1.0 Introduction
`According to Barbone et al. (2009) all members States of the European Union are also members of the Economic and monetary Union (EMU). Barbone et al. (2009) further states that the member states coordinate their policy-making in support for the economic objectives of the European Union (EU). Nonetheless, there are some member states that have gone further to adopting a single currency (Euro) (Barbone et al., 2009). They are the member states that comprise of the Euro area. Euro, according to Bekaert (2010) is a single currency that has been adopted by 19 European states that make up the Euro area. The currency that was introduced in 1999 brought about a major step to integration of the European member states and this has been a significant step towards the integrations.
In keeping with Bekaert (2010), the general currency policy has both economic and political logic. The countries following the Maastricht economic decisive factor and use Euro have been referred to as eurozone countries. Barbone et al. (2009) notes that using single currency have brought about advantages and disadvantages in the euro member countries. Some of the advantages of using the EU include; low inflation, longterm investments, and stable growth. As established by Barbone et al. (2009) euro provides new opportunities at an expansive market of 19 states making the program the most competitive and efficient. For some time now, there have emerged crisis in some of the eurozone member states (Bekaert 2010).
The worldwide financial crisis that began in 2008 spread and turned into a debt dilemma in Europe. No new countries joining the eurozone had time to adapt, such countries were not ready for transition and other countries took risks and borrowed excessively (Bekaert, 2010). Such problems increased the need for fiscal discipline among the eurozone countries. Greece, for instance, was exposed to a long term fiscal imbalances when the country joined the eurozone. Public debt rapidly increased to become a tool of generating income. Barbone et al. (2009) states that adopting the Euro is the last step towards unification with the common market system. Barbone et al. (2009) further adds that states have a free will od adopting the single currency. In essence, eurozone prides itself with being homogeneous and liquid, having an expansive economy, and large market. As such, all costs are reduced and the risks associated with exchange disappear. In addition, the introduction of the euro has boosted competition in goods and services production and this has resulted to positive impact.
In reference to European Commission (2007) being united by one currency brings about political harmony and stability. European Commission (2007) argues that stability aid the member countries in building towards a stable future.
2.0 The Euro Economic and Monetary unification
EMU can be defined as an advanced level of economic integration based on the single market. According to Barbone et al. (2009) EMU involves tight coordination of economic and fiscal policies for the countries fulfilling various conditions i.e. single currency and single monetary policy. European Commission (2007) indicates that the process of monetary and economic integration in the European Union is analogous to the history of the Union.
European Commission (2007) notes that when the EU was established in 1957, the entire member states concentrated on coming up with a common market. Over time, it became apparent that closer pecuniary cooperation was fundamental for the expansion and flourishing of the internal market. Barbone et al. (2009) further argues that the goal of achieving EMU, and attaining a single currency came to light in 1992’s Maastricht Treaty. The treaty set out guidelines for the EU introduction. In reference to European Commission (2007) the treaty states that the major objectives of EMU, the responsibility of the major states, and conditions the member countries should meet to adopt the euro. The conditions were referred to as the Maastricht criteria or (convergence criteria). According to European Commission (2007) the criteria included low and stable inflation, sound public finances, and stable exchange rate.
2.1 Importance of the Euro
According to Kotlowski and Dean (2000) the framework that is used to manage the euro underpins the currency’s stability and contributes to low inflation and encourages imposing public finances. This has remained as the outstanding importance of euro among the member eurozone countries. Other importances of the euro include;
As a single currency, the Euro complements single market thus contributing to increased efficiency, increased price transparency, facilitation of international al trade, elimination of currency exchange costs, and giving the curre ncy a more powerful voice amidst other currencies in the world.
Kotlowski and Dean (2000) indicate that the measure and strength of the euro area protect the currency better from the external economic shocks like the unexpected rises in oil prices or instability in the currency market.
Euro makes travelling easy within the member states
It is a tangible symbol of identity among the member countries.
2.2 A Macroeconomic Background to the Eurozone Crisis
The complete eurozone reflection below shows the past and the present eurozone crisis analyzed in a rich macroeconomics analysis. The statistical annex focuses on the eurocrisis trend and economic trends from 2000. The statistic by Anthony (2015) serves as a comprehensive tool for understanding key concepts and macroeconomic developments within the EU and Eurozone. Anthony (2015) has chosen six indicators i.e. GDP growth, Current accounts, employment growth, unemployment, private debt, and public dept. through the above mentioned indicators, it is feasible to outline four distinct economic phases.
2.2.1. After 2000, The launch of the Euro
Anthony (2015) indicates that after introduction of the Euro there was universal economic growth with peripheral imbalances. In references to Anthony (2015), the period was characterized by economic growth acceleration between 2003 through 2007. This was followed by a decrease unemployment and job creation.
