The Monetary Union of the European Union

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Table of Contents

Rationale for the Action: Negotiations and Decisions Made
Background of the Situation
Description of Possible Strategies for Reducing the Currency Inflexibility
The Implications of the Action
Conclusion
Reference List

The European Union (EU) is a political and economic community counting 27 countries located predominantly in Europe. The EU takes control over the countries through the system of independent institutions and intergovernmental organizations operated by the member states.

The main policy of the EU lies in developing a single market through ensuring free movement of goods, services, people, and capital. One of the main policies integrated by the EU involves monetary union. This policy represents the control of fiscal and economic policies and a common currency, the euro.

In total, these countries constitute the euro area. Certainly, the integrated economic and monetary union produces a plethora of advantages for the members of the European community in terms of a single market and free exchange of products and services.

However, there have been rigid debates concerning the optimal conditions for creating Eurozone countries with a single currency area due to the inflexibility of monetary policy. The point is that individual member states fail to act independently, which prevents the countries from printing money to pay their creditors and diminish the risk of default.

As a result of the above-presented problems, the European sovereign debt crisis occurred, leading to the difficulties to re-finance the debts without support of the third parties.

At the end of 2009, a sovereign debt crisis became serious due to the increase in private and public government debt levels all over the world along with a range of debts in European countries (Berend 2012). The ramifications of the crisis were different in various countries.

In some member states, private debts emerged because of the property bubble that were turned into a sovereignty debt due to the banking bailouts and government reactions to lower levels of economic post-bubble. Hence, although there is one currency for the region, pension plans and taxation remain different in the European countries.

The currency limits the states’ possibility to stand various financial problems. Therefore, it is necessary to reconsider the policy in order to develop a more flexible system of single currency operating (Berend 2012).

The consistency should be connected with integrating the single taxation scheme in all countries, as well as creating an optimal fiscal and pension systems for the population.

Before developing a unified economic system, these problems should be solved by organizing international meetings and specialized committees that can scan the environment and highlight the most vulnerable areas of the EU economy.

Rationale for the Action: Negotiations and Decisions Made

After the 2009 crisis, the EU institutions have started working on a common legal instrument that could stabilize the financial situation in Europe by providing financial assistance to European countries experiencing serious economic difficulties.

As a result, the European Financial Stability Facility was created in 2010 to stand the debt crisis through organizing specific funds to provide loans to the countries in need (James 2012). However, the development of new funds and reserves does not provide a viable solution to the problems of financial flexibility in the countries.

The peculiarities of various economies, such as that of export-driven Germany and high-tax level France, create serious challenges for the European Community to strike the balance between single currency and fluctuations in taxes, fiscal policies and property issues.

In addition, Hullett et al. (2010) supports the idea that the performance of the EU currency creates high unemployment rates, varied output, and investment growth problems. As a result, the performance of the euro undermines the efficiency of the single market development in practice.

With regard to the above-presented problems, non-action, superficial policy does not introduce improvements to the currency system and can even aggravate the situation (Fioramonti 2012).

It is highly important for the EU to be more sensitive toward local markets through creating statistics centers and surveys evaluating the readiness of the countries to accept the single monetary system.

The rational of this strategy is fully justified because the global market development in the European region is impossible without considering the specifics of local markets and financial systems.

Background of the Situation

Due to the financial instability and unequal access of the European countries, there is a growing tendency in economic disintegration due to the absence of common fiscal practices that have great pressure on the European Community (Hanson et al. 2011).

Therefore, the Euro was initially created to ensure financial integration of the European countries, but the massive financial difference between member states does not allow the countries to bailout the crisis that do not address the actual root of the problem.

According to Hanson et al. (2011, p. 24), “the real concern now is with Spain and Italy…they are much larger economies and have far bigger debt than Greece, so if they default, the consequences will be dire for the Euro”.

Further, the introduction of the European Central Bank has provided new problems to the EU monetary and economic integration. At a glance, the new financial reforms produce a number of improvements in terms of investment, employment, and growth.

