Euro Zone

Topics: Monetary policy, European Union, Euro Pages: 7 (2745 words) Published: February 12, 2013
Eurozone is called the Euro area, started in 1998 and consist of 17 countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The Eurozone have adopted the common currency call the Euro. The monetary policy of the Eurozone is control by the European Central Bank. When I think about Eurozone, I often think of a powerful union consist of many rich countries; and there is not likely chance of getting into financial crises. In 2007, there was an on going financial crisis that happened called the European Sovereign debt crises. The crisis made some countries in the Eurozone difficult or impossible to repay or refinance their government debt. The crisis have affected heavily on Eurozone and also made them face the risk of getting separate. In this paper, we will looking at the cause of the crisis and also find out some possible solution for the problem.

In the beginning, we will look at the Eurozone currency. Is Eurozone an optimal currency area? In 1979, the European Monetary Systems was launched when European Community fixed their currencies exchange rates around to European Currency Unit. After that time, there are many debates about whether or not the Eurozone is an optimal currency area. Optimal currency area is “the geographic area in which a single currency would create the greatest economic benefit”. A certain area has to qualify some criteria to be able to identify as optimal currency area. Those criteria are: labor mobility, price and wage flexibility, financial market integration, economic openness and similarity in inflation rates. There are several study have been made to examine the Eurozone currency. Eurozone is not an optimal currency area since it is not fulfill all of the criteria. Even though it may have many characteristics of an optimal currency area.

Robert Mundell pointed out that “ an essential ingredient of a currency area is a high degree of labor mobility”. In Eurozone, labor mobility, price and wage flexibility across Eurozone are low. The number of foreigners in Euro is low and most of them just stay in some rich countries in Eurozone like Germany and France. There are barriers to stop labor mobility that is the different between economic situations between those countries. Since Eurozone countries have different culture and language, it could be another reason that makes the labor mobility is low. The different level of production is also another reason of low in labor mobility. Eurozone’s price and wage flexibility is also low. Wages in Europe are determined mostly by the labor union and bargaining agreements with the government so wages are less responsive to economic fluctuations. Since some of the European countries have rigid wage and price another countries are not. During the recent crisis in Euro area we can see that the hit on some of countries in Eurozone lead to increase price, like Greece and Spain but the wage is still low. European countries are slow on adapting to changing condition. In the criteria of financial market integration, a single market for capital and financial services has been a central goal of the European Union for decades. Each country in Eurozone maintains individual government spending and tax collection control make it difficult to achieve integration. Another barrier could be different financial structures and hence the control of production and product standard to protect their own industries and their consumers. Another criteria are the inflation similarities between European countries. We can see clearly that the inflation in those countries is different. High inflation may have a positive effect on some countries, which have a high government debt. European does not have a very open market compare to many countries like US. We can see that country like Germany does have an open market since they are removing many barriers and increase...
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