Will the Euro Survive free essay sample

In 2002, when euro notes and coins entered circulation, the dominant view among the 15 (now 23) member states using the currency was that it represented a big step toward ensuring peace and prosperity for the Continent. What people in individual European countries tended to overlook was that a single currency brings greater interference by members of the union in each state’s monetary, fiscal and political affairs. Tension over such intrusions, coming to the fore in the wake of sovereign debt crises in Greece, Ireland and elsewhere, casts serious doubt on the survival of the euro as the single currency for most of Europe. During the next few years, member states will do whatever they can to avoid a split because the practical inconveniences would be enormous. Weaker countries, such as Greece, would face a radical devaluation of their currency and essentially would have to close their fiscal borders to prevent a flight of money. We will write a custom essay sample on Will the Euro Survive or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Stronger nations, such as Germany, would suffer as well. The inevitable rise in a German-dominated currency would make exports — a cornerstone of the German economy — far less competitive on the world market. That’s why leaders of financially robust member nations will continue to support bailouts despite grumbling from their citizens about shouldering the lion’s share of the cost; it’s also why weaker nations, such as Greece and Ireland, will continue to accept austerity measures despite protests from their citizens about cuts in government services. But over the longer term, say, a decade or so, the survival of the euro in its current form will become much more problematic. In order for the bailouts to succeed and the single currency to remain viable, the productivity gap between weaker and stronger countries must close significantly. Yet during the past decade, technological advances and wage moderation have helped Germany widen the gap with southern Europe in terms of manufacturing unit labor costs, a standard measure of export competitiveness. Since 2001, when Greece locked in its exchange rate with the euro, its unit labor costs have increased by more than 240%, according to the Organisation for Economic Co-operation and Development, while Germany’s costs have risen less than 70%. Prior to the euro, weaker countries could make up for lower productivity with currency depreciation, which made their exports comparatively cheap on the international market. When everybody is being paid in euros, however, debtor nations must resort to starker alternatives: lower wages, higher taxes and a resulting drop in the standard of living. Consequently, countries such as Greece, Spain and Portugal will need major structural reforms if they are to succeed in making their industries more competitive. Such reforms, which may include pushing back the retirement age and deregulating labor markets, are accompanied by serious political costs, especially if populations feel the policies are being imposed from the outside. An eventual split in the euro ultimately might be the best thing for all concerned. One possibility is for the stronger economic countries to keep the euro while the weaker ones go their own way. After the initial shocks, the monetary balance would probably return to its pre-euro state, with countries such as Greece and Portugal making up for their lower productivity through currency depreciation and cheaper exports. It’s important not to mistake the end of the euro as a single currency with the end of the European Union. Member nations’ commitment to the EU is unshakable; they see it as essential in maintaining peace on the Continent and in representing European interests and values around the world. The euro, on the other hand, could simply go down as a grand dream that eventually ran into the wall of economic reality. COUNTERPOINT GRAHAM BISHOP, an economic consultant specializing in european financial markets and former adviser on european financial affairs at citigroup in London Amid a serious and worsening European debt crisis, the euro this year is likely to face the greatest challenges to its survival since the inception of the unified currency a decade ago. The eurozone’s collective decision to offer massive support to Greece in 2010 was merely a prelude to what lies ahead — with no fewer than six states (Greece, Ireland, Spain, Portugal, Italy and Belgium) now deemed at risk of defaulting on their obligations and thus probably needing new infusions of eurozone assistance. Yet most eurozone leaders seem not to have realized the magnitude of the challenges ahead — or to have grasped the consequences of failure. Consider, for example, the likely result if the financially stronger European states offer anything less than full financial commitment to euro preservation by continuing to help the weaker states. In June 2010, banks in Austria, France, Germany and the Netherlands had nearly one-quarter of their overall loans tied up in those weaker economies. Should the countries drop the euro and default on those loans, worth an estimated â‚ ¬1. 9 trillion, the impact would be catastrophic for both the banks and their home countries. And what of the countries that desert the euro and attempt to reinstate their old currencies? Those currencies inevitably would face rapid, severe devaluation. If Greeks, for example, caught wind of such a change, fearing the disastrous consequences of a return to the drachma on their personal accounts, they would naturally transfer their assets to Germany or another eurozone state. Try as Greece might to close its economic borders, this flight of capital, made simple and inexpensive by technology and the euro, would be almost impossible to prevent. The result would be an immediate liquidity crisis crippling those countries’ banking systems. For all of its troubles, the euro — and a financial system that enables its daily use by 330 million people — is a major component of the region’s single market, which lets residents purchase goods and services seamlessly across borders. Though some observers contend that European unity could survive a split in the currency, it’s more likely that any sense of political oneness would be destroyed amid waves of recriminations over ruined economies Preserving that essential system won’t be easy, but clearly this is not a time for timid solutions. By the end of this year, the eurozone is likely to emerge as a distinct political federation that, at its heart, has tightly centralized economic governance. For example, because taxes are such a vital revenue resource for any state, it is probable that there will be moves toward a single set of accounting standards to promote tax harmonization from country to country — a major step toward implementing a more centralized European financial authority. Another likely step will be the arrival of Europe-wide government bonds in 2011. Issued by the European Financial Stability Facility and backed by the authority and control of a combined Europe, these bonds would begin to replace the patchwork of risky singlecountry bonds and add greater stability to the European debt system. Steps toward greater economic governance of the entire eurozone by central authorities may also include the power to assess the fiscal policies of individual member states, mandate budget and spending changes as needed, and issue sanctions for failing to comply. These changes will inevitably be contentious and difficult, but they will also bring needed stability and uniformity to the European economic system. In the end the euro will survive, not because the choices are easy or the road smooth, but because it must. One leader who does seem to understand the urgency of this issue is President Nicolas Sarkozy of France, who noted recently that â€Å"the end of the euro would be the end of Europe. † His warning hardly seems overstated.