The Euro is the official currency of the European Union and is currently used in 19 of the 28-member states. The Euro was introduced on 1 January 1999 to the world financial markets as an accounting currency.Today, the Euro is recognized as the second most traded currency after the United States dollar (USD). The origins of the Euro were partly political with the Euro promoting economic union as well as a political union within the EU. The formation of the Euro as a currency provided a foundation in which the EU could solve a variety of problems in which they faced. However, throughout this essay I will be discussing the positive or negative influence that the Euro has had on the EU since its introduction in 1999 and consider whether the recent problems that the Euro has faced connote that the creation of the Euro was a mistake that hindered the progression of the European Union as well as challenge to what extent the recent problems the Euro has faced signifies the fact that the introduction of the Euro was a mistake. In this essay, we will ultimately be analysing the positive and negative effect that the Euro had on the European Union since it’s much-anticipated introduction to the financial market in 1999 where the Euro was tipped to heavily compete with the U.S dollar the world’s most traded currency.
The Euro was introduced into the global market in 1999 due to the fact that the European Union believed that its introduction would solve a range of problems as well as contribute to the success of the European Union. The origins of the Euro were partly political, a step towards to closer political union as well as economic. The introduction of the Euro aligned with the EU’S plans to Europeanise the member states within the European Union as the Common market functioned over eight different time zones before the introduction of the Euro which hindered the progression of the common market as well the economic status of the Single Market. The replacement of the domestic currencies of various member states provided many economic advantages to businesses and citizens of the EU.The formation of the Euro boosted the trade of goods among member states and made the transportation of goods much more efficient whereas before the introduction of the Euro trade stopped trade between states from being unstable. States were able to trade more freely without different currencies hindering the economic relations between themselves, the Euro ultimately increased higher levels of integration within the Single Market which thereby promoted economic growth and stability. In a recent study for the European Commission, Baldwin, DiNino, Fontagné, De Santis, and Taglioni (2008) argue that the increase in trade due to the euro is likely to have been generated by a rise in the number of exporters and products traded across borders. By reducing the fixed and variable costs, the euro has subsequently enabled previously non exporting firms to start exporting, whilst firms which were already participating in a trade to expand the range of products they sell abroad. They provide stylised evidence consistent with this explanation from member states who had adopted the euro such as France, Belgium, and Sweden in order to support their hypothesis. However, on the other hand, Berthou and Fontange found out that their results became weaker when they restrict the control group to those EU countries that did not join the euro. The Euro ultimately, led to huge strides in economic integration and progression and was a significant factor in the growth of the Single Market.
The introduction of the Euro was beneficial as it lead to the end of transaction costs which meant that there was no need to pay to convert currencies which meant price comparison was now straightforward which encouraged cross border trade between states that adopted the Euro. The effect of the end of transaction cfoststs are significant, this can be seen through the fact that the UK would’ve saved approximately £1 billion if they had adopted the euro. By switching to the euro, members of the EMU were expected to save as much as $30
Billion a year .Savings were so large due to the reduction in transaction costs associated with the exchange of currency by firms that import or export to or from many countries .Along with eliminating exchange currencies, the problems with exchange rate volatility were also eliminated between member nations which only led to the fluctuations between the Euro, the dollar and any other important European currencies outside the EMF. Exchange rate fluctuation were an additional transaction cost because they made, because they made trading between firms from different countries more risky. The elimination of this risk will help international trade, therefore, giving advantages to all EMU countries. The removal of exchange fluctuation was hugely influential in the growth of a variety of business and industries in the Eu, as it reduced the risks of businesses especially losing money at the hand of exchange rate fluctuation and as a result ensured the possibility of greater prosperity within the EU and not just states who are members of the EMU.
Two other major benefits of switching to the euro deal with the prevention of competitive devaluations and speculation. A competitive devaluation is whereby one country will devalue its currency to get more goods. This may encourage other countries to respond by also devaluing their currency to maintain their own competitive advantage. If countries are making great efforts to keep devaluing against each other, it could be termed a currency war. As one of the primary goals of the EMU is to keep inflation down the switch to a single currency was a wise decision. In terms of speculation, a single currency for a group of nations would decrease the volatility of the relationship between a group of nations as well as the speculation. Speculation happened on a regular basis throughout Europe because whenever people predicted a currency would drop in value, they would instantly sell their holdings in that type of currency to gain a competitive advantage, other will follow the trend of matriculating. To control the volatile speculation that was taking place European countries purposefully kept interests high which was consequentially hindering economies within Europe especially during the 1990’s and early 2000’s. Ultimately, by the elimination of speculation economies of member states would be able to grow more effortlessly when unnaturally high interest rates were needed to ward off speculation. The ending of speculation and competitive devaluation as well as the end of transaction costs are all beneficial to the European Monetary Union and were the foundation of the monetary fund as it promoted cross border trade as well as allowing businesses and consumers to save a considerable amount of money.