However, much deeper considerations provide the evidence distinction between long-termed and short-termed problems, including increased unemployment rates in some countries and increase in financial stability in other countries.

At the beginning of the Euro formation, eleven countries has joined the union and accepted a single currency. However, their inflation levels were diverse and, as a result, the group was supported by the three best performed states – France, Austria, and Ireland.

According to Welfens (2001, p. 4), “the costs of disinflation … have leveled, and no further significant increase of unemployment should occur as expected and actual inflation rates have converged at a very low level”.

In this respect, the history of euro formation shows that the problems occurred to local levels of economy were ignored by the community, which has led to diverse rates of integration (Buti and Sapir 2002).

Monetary union focuses more on a global political decision according to which the selection criteria has not been premised on the optimum currency framework, but on the convergence criteria.

The analysis of future perspectives of the EU commission requires reconsideration of the single currency system because it can become a problem for Britain in terms of exchange rate. In particular, there are a number of factors that undermine democracy system and budgeting principles.

Democratization of the European currency, as well as the European Central Bank is crucial due to the deficiency in political system inconsistency.

In addition, the Commission criticizes the EU government that acts illegally by ignoring the need to punish Germany and France for infringing the budget rules (Implications of the Euro: A Critical Perspective from the Left n. d.).

The unequal treatment of countries of the EU is also connected with the inflexibility of the euro principles, as well as the role of ECB. In order to eliminate the problems, the local economies should be analyzed in more detail to face the requirements of the single area.

Description of Possible Strategies for Reducing the Currency Inflexibility

As it has been mentioned briefly, the main approach to reducing the unemployment rates and removing the diverse economic and financial rates in countries implies developing reforms that can introduce greater sensitivity to local markets to be ready to face challenges of diverse requirements and budgeting rules in various countries (Cline and Wolff, 2012).

What is more important is that the currency should be congruent with the taxation systems in the countries. Certainly, modifying the taxation systems in countries undermines other financial and political spheres, but the introduction of a singly currency should not be premised on a one-dimensional approach.

In fact, the policy should cover all spheres of country’s life, including social plans, budgeting, financial funding, investment, taxation system, and pension schemes (Credit Matters: The European debt crisis – a solution? 2011). Lack of awareness can lead to even greater difficulties and economic disintegration.

In order to the fight unemployment and unequal inflation rates, specific emphasis should be placed on developing new budget disciplines that could solve the problem of the deep crisis.

In this respect, Ségol (2012, p. 70) insists that the current paradigm for reducing the inflexibility implies “cutting pay and social welfare, attacking bargaining mechanisms and making employment contracts ultraflexible”.

In this respect, there should be a relatively equal level of salaries and wages that can allow the governments to predict further complications and losses, as well as avoid inequality among the employees.

Second, introducing the art of negotiation is crucial in all spheres of political control that should be assigned to a single political organ that regulates all financial transactions.

As a result, the development of a common fiscal system would allow the EU to create a community where the crisis in one country will not affect the situation in other countries.

In this respect, Fontevecchia (2012, p. 82) explains, “banks and pension funds in Europe can choose between many different sovereign bonds to operate, leading to a relocation of capital in times of stress that can put intense pressure on borrowing costs”.

Absence of analogous institutions in countries, such as gilts in the UK do not have analogues in other countries, provides fewer restrictions on the borrowing costs. In this case, governments of the EU should actively participate in negotiating for price, tax levels, and wages (Baimbridge and Whyman 2003).

It is also important for a government to establish a common system of informing the population about the shifts in prices. One the one hand, earlier stages of the funds relocation can cause serious protests on the part of the countries with greater financial opportunities.

Therefore, they could be reluctant to cede their political and economic positions. On the other hand, the development of a strong European Community requires the acceptance of certain risks.

Finally, focus on the root of the problem, rather than on its cause, can allow the European Union. In this respect, Adams (2012) asserts that the Greece crisis has becomes the starting point of the debt challenge.

