On first January 1999, eleven European countries decided to denominate their currencies into a single currency. The 1991 Maastricht Treaty had established a convergence criterion for countries wishing to join the European Monetary Union (EMU). The criterion was designed to be a foundation for qualifying for the EMU and related to the size of national debts, interest rates, inflation and budget deficits. The Euro system consisted of the European Central Bank with eleven central banks of the participating states presuming the roles in monetary policy (Mody et al. 2012). In 2002, the Euro took the form of coins and noted and replaced the domestic currencies. In 2011, members increased to seventeen.
The Euro's justification was not only economic but also political. The single currency was identified as a symbol of social and political integration in the post world war two. At the micro level, a single currency was expected to increase efficiency in the market for capital integration and cross-border competition. At single monetary policy was expected to enhance price stability at the macroeconomic level. The Euro system's devotion to price stability was projected to play a part in the long-term credibility and stability of the Euro and endorse its appeal as an investment and trading currency. The Euro was also supposed to become a crucial currency in the foreign exchange markets.
Since the Euro's existence in its physical form in 202, there remained uncertainty about its future with some members failing to stay within the standards of the stability and growth pact. With the introduction of the new currency, the financial markets, and the euro area money saw quick changes. Segmented bond markets were integrated in a short period ( Jovanović 2013). There was a union in the income on government bonds. Interest rates dispersion between rates offered by different banks and distribution of country short term rates reduced. Establishment of standard benchmarks, lower transaction costs and increased competition led to the narrowing of revenues and market liquidity across borders.
The global 2007-2008 global financial crisis acted as a spark off that set the snowball of debt rolling across Europe and in the euro zone as growth deteriorated stridently. In an attempt to meet liquidity problems arising from the financial crisis, the European Union held a summit in Paris to outline a cooperative action for the Eurozone and agreed to a bank rescue strategy to increase their income. Cooperation against the crisis was necessary to counter one country from harming another. The disaster degrees put in place to prevent financial crisis seemed to be successful in sustaining short-term domestic demand and preventing the financial crisis. These measures nevertheless worsened debt and fiscal deficit, with Greece admitting that her fiscal deficit was understated.
A confidence crisis was marked by increasing risk insurance on credit swaps and bond yields caused by high debts and fiscal deficit. In early 2010, a sovereign debt crisis was clearly on the hand in the Eurozone with Greece in the eye of the rage. This crisis is referred to as the Eurozone crisis, which mostly affected Spain, Portugal and Ireland and Greece. This crisis was as a result of complex factors including finance globalization international trade imbalances and easy credit conditions. To reassure investors' confidence, the European Union and International Monetary Fund (IMF) combined a one hundred and ten billion Euros as a bailout package for Greece. This step was followed by the creation of the European Fiscal Stability Facility (EFSF) that would safeguard financial stability in Europe by offering financial assistance to Eurozone states in trouble in May 2010. Greece was expected to mobilize seventy billion Euros by privatizing her state ventures.
There were doubts on Greece's ability to service her debts and union revenues developed. Portugal too disclosed of her incapacity handling her finances and requested for European's Union help. In July 2011, leaders once again assembled in Brussels to agree on the measures to put together to avoid the possibilities of contagion. They agreed on an additional bailout for Greece in partnership with the IMF and voluntary donations from the private sector to cover the financing gap. There was also an agreement to involve extending loans repayment periods and a cut in interest rates. The leaders also agreed to increase the flexibility of the EFSF to facilitate lending to states on a preventative program. The EFSF was also permitted to intrude in secondary markets to deal with extraordinary financial market conditions.
The success of the euro has been dependent on the capability of leading economies to uphold fiscal discipline as well as the capacity of the financial services industry and private sector to preserve the trust of the markets. The Eurozone crisis has been hard to untangle due to the integration in the money and financial markets due to a single currency. Decision making is also always problematic in the Eurozone. Decisions require agreement among representatives. Political decisions reached in a particular country affect the economies of other nations which worsen this crisis management. Differing political perceptions and attitudes have acted as a roadblock to achieving structural reforms and changes within the Eurozone.
The Eurozone crisis has moved from one peripheral economy to the next, affecting core economies in the Eurozone, the European Union as a whole and its member states. The Eurozone accounts for close to nineteen percent of the world gross domestic product at the market exchange rates and the European Union close to twenty-six percent. The Euro represents twenty-six percent of the apportioned global holdings of reserves, and the Euro area forms ten percent of the global equity markets turnover. This crisis, therefore, threatens the pace of recovery of the global economy. The spillover report shows that increment of the Euro area debt crisis could cause significant global consequences. The way in which the current crisis is dealt with is crucial to Europe and the Eurozone. The formation of the Eurozone and the European Union has been part of the European vision of integration.
The Eurozone has affected the European Union economies, increased unemployment and decreased growth while threatening the European banking system. Despite signs of recovery, many European Union countries continue to struggle with sluggish growth and dissatisfied publics. Economic disparities have also created pressure and led to policy divisions among member states. For instance, Greece has taken umbrage for more strictness from the economically strong Germany. Some Eastern and Central Europe members have opposed to giving financial assistance to Greece as well as doing more to assist in supervising migratory flows because of their less wealthy economic positions within the European Union (Wallace et al. 2015). This crisis has particularly affected France and Germany because banks of these countries face significant exposures. Markets have been persistent in pressing them down. The Eurozone crisis has also affected European Union member states in that it has led to a stagnation of their export growth as well as undermining emerging markets.
In conclusion, the results of the current crisis are an issue of speculation. The Eurozone is currently not operating as an optimal currency area. Status quo is not a choice. The choices to be made will be political while the consequences will be economical. Policymakers in the Eurozone must address both long-term and short-term issues so as to gain economic stability in the European Union together with its member states. The political upshot they opt for could move Europe faster in integration or quash the developments made so far. Ultimately, the contribution of the Euro to European integration will remain to be profound and immense. It will be the duty of the policymakers to establish the vest feasible and pragmatic compromise between the economic and political realities of today and the future as they search for the right path to move forward for the single currency for the European Union and the Eurozone.
REFERENCES
Jovanović, Miroslav N. "The Economics of European Integration." Books (2013).
Mody, Ashoka, and Damiano Sandri. "The eurozone crisis: how banks and sovereigns came to be joined at the hip." Economic Policy 27.70 (2012): 199-230.
Pâris, Pierre, and Charles Wyplosz. "To end the Eurozone crisis, bury the debt forever." VoxEu. Org: http://www. voxeu. org/article/end-eurozone-crisis-bury-debt-forever (2013).
Wallace, Helen, Mark A. Pollack, and Alasdair R. Young, eds. Policy-making in the European Union. Oxford University Press, USA, 2015.
