Can the Eurozone Survive?

The Eurozone crisis has been running for years starting with the housing bubble in Spain to the Greek economic downfall. In 2009, the Greece government declared the actual country budget deficit something that triggered a series of unwanted events throughout the Eurozone. The main cause for economic failure in Greece was a large debt to GDP ratio and a huge budget deficit that had been understated by the previous government. Italy and Spain also suffered from a huge debt to GDP ratio. Other aspects that contributed to the economic crisis is a poor banking system within the Eurozone. Efforts have been made to make sure that the Eurozone countries survive this tough time, which is very crucial. However, what the world, countries in the Eurozone and employees do not understand is whether or not the Eurozone will ever walk away from the economic problems that have been haunting it for some years now.
Build up to the crisis
There are a number of variations between the blueprint of the Euro and other global currencies. Unlike the build up to the development of most currencies, the rise of the Euro was entirely political. France agreed to the need for a common currency and a unified Germany because of the peace and stability a “new Germany” assures Europe. Therefore, France joined the new economic system due to the political stability it assured Europe and France (Lorenzo 2011, p. 2). This is a thought shared by Germany Chancellor Kohl who believes a common currency will ensure political unity in Europe due to the unification of the eastern and western blocs. This indicates that the roadmap to a common Eurozone currency was political (Reinhart & Rogoff 2009, p. 15). On the other hand, the macroeconomic environment play a crucial role in shaping the development of a universal currency system in Europe. When the Britton Woods financial system failed in the 1970s, it was crucial for Europe to find a solution to its economic problems and coming up with a universal Eurozone currency was crucial (Hubbard and Kane 2013, p. 1).
Though the new currency system was the right roadmap for Europe, there was too much economic influence in the creation of the Euro. First, the reason why Germany and France strongly agreed to the common currency is that it encouraged a more peaceful Europe. A common currency also reduced the fear which France had towards Germany due to its contribution towards the Second World War (Issing 2008, p. 22). On the other hand, over 50% of the Eurozone members did not meet the new currency system debt requirements but were voted in to adopt the Euro. Political power was also a major factor when adopting the Euro (Kindleberger & Aliber 2005, p. 9). This means that countries which did not make the economic cut still joined the new currency system. Such economic deficits are what contributed to a lesser stable Europe in recent years including the debt in Greece, Spain and Italy (Strupczewski 2011, p. 3).
Therefore, political influence during shaping the economic future of the Eurozone in the Early 1990s has largely contributed to the current economic crises. On the other hand, German and France economic power contributed to violation of the deficit requirements in 2003 (Wolf 2012, p. 3). From this point forth, other countries in the region found it less important to concentrate on the deficit threshold. An element that has contributed to the current Eurozone economic crisis (Veronique 2012, p. 2). The economic crises in Eurozone is not only influenced by poor planning in the roadmap to develop a common currency but the financial markets also have a hand in the economic crisis (Pavoncello 2011, p. 4). After accessing loans from financial institutions, most people end up investing in the real estate industry as the case in Spain resulting to a housing bubble (Eavis 2012, p. 4). The investment opportunities and confidence provided by financial markets across the Eurozone encouraged people to borrow money since they know they have a place to invest (Barber 2013, p. 4).
Current situation
While Greece was under economic crisis and the European Union was fighting to save it, the worst nightmare faced by Eurozone countries is the spread of the crisis to other parts of the continent (Nissanke 2010, p. 16). The crisis did spread to other Eurozone countries and due to a number of reasons. First, the Eurozone banking system was poor and nobody did something to ensure that this anomaly is corrected (De Grauwe 2012, p. 18). There was much focus on the labour market and little focus on the financial institutions which turn out to be the cause of the crisis and the spread (Lindner 2012, p. 7). For example, in 2010 European Bank declared that all banks in Europe had passed the stress tests but this was not the case. However, four months later the Ireland government announced that its banks had lost about half of the country`s GDP to real-estate loans despite the fact that they had passed the stress tests. The Ireland government was forced to absorb these loans (Eichengreen 2011, p. 2).
In the Eurozone there are a number of groups that take a different approach when it comes to making economic decisions their economic positions (Irwin 2002, p. 9). In the past (before the common currency was adopted), Germany was stable and most countries devalued against the mark when faced with tough economic times. However, after joining the Eurozone, the situation is no longer the same (Forelle and Enrich 2012, p. 2). Germany has been on the same trail as Spain, Italy and Greece for some time when it comes to national debt ratio against GDP and their financial institutions` leverage (Wearden 2010, p. 5). At the moment, we see that most Eurozone countries resolve to seek more funding from the European Bank as the case with Ireland and Greece (Blundell-Wignall 2012, p. 3). However, this is not the case with Germany. The country has resolved to changing labour policies and taxation in order to avert economic downturns (Eichengreen 2011, p. 1).
