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European Monetary Union and Its Crises Essay

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Updated: Apr 20th, 2021

Introduction

The introduction of the European Monetary Unity (EMU) was meant to uplift the economies of member states. All the member states were expected to use a common currency as required by the rules set by the member states. Despite the idea being so good, it was coupled with shortcomings that made people see the creation of this union as a mistake. Some of the challenges that the European monetary union has faced are discussed below.

Making monetary union

The union was meant to distribute resources equally among the member states. These resources depended on the supply and demand that existed in a given country. There was an influx of labor from high to low unemployment regions. The result of the influx was the appearance of more unemployment of the locals, who did not have enough skills to get employed.

The membership in the EMU was initially done discriminately depending on the GDP of a country and its independence of national banks. However, France avoided membership in the EMU for the fear of a power struggle with Germany.

The Crises

Countries with developed economies continued to widen the economic gap between them and the developing ones. The development was insignificant in the Eurozone. The interpretation of the movement of resources from developed economies to developing economies was hard: it reduced the per capital income of the developed economies This flow of capital to problem countries accelerated excessive spending by the public and private sectors who adopted excessive budgets instead of investing the capital wisely. The culture of unnecessary borrowing erupted as a result of low-interest rates charged on money borrowed by poor member states. Rich member states oppressively enjoyed the interest rates charged on the loans.

The investment rates in the European member states stagnated as the economic gap between the rich and poor member states increased. For example, the German bank lent out capital to poor states at a profit. Much of the capital invested in poor states was used to develop residential constructions that added little to the economic development. Savings declined in poor economies due to the inflow of foreign financing from rich countries.

The developed economies, such as France and Germany, still use their political strength in the council to violate the laid down laws. They are immune to sanctions, and this makes it difficult to apply these sanctions to other member states. The imposing of 2 percent of GDP fines as outlined in the EMU pact only helps make the developing economies more indebted.

Initially, before the formation of the union, countries in the Eurozone periphery had balanced and surplus budgets. The introduction of the EMU led to imbalances, especially, in the private sector. These imbalances only forced the private sector to rely on borrowings. International competitiveness declined rapidly as a result of capital inflow to poor countries. These raised wages, resulting in high inflation rates. Therefore, it weakened the economies. It is right to argue that a nation’s problems can well be solved by the nation itself through the proper budgeting and not by the EMU.

The EMU pact is silent on surveillance in banking systems. It does not check the liabilities and assets that the bank owns. When banks fail, they leave the nation to offset their liabilities. This act forced them to unconventionally provide liquidity to securitized markets.

Conclusion

Countries that are indebted are subjected to high costs in the borrowings, further increasing the gap between the rich and poor countries. Moreover, there is inadequate funding. The Eurozone should operate with a capital of 700 billion euros, but it operates only with only 80 billion euros. This state makes them impose more sanctions on the poor states in the borrowings. The rich member countries still continue to enjoy profits from the loans lent out to poor nations. It, therefore, makes no sense to form a union that can only exploit in the name of uplifting the weak economies.

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IvyPanda. (2021, April 20). European Monetary Union and Its Crises. Retrieved from https://ivypanda.com/essays/european-monetary-union-and-its-crises/

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"European Monetary Union and Its Crises." IvyPanda, 20 Apr. 2021, ivypanda.com/essays/european-monetary-union-and-its-crises/.

1. IvyPanda. "European Monetary Union and Its Crises." April 20, 2021. https://ivypanda.com/essays/european-monetary-union-and-its-crises/.


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IvyPanda. "European Monetary Union and Its Crises." April 20, 2021. https://ivypanda.com/essays/european-monetary-union-and-its-crises/.

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IvyPanda. 2021. "European Monetary Union and Its Crises." April 20, 2021. https://ivypanda.com/essays/european-monetary-union-and-its-crises/.

References

IvyPanda. (2021) 'European Monetary Union and Its Crises'. 20 April.

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