Anticipated Benefits of Adopting Euro - Case Study Example

Anticipated Benefits of Adopting Euro Name Institution Course Date Anticipated Benefits of Adopting Euro The European Monetary Union (EMU) is considered the only section of a mega vision representing an integrated Europe (Cooper and Tomic, 2007). Its formation has gone for a very long time and has vast historical significance to the whole of Europe. During the signing of the Paris and Rome conventions, the leaders all over Europe came up with European Union legal basis which has foreseen a very substantial advancement of Europe as a continent (Cooper and Tomic, 2007). They have been able to form a common market which has allowed the free movement of both people and goods as well as capital. This has been considered as one of their greatest achievement as a continent. At the beginning of the EMU, it had a total of 11 Member states but for now, it has a total of 17 states (Cooper and Tomic, 2007). The EMU entails changes within the system that exists between currencies of different nations and then integrating it into a single European currency which is known as the euro (Panizza et al., 2009). These common currency led to the separation of National Central Banks which is comprised of separated National Monetary policies and into a single National Central Bank as well as a single European Monetary policy. Therefore, the adoption of the euro has been one of the most courageous partaking every performed (Veen, 2002). It was primarily performed so that independent states may earn profits from the use of the single currency. This essay will describe the key predicted benefits of implementing euro for both organization and Eurozone member states. In addition, it will detail out the origins of the Eurozone sovereign debt crisis. The benefits derived from unionization of the euro can be observed in two vantage points; either from the individual member state or from the Eurozone as a whole (Beetsma and Giuliodori, 2010). The convergence operations for Eurozone entrance is directed at making sure that any participation within the Eurozone is beneficial for both. The emergence of the euro as a single currency unit is expected to bring about stability of the exchange rates within the zone (Beetsma and Giuliodori, 2010). This stabilization of the exchange rates has supported trade as well as enabled economies of scales. It has also offered stable condition for a more efficient allocation of resources. For the ordinary citizens, the advantage they derive from the unionization of their currency is that the issue of conversion is completely barred since the member states within the Eurozone share the same currency (Tavlas, 2004). Additionally, it is predicted to result to monetary stabilization within the Eurozone (Kopf, 2011). This will be achieved by minimizing the rate of inflation as well as a merging of long-term interest’s rates to match the low levels dominating in the member states that possess the highest monetary policies credibility prior to the introduction of the euro (Pisani-Ferry, 2013). Furthermore, in spite of the various economic shocks that occurred over the years, which was primarily caused by the cases of oil prices as well as the development of the financial markets and inflation, the euro stayed stable and anchored to price stability as described by the European Central Bank (Acharya and Steffen, 2015). Price stability paired with low inflation rates as well as low long-term interest rates has offered significance support for sustainable economic growth and job creation. In addition, for the member states who found that a political integration as desirable, the existence of a Monetary Union was one of a step closer towards political union (Beetsma and Giuliodori, 2010). The member states of the Monetary Union anticipated potential advantages which are categorized into two groups namely: macro and micro economics. The various advantages connected to micro-economics includes: the elimination of transaction costs and exchange rates fluctuations; increase in foreign trade amongst the member states; effective capital allocation and an increased price transparency as well as competition (Maurice et al., 2005). On the other hand, macro-economic advantages included: low inflation rates due to the presence of a common currency and an independent ECB. Another example of macro-economic advantage that was anticipated by the member states was eradication of the issues that develop due to currency instability (Maurice et al., 2005). With regard to an individual member state, especially for those that had either a small or an open economy, the main benefit that was much anticipated was their ability to promote trade activities (Maurice et al., 2005). The integration of the euro has brought about both price transparency as well as eradication of exchange rates volatility. This is expected to enable various member states to conduct their economic activities efficiently across borders. It is also predicted to bring about a significant increase in trade integration in both the intra-euro area trade as well as foreign direct investment (Bukowski, 2011). The increase in cross-border trade between member states may be as a result of the integration of multiple currencies into a single functional euro currency. The smaller economies within the member states have found it important in adopting the euro since it may offer stronger protection against disturbances existing within the international finances (Maurice et al., 2005). This kind of disturbances have had very serious effects to the smaller economies exposing them to potential risks of external shocks. The introduction of the euro is expected to make the European single markets more efficient in terms of their operations. It is expected to enable and encourage competition between different countries by giving access for 17 member states to find the best deals ever without the fears of calculating exchange rates or even costs incurred in conversion of the funds (Maurice et al., 2005). Furthermore, a number of surveys have indicated that the introduction of a common currency is very beneficial especially since having a national currency has been one of the biggest challenges. With regard to this, both the single currency as well as the common monetary policy is anticipated to eliminates further competition devaluation, eases foreign