2.2.2 In 2008-09 the economic and financial crisis
Anthony (2015) indicated that the economy was impacted by a wide-ranging recession, Eurozone GDP decline by 4% in 2009, followed by a pointed increase in unemployment of 10,1% in the following year (2010). Anthony (2015) further notes that public debt elevated from 60% in 2008 to 80% in 2010.
2.2.3 After 2009 Growing Divergences:
Anthony (2015) indicates that late 2009 there was a weak recovery that was marked by increased divergences in unemployment rates throughout the Eurozone.
2.2.4 After 2011, Risks of Further Recession:
In reference to Anthony (2015) there was a general downturn with lesser growth rate from 2011 to 2012. Anthony (2015) notes that some member states entered into recession and had sharp contractions.
3.0 Governing the euro area
According to Barbone et al. (2009) adopting the euro strengthens the economies of the member countries and increases integration. Kotlowski and Dean (2000) add that the economic integration must be managed efficiently to enjoy the full benefits of using a single currency. In this regard, the euro area is also distinguished from other parts of European Union by its economic management i.e. monetary and economic policy making.
3.1The monetary policy
In keeping with European Commission (2007) the eurozone’s monetary policy responsibility is bestowed on the European Central Bank (ECB). The ECB was created for that particular purpose and together with the national banks of the eurozone countries they comprise of the Eurosystem (European Commission, 2007). The ECB is based in Frankfurt Germany, while the member countries national banks are at every member states. A European Commission (2007) note the monetary policy is defined through every countries governing council and the main objective is to maintain euro stability. According to Witte (2009) monetary policy focuses on the essential mandate of eurozone price stability though other policies are deployed every time the financial cycle deviates from the economic cycle or every time heterogeneous financial developments necessitate financial tightening in some member countries. Such policies according to European Commission (2007) include; macro-prudential supervision, fiscal policy, micro-prudential regulation, and regulation of those zones that pose threat to economic stability e.g. construction. European Commission (2007) adds that ultra-loose monetary policies i.e. low or negative rates of interests, purchasing of large scale assets, long maturity lending to financial institutions, and frontward guidance into communication of the central bank increase inflation and output resulting to financial stability. Nonetheless, the measures also pose various risks and are likely to create challenges in the financial institutions.
3.2 Fiscal and structural policies
Witte (2009) indicates that the structural and fiscal policy remain in the hands of individual member countries. Nonetheless, the policies must be coordinated in order for the eurozone to attain common objectives of growth, employment, and stability. Witte (2009) further acknowledges that a major coordination formation is the stability and growth pact. The pact comprises of established regulations on fiscal discipline. Witte (2009) states that within the euro area, the member states are overly responsible for their economic policies though the national governments are obliged to coordinate their particular economic policies for them to achieve the universal purpose of employment, growth, and stability.
In keeping with Witte (2009) coordination is achieved through several structures and fiscal policy instruments, Stability and Growth Pact (SGP). Witte (2009) indicates that SGP has agreed regulations for fiscal discipline like the limits on national debt, government deficits that must be respected by all member countries.
4.0 Eurozone vs European Union
Gadzinski, Orlandi and European Central Bank (2004) indicate that the most common resemblance between the Eurozone and EU is that the two unions are founded by nations principally in Europe. EU are the countries using common currency therefore enjoying benefits like currency stability, and improved international trade. The disadvantages of EU are following similar monetary policy that may not suit the varying economic conditions of all the member countries. Gadzinski, Orlandi and European Central Bank (2004) define the eurozone as a union of countries that have joined hands to facilitate free movement of resources, and free trade. Hence, improving economic conditions of the member countries.
5.0 The Macroeconomics of European Disunion
According to Gadzinski, Orlandi and European Central Bank (2004) the economic integration movement among the EU members reflects how trends, decisions and economic approached contribute to growth. The successful introduction of a single currency is an achievement towards monetary integration. Firstly, it is the responsibility of the member states to strengthen their central bank. Arguably, a major role of the ECB is to ensure price stability in the eurozone. The ECB also purchases the value of the euro and controls inflation that would corrode the value of the currency. Arguably, the ECB is the institution with full control of the eurozone stability and has five duties. 1) Defining and implementing single monetary policy. 2) Carry out foreign exchange transactions as established in article 109 of the convergence criteria agreement. 3) Holding and managing the official overseas reserves of member countries. 4) proving liquidity. 5) Lastly, ensuring efficient functioning of payment systems.
