The Euro of the Future

The Euro has popped up many times in the news recently. Because of the debt crisis in Europe, many countries were left unable to fulfill the convergence criteria to have the Euro as a currency, leading to many problems throughout Europe. It wasn’t just the current crisis that brought about these issues; they have been rooted in the Euro ever since it was created. So what exactly are a few of these issues and how can they be solved?

There are a few key issues with the Euro and a common currency in general. A common monetary policy involves a common interest rate for the whole Eurozone area. However, the interest rate set by the European Central Bank may be inappropriate for regions which are growing much faster or much slower than the Eurozone average, which was definitely the case with the past recession. These rates cannot be cut to boost demand unless the whole Eurozone decides to drop the rates. The rising debt levels of many countries are also causing a large issue because fiscal policy is also limited. There is no devaluation of currency option for a country experiencing a large deficit to increase exports, because they do not have their own currency. 

Another big issue is the language barrier. It can be argued that this is not as big a barrier as it used to be, but still transferring jobs can be much harder in the Eurozone. Let’s compare two examples, one within the United States and another within Europe, to see what we are talking about here. On the one hand Texas’s labor force has grown by 6% since the start of the recession in late 2007. In the United States if people are hit hard by rough economic times, they can simply pack their bags and move to where the jobs are. You cannot say the same about Europe. In Germany, the labor force has actually decreased by a half a percentage point, and as a whole immigration is very low. Because it’s hard for people from poorer Eurozone countries to move to places like Germany, fiscal transfers are needed to address imbalances between the economies. Currently this isn’t happening as it should.

Another issue is that countries like France and Germany are demanding that all countries boost their competitiveness, which is ironic because of the single currency, it is hard for the peripheral poorer countries to compete compared to the core countries such as France and Germany. Unless France and Germany are willing to be less competitive (which I’m sure is not the case) then this will not work.

Can these problems be fixed?  One way to cut the peripheral countries interest costs is to introduce common euro-zone bonds, but Germany is hesitant to agree to this. The best solution in the long term is fiscal integration, which needs to happen to allow more effective governance in the Eurozone and ensure fiscal responsibility. Again there are many possible solutions, but none of these are going to receive total support and others will take quite a while to implement. It looks like the only viable option in the near term is that the peripheral countries will get pushed out of the Euro.