exists because member countries are issuing debt in the Euro – a currency they do not control. The European Central Bank has control over the entire Euro and can provide as much money as necessary to any given country. However, each separate government has no control over the ECB, meaning that each country cannot buy government debt when imperative. For example, if investors decide to sell Spanish bonds to invest in another member country, then the liquidity (money supply) leaves Spain. Once having left Spain, these Euros are invested in another member country and are not changed in value inside the Eurozone. This constant flow of the Euro between countries without a flexible exchange market or exchange rate is what causes governments to struggle. In a country outside of the EMU such as the United Kingdom, a foreign exchange market maintains liquidity while the Bank of England acts as a last resort to buy government debt. With these two insurance mechanisms, it is harder for investors to trigger a liquidity crisis that will force the UK government into default. 6
Another problem within the debt crisis involves the high private debt that causes slow growth and more harm than public debt. When households that borrow too much trim their spending and...

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