Introduction
For three years now, the Euro zone has experienced major fiscal inadequacies that have threatened to disintegrate the union. The crises have led to categorization of European members as either debtors or creditors. Germany remains to be the most influential creditor within the union while Greece, Spain, Italy and France are among members that have received momentous bailouts from other countries.
Under the prevalent economic and financial policies within the region, the debtors will continue to pay significant amount of risk premiums to finance their debts. Consequently, the policy has plunged some economies into depression and denied some members a competitive advantage.
This is not only in the short term but the trend has also started to be a permanent feature of the respective economies. This position paper asserts that many European Union members will abandon the Euro in the long term due to the ever-increasing fiscal challenges and problems.
Disintegration of the Euro Zone in the Long Term
The current trends in the Euro zone have continued to illustrate the inevitability of disintegration of the European Union. Various reasons are critical in the analysis of the fiscal challenges within the Euro zone. First, economists argue that the Euro Zone is headed for disintegration owing to the fact that some of the policies have become redundant.
Indeed, they say that the introduction of the Euro came about due to a series of mistakes in the formulation of policies. Before its inception, it was almost obvious that the euro was an incomplete currency without a treasury but with a central bank. Members were not quick to realize this mistake and went ahead to give up their sovereign right to print their currencies.
This predisposed them to the high risk of default. Undoubtedly, this became apparent at the start of Greek crises. Upon the onset of the crises, the policy makers within the Euro Zone did not seem to understand the problem. Instead, they erected measures that only made the situation to deteriorate. Outstandingly, lack of cooperation within the Euro Zone was apparent leading to a lack of plan that could alleviate the crises.
In fact, Germany was unwilling to take up increased liabilities leaving few if any chances to resolve the fiscal problems. As the problem spread, it became clear that other members were facing similar challenges. It is only then that Germany attempted to put up minimum measures to hold together the euro owing to the apparent breakup.
As such, lack of cooperation between members of the Euro zone has exacerbated the fiscal crises leading to the assertion that the euro may not hold on for long considering the attitudes of other members. The Maastricht Treaty was a failure from the start. Although the policy aimed at stabilizing countries transitioning into the Euro Zone, it left out some important details that were only apparent during the fiscal crises.
Indeed, the treaty failed to ensure that the Euro Zone had a common treasury where members issued with bonds could have equal obligations. To this end, the Eurobonds printed by the European Central Bank face resistance from many members including Germany. Contrary to the belief of the formulators of the treaty that members will have a political will when the need for common treasury emerges, the political will is lacking.
Despite this mistake, the euro also suffered from other defects that the financial crises of 2007-08 revealed. Further, the Euro Zone continued to rely on the Maastricht treaty that had overlooked the potential inability of the financial markets to correct their own inadequacies. In fact, the treaty formulation came under belief that only the public sector suffers from chronic deficiencies and deficits.
Ideally, fundamentalists in economics would argue that the treaty had correctly articulated the financial markets’ ability to correct their own defects. Nonetheless, the dawn of the financial crises that engulfed the world in 2008 revealed the weaknesses of the Euro. Initially, the European Commission had continued to take the stance that the crises were only fiscal.
To the contrary, only Greece experienced fiscal crises while other countries faced budgetary problems. Besides, they suffer from the lack of competitiveness leading to negative balance of payments (BOP). Instead, the Euro Zone attempted to buy time with the hope that the crises would disappear. In contrast, many countries continued to plunge into recessions.
The level of recession that many countries in the Euro Zone experience has precipitated temporary actions that are not necessarily in line with the objectives of the European Central Bank. Specifically, Spain has attempted to erect measures that have increased its national debt and budgetary deficits. These measures according to the European Commission were not objective and failed to resolve future crises.
Indeed, it is apparent that the measures failed to address the banking regulations, economic growth and unemployment in both the short term as well as in the long term. To this end, many countries have begun to formulate policies that fit their situations as opposed to having one ‘blanket’ policy that governs the entire zone.
In the long term therefore, it will become a difficult task to harmonize the policies in line with the objectives of the European Commission. This is a precipitate of the impending disintegration of the Euro Zone. Finally, many countries that are currently in the Euro Zone and do not suffer from fiscal policies problems have expressed interest to leave the Euro.
Particularly, Prime Minister, David Cameron of Britain has shown dissatisfaction with the euro. The rationale is that the austerity measures erected by the EU have had negative effects on the population due to deceleration in the economic growth. Consequently, this has led to an increase in the rates of unemployment in the country.
In addition, protests across Europe against austerity measures have grown immensely questioning the ability of the euro to remain together. Germans too are a concerned lot. The reason is that the country has used huge amounts of money to loan and bail out member countries whose economies look bleak. As such, it is a matter of time before the Euro collapses.
Conclusion
Since the inception of the euro, many countries were willing to join the common currency. However, the current financial and policy challenges have lend to an inevitable abandonment of the euro. The reason behind the threat is that the euro suffered major faults since its inception.
Lack of cooperation among the members, shortsighted corrective measures, protests against the euro and the austerity measures have exacerbated the situation. To that end, it is important to state that many members of the euro will abandon it in the long term.