In recent years, due to fiscal conflicts in places like Greece and Italy, there has been much debate about whether the Euro is feasible as a currency and if its use should be continued. Critics of the currency argue that it should be dissolved amid questions of widespread debt, globalization and a changing European market. This has led to a split among Europeans regarding fiscal policy: one side argues that a populist policy encouraging domestic trade is the proper course of action while an opposing side argues that embracing the coming wave of globalization is the right approach. While some argue that globalization is inevitable and Europe would be better off embracing it, others say that globalization will “strip Europe of the technologies that made it rich”. The Euro zone appears to be in a downward spiral, with the many member states heavily in debt (Greece, Ireland, Spain, Italy, etc.) and the banks failing as a result. http://www.economist.com/node/21536872 The implications of the Euro being dissolved as a currency remain unclear, but what is clear is that the effect will be felt worldwide.
The debate over whether the Euro should be kept as a currency is heated, but the it is far from over. Mario Draghi, President of the European Central Bank, is cautious in pursuing monetary policies regarding the Euro, citing the need to keep the rate of inflation low. When questioned about the so-called “cuurency war” regarding the Euro, he is dismissive, though he does stress the importance of maintaining a watchful eye over the strength of the Euro. http://www.reuters.com/article/2013/02/18/us-ecb-draghi-currencies-idUSBRE91H0EX20130218
So, the question for Americans is, how will a currency crisis in the Eurozone affect the US economy? A Eurozone crisis would have an adverse effect not only on the US economy, but on the global economy. There has been much debate and frustration over the slow recovery here in the US from the recession of 2008, but it has now become clear that the recovery, fragile as it is, is threatened by the European debt crisis. http://www.nytimes.com/2011/11/12/business/global/european-turmoil-could-slow-us-recovery.html?_r=0 As one expert pointed out, the US and Europe have one of the largest trade relationships in the world, accounting for roughly a third of the world’s trade. Consequently, any action that weakens the value of the Euro weakens the value of the dollar as a result. With such a large portion of the international financial market on the line, the US should stay informed and up to date on the fiscal news in the Eurozone.
I wonder what "embracing the coming wave of globalization" actually means. In my opinion, it was Europe who began this era of globalization with their imperialist and industrialist agendas during the 18th and 19th centuries. Does embracing globalization mean fewer subsidies? If so, this would lead to fewer exports and more imports, most likely from Asian Tigers. Thus I would support the side mentioned that favors encouraged domestic trade and specialization of certain countries in order to be relatively self-sustainable. Similar to an autarkic system, this would give the ECB monetary policy autonomy and the advantage of a Fixed ER, at the cost of capital mobility.
ReplyDeleteWhat is important to remember is that the European market and the US market heavily depend on each other. With the US is recession, the European Union was also forced into economic crisis. This is why it will interesting to see if the proposed Euro-US FTA will actually come to fruition. In my opinion, this would help not only ease the tension between markets, but also help unify some of the fiscal policies within the European Union itself.
ReplyDeleteDissolving the EMU would certainly have far reaching effects. As far as trade with the US is concerned, it would certainly decrease. But trade within the European Continent would as well with a return to an exchange rate system. This would cause all sorts of messes and a deep recession. So, while it may be easy to begin talks of abandoning the Euro, it is probably one of the worst choices Europe could make.
ReplyDeletePaul Krugman of the NY Times had an interesting article about the Cyprus crisis. https://cuvpn.colorado.edu/2013/03/22/opinion/,DanaInfo=www.nytimes.com+krugman-treasure-island-trauma.html?hp&_r=0. According to Krugman, the origin of this latest panic was due to Cyprus's status as an international tax shelter for wealthy foreigners and corporations (Not limited to just Russians). I just don't really understand what the incentive is for the Cypriot government to become a tax shelter if they are unable to receive a percentage of this large pool of deposits.
ReplyDeleteThe current financial environment that exists within the Euro Zone can be seen as the paramount compilation of numerous institutional failures. The interconnected monetary nature of the Euro Zone is weakened by the deficiencies of the individual countries. Prior to being inaugurated into the Euro Zone, individual countries monetary policies and attributes were not scrutinized by an independent body. The lack of transparency created an environment were frailties that exists were allowed to grow to create a systematic problem. Although the capacity of the Euro is strong compared to other currencies, i.e. U.S. dollar, but the future of the Euro’s viability seems to be put into question. A failure of the Euro will undoubtedly affect the global economy due to the interconnectedness nature of monetary policies. The only question that is relevant, too what extent will the strong economies within the Euro Zone (Germany, France) continue to bolster the survival of the Euro? Will the continuance of supporting and weaken economic/currency interaction benefit European economy?
ReplyDeleteThe dissolution of the euro is a very last resort for the European Union. The effects it would have would be drastic and could make the situation worse for all countries in Europe. By getting rid of the euro, it would not longer be considered a stable currency and investment would fall. Not to mention that it would like the ECB has lot control of the monetary policy and would have to create institutions to prevent capital flight. Countries in the periphery would suffer even greater recessions and would be unable to pay back public debt burdens. "A disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008." The European market makes up 1/3 of the world's GDP and the "potential for political turmoil and human hardship is staggering". Though this article seems to believe that the euro system will inevitably come to an end and all anyone can do right now is delay it.
ReplyDeletehttp://www.huffingtonpost.com/simon-johnson/euro-collapse_b_1549444.html
I find it interesting that the NY Times article linked discusses the idea of financial contagion leading to rapid global spread of recessions. Seeing that a forecasting company predicts that if trouble intensifies and spills over to equities and other U.S. risk assets, we could see it only slightly changing the current U.S. economy . Even though the EU and the United States economies are interwoven and account for the largest bilateral trade relationship, I tend to side more with the Economists in the article, who note that the Europe's financial troubles would have to drastically worsen for before it would solely plunge the United States back into a full blown recession crisis.
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