Pagden (2002) indicates that the uncertainly regarding what will unfold in the exchange rate and consternation on the prospects of companies comes with risks. In any economy driven by exchange rates, policies that are risk averse lead to losses. Pagden (2002) argues that monetary integration has brought about numerous benefits in the European union. Some of the benefits include price transparency and projected competition among companies that would increase efficiency. Arguably, the euro eradicates exchange rate fluctuations and therefore firms are able to eliminate uncertainty in the investment plan. In addition, financial firms offer a expansive investment channels (Overtveldt, 2011). Such firms, according to Pagden (2002) are able to perform efficiently since their countries treasury management is simple and resultantly they have better control over their assets.
According to Pagden (2002) companies have greatly benefitted from the single currency since the use of single currency encourages transparency as well as competition in the labor market that is contemporarily stronger since wage union can no longer be formed in the EU. In essence, productivity trends ion wage policy are hard to create independently and the EU countries ca n not use exchange rate as a monetary tool. In this regard, wage policy is more disciplined among the EU member countries. In keeping with Efenhoff, (2009) money has three basic functions i.e. a store of value, a measure of value, and a change of value. As such, the value of the national currency can be defined as an assessment of the country’s economic confidence, and the credibility of the country’s domestic policies. Efenhoff, (2009) affirms the euro as an anchor of currency through Maastricht criteria. The EU countries have a low inflation; provide long term investment opportunities, as well as, safe and stable growth.
According to Bekaert and National Bureau of Economic Research (2010) with noble plans and strategies in future, the euro could be more effective and valuable with increased member countries. Incontrovertibly, participation in eurozone brought about both technical and politic al dimensions. Factually, political will is observed to be the most pursuant factor in this course. Efenhoff, (2009) notes that the current number of member countries is a clear indication of the limited will to be in the eurozone based on the previous crisis. Bekaert and National Bureau of Economic Research (2010) further acknowledge that the monetary union forces entity countries to come up with changes, politically and economically, thus creating harmonization. In conclusion, making efforts towards integration makes the economies of the member states more stable. In addition, greater market discipline and macroeconomic variables stability reduces risks and at the same time increase efficiency.
6.0 References
Adopting the euro - European Commission. (n.d.). Retrieved from http://ec.europa.eu/economy_finance/euro/adoption/index_en.htm
Barbone, L., Bontch-Osmolovsky, M., & Zaidi, S. (2009). The foreign-born population in the European Union and its contribution to national tax and benefit systems : some insights from recent household survey data.
Bekaert, Geert. (2010). The European Union, the euro, and equity market integration. Cambridge, MA: National Bureau of Economic Research.
Bekaert, G., & National Bureau of Economic Research. (2010). The European Union, the euro, and equity market integration. Cambridge, MA: National Bureau of Economic Research.
Efenhoff, K. G. (2009). The financial crisis and the European Union. New York: Nova Science Publishers.
European Commission (Ed.). (2007). How the European Union works: Your guide to the EU institutions. Luxembourg: Office for Official Publications of the European Communities.
The European Union and the euro zone: Outs and ins | The Economist. (n.d.). Retrieved from http://www.economist.com/node/18333103
The financial stability risks of ultra-loose monetary policy | Grégory Claeys and Zsolt Darvas at Bruegel.org. (n.d.). Retrieved from http://www.bruegel.org/publications/publication-detail/publication/876-the-financial-stability-risks-of-ultra-loose-monetary-policy/
Gadzinski, G., Orlandi, F., & European Central Bank. (2004). Inflation presistence in the European Union, the Euro area and the United States. Frankfurt am Main: European Central Bank.
Is it an advantage for European Union countries to be in the eurozone? (n.d.). Retrieved from http://www.todayszaman.com/op-ed_is-it-an-advantage-for-european-union-countries-to-be-in-the-eurozone_354998.html
Kotlowski, Dean J. (2000). The European Union: From Jean Monnet to the Euro. Athens: Ohio University Press.
The Macroeconomics of European Disunion - NYTimes.com. (n.d.). Retrieved from http://krugman.blogs.nytimes.com/2013/06/03/the-macroeconomics-of-european-disunion/?_r=0
Overtveldt, & J (Eds.). (2011). The end of the euro: The uneasy future of the European Union.
Pagden, A. (2002). The idea of Europe: From antiquity to the European Union. Washington, DC: Woodrow Wilson Center Press.
Witte, M. D. (2009). The currency denomination of external European Union imports after European Union expansion. Economic Systems. doi:10.1016/j.ecosys.2009.05.003
Anthony, F. (2015). A Macroeconomic Background to the Eurozone Crisis » Social Europe. Retrieved April 26, 2015,