In addition, the researcher argues that the fall of tax revenues, as well as social safety net, does not contribute to the debt reduction (Barston 2006). On the contrary, focus on the local market should be confined to total rejection of the previous currency and price rates and absolute penetration to the EU space.

Hence, the member states should accept a genuine political union, with permanent transition of independence from the country’s capitals to the center of the European community.

The Implications of the Action

Regulating local budgets and reducing deficit spending should be included into future EU treaties because they can ensure closer economic union among the member states. However, these regulations have already been violated by the Great Britain with the Czech Republic and Hungary.

The reluctance to obey the established rules is explained by the desire of power-states to establish dictatorship. Hence, historic circumstances play a crucial role in strengthening the political and economic positions of such countries as the United Kingdom, France, Germany, and Austria.

However, the European Union implies the development of relatively equal opportunities for all the participants (Buttsowrth n. d.). As a result, the governments should reconsider the issue of power to be able to compromise.

Further, the Greek crisis proves that the problems in a separate region have a tangible impact on other participants and, therefore, the necessity for creating a single political organ regulating financial and economic issues is crucial (Lynn 2010).

In particular, the created equality in access to the financial resources, as well as stable pricing policy, will eliminate further rises in currency devaluation in the country.

Conclusion

The development of UE monetary system ensuring the flow of the single current in Europe ensures greater exchange of good, services and people. Moreover, it simplifies the transport system control and allows the EU members to freely move from one country to another.

However, apart from the proposed advantages there are a number of shortcomings of the policy, such as unemployment rates, inflexibility, and diverse tax levels in countries. In this respect, the proposed strategy refers to the analysis of local markets and absolute transition to an absolute currency system.

Stabilizing tax payments and introducing relatively equal wages provide a new platform for the EU development. These recommendations should lead to ensure successful transition to a single market system.

Reference List

Adams, T 2012, ‘When Greece Exits The Euro’, Coloradobiz, 39, 7, p. 10.

Baimbridge, M and Whyman, P 2003, Economic and Monetary Union in Europe: Theory and Practice. Edward Elgar Publishing, UK.

Barston, RP 2006, Modern Diplomacy, Pearson Education, London.

Berend, I 2012, Europe in Crisis: Bolt from the Blue?, Routledge, New York.

Buti, M, and Sapir A 2002, Economic and Monetary Union and Economic Policy in Europe, Edward Elgar Publishing, UK.

Buttsowrth, M n. d., Democracy and Debt – the European Debt Crisis, Mat Buttsworth, US.

Cline, WR, and Wolff, G 2012, Resolving the European Debt Crisis, Peterson Institute, US.

‘Credit Matters: The European debt crisis – a solution?’ 2011, Euroweek, 1209, p. 82.

Fioramonti, L 2012, Regions and Crises: New Challenges for Contemporary Regionalisms, Palgrave Macmillan, US.

Fontevecchia, A 2012, ‘How to Solve Europe’s Sovereign Debt Crisis, SocGen Style’, Forbes.Com, p. 24.

Hanson, G, Kovacs, R, & Lanham, P 2011, ‘The global economy — lessons learned’, Money Management, 25, 31, p. 24.

Hullett, AJH, Mooslechner, P, and Schurz, M 2010, Challenges for Economic Policy Coordination within European Monetary, Springer, New York.

Implications of the Euro: A Critical Perspective from the Left n. d., Routledge, New York.

James, H 2012, Making the European Monetary Union, Belknap Press of Harvard University Press, US.

Lynn, M 2010, Bust: Greece, the Euro and the Sovereign Debt Crisis, John Wiley & Sons, US.

Ségol, B 2012, ‘Towards growth and a “social contract” for Europe’, OECD Observer, 290/291, pp. 70-71.

Welfens, PJ 2001, European Monetary Union and Exchange Rate Dynamics: New Approaches and Application to the Euro. Springer, New York.

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