While the situations is worsening for Eurozone countries, one cannot say that other countries in the union are benefiting from the current situation. However, they are at a better economic position compared to Eurozone countries (Goodhart and Illing 2002, p. 35). A good example is the United Kingdom. Though it is not at its best economic position, its debt to GDP ratio is better compared to Italy and Spain. In 2011, the economic situation in the United Kingdom was “shaky” with decreased economic growth and poor performance in some of its sectors (Mattich 2011, p. 5). Therefore, other European Union members have not benefited from the Eurozone crisis. Furthermore, economic interdependence between the European Union countries there has been little to benefit from (De Grauwe 1999, p. 3). This is a clear indication that it is advisable for Eurozone countries to embrace their own currencies in order to avoid such a “contagious” economic crisis in future. As seen the crisis started in Greece and then spread to other countries (Dammann 2012, p. 2).
Future of the Eurozone
The new measures adopted by the European Union and the European Bank will be sufficient to resolve the current crisis and avoid further crisis. First, ensuring that all countries maintain their debt GDP ratio to less than 0.6 and the deficit at less than 3% ensures that such a crisis is avoided in future. However, the concept of a structural deficit is not fully supported and those against it think that it cannot be applied in the real life situation (Randall 2011, p. 3). Therefore, it is crucial to come up with ways of making sure that calculations are made in time and that the GDP deficit is kept at 3% (Clifffe 2012, p. 2). Therefore, the strategy in place by the EU, ECB and IMF will work but it is vital to secure a more realistic and universal solution for the “structural” deficits. The three bodies should also be stricter in making sure that the Eurozone countries maintain the required debt GDP ratio (Vucheva 2008, p. 5).
Should the Euro Survive?
It is crucial for the Eurozone to survive because with time the crisis will spread to the rest of Europe. On the other hand, if the existing crisis is not stopped it will end up ruining the economic state of the affected countries. Furthermore, a stable Eurozone ensures that there is a table Europe (Godley 1992, p. 5). This is due to the economic interdependence between European countries. Even though countries such as the United Kingdom are doing well and have not been affected by the ongoing crisis with time the downturn will get to them (Shiller 2000, p. 10). Other than regional economic problems, individuals will suffer due to decreased economic activity, increased unemployment rates and low income (Kindleberger and Aliber 2005, p. 27). Therefore, ensuring that the Eurozone survives this economic crisis is not only crucial to countries involved but the entire Europe, rest of the world and people living in Europe (Belkin, Weiss and Darek 2012, p. 4).
Can the Euro Survive?
The euro can survive given the efforts that are being put in place to control national debt, unemployment and foster economic growth. Excessive debt and a poor banking system is what contributed to the economic crisis (Eichengreen 2008, p. 44). With controlled debt and a better banking strategy, the Euro will survive (Forelle and Enrich 2012, p. 3). The Eurozone countries should stick to the principles that they formulate with regard to debt to GDP ratio and budget deficits (Wilson 2011, p. 4). Other than survival economically, the euro can survive politically given the fact that politics have played a great role in trying to revive failing European economies (Schularick 2012, p. 21). If the Euro stays as a currency, all the political advantages and disadvantages surrounding it will still be present. Political decisions will have to be made during crises and members recruitment (Belkin, Weiss and Darek 2012, p. 6). This ensures that the political state that exists in the Eurozone remains in existence. However, it is crucial to ensure that political aspects such as the use of political influence in making economic decisions are eliminated to ensure that political cohesion is enhanced (Gros 2012, p. 5).
The Eurozone economic crisis is one of the greatest economic downturns that have ever hit the region. A poor banking system in the Eurozone contributed to a spread in the crisis from Greece to other countries in the Eurozone. However, the measures put in place by the EU, ECB and the IMF will definitely solve the problem. It is crucial for the Eurozone to survive and come out of the economic trouble given the economic interdependence that exists between the countries. Despite the fact that other members of the EU like the United Kingdom are less affected or benefited from the crisis, if the crisis continues the countries will soon be affected by the economic downturn. Individuals are also affected due to increased rates of unemployment and inflation. Controlled borrowing and a new financial system for the Eurozone will be a good way of making sure that another crisis is avoided.
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