The Eurozone crisis had seriously and extensively affected nations that trade in the euro currency such as Greece. With the fixed exchange regime, the common Euro currency dominated parts of Europe, including Greece. Reflectively, Greece became the victim of instability in the currency exchange rate as a result of the common Euro currency. As was the case of Greece, some economies within GCC have a large structural deficit as compared to other economies. As a desperate measure, a member of the GCC affected by the fixed exchange regime under common currency may opt for heavy expenditure to try and salvage the situation. Unfortunately, this may not work and instead, the debt of this country would increase un-proportionally to the GDP. As a result of such a crisis, the sovereign debt of such a member state may become ‘junk’ and investors are likely not only lose their profitability. As opined by Mankiw (2007) “strong capital accumulation have driven the growth process in the transition countries” (Mankiw 2007, p. 8). However, this is not the case. Rather, due to large public debt, the long term economic growth is likely to be compromised since the factors of products will eventually become very expensive and uncompetitive since this economy has to trade with competitors operating in a flexible exchange regime (Hausmann 2015).
The exogenous progress as a result of competitive advantage may seriously be compromised when common currency is applied in three economies with different performance margins as investors will opt to move to more friendly economic zones away from the member state in GCC affected by the fixed exchange regime. For instance, even though series of austerity measures that were adopted by Greece has been successful in lowering its economy’s primary deficits of the GDP by 2011, the side effects resulted into a long term recession and unending depression that culminated into more companies within Greece declaring bankruptcy since factors of production against demand were not proportional. The GCC member states may find themselves in the same dilemma should the deficit in the BoP persists, especially in the common currency regime (Hausmann 2015).
Often, stimulating the economy requires the combined use of both monetary and fiscal policies. For instance, the European Union (EU) has attempted to stimulate Greece economy by using fiscal policies. The fiscal policy entails the use of taxes and government spending to stimulate the economy. To increase consumer spending in the economy, the EU advised the federal government of Greece to put in place tax cuts. Reduction of taxes increases consumers’ disposal income thus increasing spending. An increase in consumer spending increases the demand for goods and services (Mankiw 2007). This creates upward pressure on the supply. It, in turn, leads to expansion of production thus creating employment opportunities. However, due to imbalance in these aspects, the long effect of the potential GCC common currency crisis on the economies of member states will be unemployment, low capital stock, and social disjoint as factors of production will be skewed towards unpredictable performance.
Reference List
Hausmann, R 2015, Austerity is not Greece’s problem. Web.
Mankiw, N 2007, Principles of Economics. Thomson Higher Education, Mason, Alabama.