Monetary unions and foreign debts
De Grauwe asserts that monetary unions proceed beyond sharing different currencies and solitary central repositories; the union also means that the nature of the sovereign debt of the member states changes (De Grauwe 214). The nations in a monetary union are involved in debt issuance over a currency that they have minimal influence on. According to Professor De Grauwe, this is the onset of economic instability in such unions (2014). When debts are issued over currencies that one is unable to manipulate, then it is hard to institute the monetary policies necessary for padding the economy from instability. The member states in a monetary union can be easily “coerced” into evasion of debts by the financial markets and the resultant outcome of the default directly and negatively affects the economy (De Grauwe 379).
Monetary unions have practically “deferred” debt control into the hands of the financial markets. The solvency of the member states is not defined by their monetary policies (Onida 54). In a monetary union similar to the EU, there exists a dangerous “separation” between two cardinal concepts that directly affect each other, issuance of debt to the member states, and monetary control (De Grauwe 43). The writer asserts that the economies in monetary unions are influenced by externalities that they have very little influence on; this, however, is not an assertion that monetary unions are diabolical concepts in economics, not at all. A proper management level of currencies should, therefore, be instituted so that the member states are capable of having a “standard” autonomy regarding their currencies (De Grauwe 126).
Debt mutualisation
The Euro zone has a financial responsibility to “uplift” the economies of the member states. Professor De Grauwe argues that the greatest misconception that may occur in a monetary union is the assumption that member states are able to fix their own economic woes without the input from other states. This is why it is the business of other members of the union to “bail each other out” when facing an economic hitch (200). A proposal to restructure the ECB is to enable it to have a more elaborate role in the monetary policies of the member states (Onida 4). The Euro Zone member states face the dilemma of “playing the union policies” or reversing into “local monetary policies” (DeGrauwe 101).
The threat of an unstructured and non-refined monetary union is “very real,” In this regard, De Grauwe proposes that the debt mutualisation strategy ensures that the member states are “encapsulated” in a “responsible” government spending (De Grauwe 62). Whether this proposal of Professor De Grauwe is a long-term solution to the crisis in the Euro Zone or not, remains debatable. The fact of the matter though is the question of whether “mutualising” the debts is based on the inability of the member states to borrow money using their own currencies (DeGrauwe 331).
Consequences of “inability” to borrow from “own” currencies
Monetary unions and the “chaos theory”
Chaos theory quintessentially explains the economic morphology of the Euro Zone (DeGrauwe 87). This concept has been witnessed in the Euro Zone since the beginning of the European Union financial crisis. The small variations of the initial conditions of the economic slump witnessed in some member states caused ripples across other member states (Onida 82). The economic slump in the Euro Zone was “procedural, gradual, and predictable” (Onida 225). Mostly, these economies were “depressed” by several externalities (De Grauwe 204). The member states are unable to carry out any radical monetary measure using their currencies since these currencies are “swallowed” by the adoption of a common currency. The inability to harmonize the currency issues was the economic tinderbox in the Euro Zone crisis (Onida 39).
Optimum currency area: monetary union and fiscal policies
The theory of optimum currency area dictates that when joining a monetary union, the member states effectively lose their “financial independence.” Onida, however, is quick to point out that this sovereign loss over fiscal and monetary policies in local currency is not essentially a bad thing, either way; there are several benefits of monetary union as compared to “stand alone” economies (110). The fact is that the European member states have limited fiscal policies or monetary policies on individual capacities to regulate their economies. Borrowing money in their currencies would, therefore, be in vain (Onida 129).
Onida (207) notes that signing up for monetary union “renders the local currency redundant” as was the case of Euro Zone. Essentially, a nation that has no control of the local currency is not capable of evaluating or revaluating its own currency, this means that the members cannot control the amount of money that enters or leaves the economy. Consequently, this explains why the member states of the European Union may not be able to borrow money in their own currencies; the influence of the local currencies in their economic construct is null. Their fidelity is to the regional currency and not the local one (Onida 44).
Works Cited
De Grauwe, Paul. Economics of Monetary Union. Oxford [England: Oxford University Press, 2014. Print.
Onida, Fabrizio. The theory and policy of optimum currency areas and their implications for the European Monetary Union. Tilburg, Hogeschoollaan 225,: Société universitaire européenne de recherches financières (S.U.E.R.F.), 1972. Print.