The Euro-zone is an economic and monetary union (EMU), comprised 17 European Union (EU) member states, which have all adopted the Euro as their common currency and sole legal tender. Within the zone, monetary policies are the responsibility of the European Central Bank (ECB), governed by a president with a board, comprised national central banks leaders. Fiscal policy is less centralized, but restricted by the previously agreed upon rules within the Broad Economic Policy Guidelines. These guidelines set individual national limits on deficits and national debt - Fiscal Commitments (European Council 2011).
In the early 2000s the euro grew in appeal for many reasons: euro-zone was similar to the U.S. economy in relations to trade openness and GDP, the region was able to keep inflation under control and never experienced external debt or current account deficit like the United States. This favored the euro against the dollar. (Nesvisky, 2005). Many experts thought the euro was inevitably the rival to the dollar and would eventually take over the the reserve currency. The thought was not if, but when this would happen.
By 2005 many central banks were beginning to diversify away from the dollar and began to hold more Euros; by the end of 2006 the total number of Euros in circulation exceeded dollars by 75 billion, further evidence of its gaining strength (EconEdge, 2007). In addition, a study by several economists revealed that the reserve currency is basically the one that more countries peg their own currency to and could easily transition to the euro on the condition that most countries would soon begin to manage their currencies with respect to the euro instead of the dollar. These results were based on examining the currencies being used in international trade as well as “composition of central banks’ foreign exchange reserves” (Nesvisky, 2005).
Fast-forward to today, the post-worldwide economic crisis, and some believe the existence of the euro-zone is in danger. Weakness in the euro has been exposed as the bailouts have already cost over €350 billion since 2010 (Fidler, 2013). Recent events have made it evident that a common currency across nations with previously varying fiscal and monetary policies is much more difficult than thought. The lack of each individual government’s ability to impose effective fiscal or monetary policy independent of the other euro-zone nations as an economic tool, has become a huge disadvantage during times of crisis. These issues have cast a doubt on the ability for the euro to one day replace the dollar as the reserve currency. When looking at all of this it is important to study why the measures put in place have not been able to solve the problems and what changes can be made to improve.
Guidelines put in place to kept the euro-zone economically healthy, have failed under crisis and the monetary union is prone to collapse (Fidler, 2013). Up until now, the strategy has been that if the nations within...