direct investments and also is expected to create business deals that are long-term (Veen, 2002). The Eurozone sovereign debt crisis can be termed as the debt crisis that has been around in the European nations since the end of 2008 (Issing, 2011). A number of Eurozone states such as Ireland, Greece and Spain were incapable of refinancing their debt offered by the government and different banks without the assistance of a third party. The Eurozone debt crisis took place in the period when Eurozone countries were confronted with the collapse of financial institutions, rising bond yield spreads as well and high government debt (De Grauwe, 2010). The debt crisis started in 2008 that was preceded by the collapse of Iceland’s banking system which eventually spread to other countries primarily Greece and Portugal in the following year. The Eurozone debt crisis resulted to the crisis of the confidence for different European businesses and economies (Maurice et al., 2005). The European sovereign debt crisis was enhanced by the financial guarantees who were scared of the collapse of the euro (Mucha-Leszo and Kakol, 2009). Eurozone member states were unable to repay their government debt without the help of a third part like the European Central Bank and International Monetary Fund. Seventeen Eurozone member states agreed to design the EFSF in 2010in order to address the debt crisis (Maurice et al., 2005). The major causes of the Eurozone debt crisis entails the financial crisis between 2007 and 2008 and the great recession that took place between 2008 and 2012. Another cause of the debt crisis is the real estate market crisis and the different countries’ fiscal policies related to the government expenses and revenues. This pattern peaked in 2009 when Greece disclosed that the previous government had unreported budget deficit which was a violation of the EU policy (Pisani-Ferry, 2012). This resulted to the fear of Euro collapse as a result of the political and financial contagion. According to the report released from the United States Congress, the European Sovereign debt crisis started publicly in 2009 when the Greece government realized that the previous government had misreported its budget data (Lane, 2012). As mentioned earlier, this led to fear among the investors which resulted to the rise of bond spread to unmaintainable levels. From the investors, fear blew-out that the fiscal positions of several Eurozone member states were unsustainable. In 2010, as a result of the growing fear, lenders claimed the need to receive higher interest rates from Eurozone countries affected by the debt crisis (Lane, 2012). This made it hard for such countries to fund their budget deficits. In addition, a number of Eurozone countries raised their taxes and minimized their expenditures so as to fight the crisis which led to social upset and low confidence towards the leaders. In Greece, the debt crisis was seen on the sovereign bond yields which led them to needing assistance in 2010. The country received bailouts from EU (Lane, 2012). The central banks stepped up to assist financial institutions that were in trouble due to the Eurozone debt crisis. They instituted measures that prevented a larger banking crisis. The potential impacts of the Eurozone debt crisis can be explained by the economic theory (Nelson,Belkin and Mix, 2011). One impact of this crisis is monetary deflection. According to the theory, if one or more governments defaulted banks which act as the investors in government debt, there will result capital losses. This may lead to banks going out of business causing a decline in monetary supply. As a result of the Eurozone crisis, banks were affected immensely which led to deflation that made euro more valuable (Lane, 2012). However, many euro member states were afraid of the crisis and thought of returning back to their domestic currency. The central bank resulted in the implementation of the sterilization measures that reduced the supply of money (Lane, 2012). The European sovereign debt crisis did not only affect the European economy but also the economy of the United States. The European demand for American export has fallen over the years. Few good are shipped to Europe (Pasani-Ferry, 2012). The currency flow from euro to dollar has significantly increased the value of the dollar which as ultimately hurt export competitiveness. Importers are negatively affected but the exporters gain in return. According to the game theory, people act different in an even of an economic situation which may entail strategizing in order to gain the best outcome. One person always wins and another one loses which results to a zero-sum equilibrium (Pasani-Ferry, 2012). Nevertheless, in real life, this may not be the case. In the case of Greece, the government did not offer correct financial picture since it wanted to be part of the Eurozone. This worked for some years until the Eurozone debt crisis in 2008 where it was badly hit. The country was bailed out by EU and IMF which meant that Greece had to commit to some reforms in order to be aligned with Eurozone standards. Greece has been going along with Eurozone reforms but changed its strategy recently (Lane, 2012). Generally, Greece and Eurozone are in a high-stake game where each party wants to get the most concessions. Game theory explains how this framework might play. For instance, Greece might return to its traditional currency which will better its economy. To sum up, the adaption of Euro was the vision of an integrated Europe. The adaption of Euro by Eurozone member states anticipated many benefits. For instance, the adaption of Euro was anticipated to result to transaction reduction which is viewed in terms of visible and invisible savings. In addition, Euro was expected to reduce fluctuation rate and prevent competitive devaluation. The euro was expected to retain fluctuation at low rates and eliminate speculations within Eurozone member states. Other benefits of adaption of Euro were monetary stabilization, political integration and stabilization of exchange rates. Eurozone debt crisis started in 2008 as a result of the collapse of financial institutions. The crisis resulted to fear for European companies and investors. The crisis led to monetary inflation and the attempt of some countries to exit Eurozone and adapt traditional currencies. 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