However, on the other hand there are significant reason that suggest that the Euro has been a failure since its introduction. The main problem that opponents of a one currency EMU focus on is that one country can be in a recession, and have no choice but to wait it out, ultimately being part of the EMU may mean that countries who strong economically may be sacrificing the progression of their nation due to being a member of the EMU, which would leave the monetary policy of the EMU damaging many more nations than helping, which is a situation which is not new to the EMU with countries who are feeble such as the likes of Portugal ,Italy, Greece and Spain heavily relying on the dominant economic forces within the EU such as Germany who able to provide economic support which ultimately hinders the progression and stability of the German economy with the likes of Greece owing 57.23 billion Euros with Germany being by far the largest creditor, whilst the whole Euro zone governments as a whole contributed Greece 52.9 billion euros in bilateral loans under the first bailout agreed in 2010, known as the Greek Loan Facility whilst under the second loan bailout agreed in 2012 Athens has so far received 141.8 billion euros from the euro zone’s financial rescue fund. Ultimately, the never ending recession of primarily Greece and many other EMU member states have damaged the likes of Germany , France and the U.K economies and has meant that these countries have had to suffer which has consequentially led to Brexit in 2016 as voters who had endured five years of economic crisis, falling real incomes and welfare cuts vented their anger and frustration by voting to leave the EU, as well as the growth as Right wing Eurosceptic parties such as the AFD to grow within states like Germany who are tired of the Eurozone relying on them as an economic stronghold.
It can be also argued that by the creation of a single currency throughout Europe the economies will be secured together which will lead the business cycles to eventually merge. If the economy and business cycles were in sync, states would not be as fearful of fellow members of the Eurozone being in recession. Furthermore, one may suggest that there a variety of ways in which economic problems can be resolved, as even though a country gives up its right to alter its monetary policy as states still maintain the right to change their fiscal policies which will enable the EMU to freely choose how much they tax people. If only one EMU country is having economic problems, then the other countries can rise taxes to increase the purchasing power from those countries. The excess money could then be used to help bail out the country that is having problems. There has also been talk of the European Union budget increasing, so they would also be able to assist countries in the union that undergo economic problems in the future or countries who may have had previously faced economic prone to recession or a debt crisis.
The most recent example of the weakness of the adoption of the Euro was the financial crisis or European sovereign debt crisis which had been taking place within the EU since the end of 2009 which was one several Eurozone states were unable to refinance or repay their government debt or to bail out over-indebted banks under their national regulation without the assistance of third parties like other Eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF).The sovereign debt crisis which occurred implicated how feeble the Euro was as a currency and showed that there were a variety of alterations needed.The manner in which the PIGS have struggled (Portugal, Italy, Greece, and Spain ) since there introduction to the Euro was exposed. Greece, for example, saw its economy contract from 2008 to 2013. Italy has experienced a double-dip recession and 14 consecutive quarters of negative growth since 2011. Both countries have high levels of unemployment: 25 percent in Greece and 12 percent in Italy which make us questions how beneficial the adoption of the Euro was to the EU. Even though many have claimed that Eurozone member states are no longer in a crisis and no states have decided to leave the Euro, one could strongly argue that problems have been patched up and hidden. For instance, the question of how to deal with a substantial amount of public debt levels given the currency area’s structural rigidities and institutional constraints which include a ban on monetizing the debt.
In conclusion, there are many positives and negatives of the Euro which are clear to see, that make us view the Euro since its introduction as a success as well as a problematic barrier. However, even though the Euro has faced significant problems recently one could say that it did not only do the members of the EMU elect to put the euro into circulation, there are other countries, including Croatia, Bulgaria, Sweden, Romania and many other nations that are trying to join the EMU, which reflects the fact that many states within Europe hold the EMU and Euro in high esteem and shows that states believe that joining the Eurozone would ensure economic security which shows that many states continue to have confidence especially as the eurozone has reassured states by the radical changes they made to stop the possibility of financial crisis ever reoccurring and is more than ever completing as a global currency in the same way as the dollar.