December 9, 2011 1 Comment
When the Euro was created it was known as the largest currency area in the World and had such potential.
Now with the current Euro Crisis threatening multiple European states, there are many questions that need to be answered. I’m not going to get into detail about the entire crisis mainly because I will probably develop carpal tunnel, but I would like to discuss the many flaws of the currency.
My personal question is ” Who the hell designed the structure of this vulnerable currency and who approved of it?!
To make sure we all understand the basics of the Euro, here are two important factors that everyone should understand.
- The Euro is a single currency within the Eurozone area (HAZARD).
- The Euro shares a common monetary policy with all of its members (HAZARD).
These two hazards play a huge role in the flaws of the Euro. I would like to begin my rant on the Euro with the problem concerning the interest rate.
1. All Euro zone states must share same interest rates
Within a monetary policy is a common interest rate. This goes for any currency or monetary system, and therefore the Eurozone follows it. Interest rates are used to help balance money supply and growth of a region.
It is the main tool to control the financial situation of a region or Eurozone state. The problem here is that the Eurozone all share the same interest rate levels.
Say the ECB sets an interest rate according to the Eurozone averages, but one or two of the states within the Eurozone are growing much faster or much slower than this average. Obviously, this interest rate level may not be suitable for every member of the Eurozone.
For example, if one region is showing signs of inflation (GERMANY), than the ECB may set higher interest rates. These higher interest rates are going to hurt states that might be in a recession ( GREECE).
This is something that Americans take for granted. Say you live in New York with your family. You are working fulltime, but one day you are let go from your job. This is a terrible situation, but in the United States there is so much more opportunity than anywhere else.
You can move to any other state and apply for a variety of jobs. This is made possible because we share the same language, and you are still in the same country.
Unfortunately, this is not the case in the Eurozone. It involves moving to a different country and even learning a new language. There are much more barriers simply because Europe is so diverse.
Being diverse is nice, but not when it comes to fiscal and monetary situations/policies.
3. Regions in a positive financial situation may have to bail others out.
Market discipline is not the only factor that the Euro relies on. The creators of this currency assumed that when one member is in a good financial situation, the rest will benefit from it.
This was so terribly wrong.
Yes, Positivity can spread from region to region, but I guess no one took the counterpart into consideration.
Basic economics- Deficits=boosted spending = upward pressure on inflation = pressure on interest rates.
When inflation and interest rates are unstable, everyone in the Eurozone is going to feel it. Especially the regions in good financial health because they may be bailing others out.
Now that the Eurozone is in such terrible shape, people are starting to point fingers.
If I were to blame anyone it would be the brilliant architects that masterminded this unstable currency.