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The creation of the euro was not a mistake. Its ineffectiveness in creating convergence emerges from factors such as differences in political ideologies, less mobility of labor, inadequate funds for the European Stability Mechanism (ESM), and the compromising of rules by Member States (Eichengreen 133).
Existing literature cautioned against a union that includes the EU periphery countries, such as Greece and Ireland, during the formation of the EU (Eichengreen 125). The problem of including countries with different economic imbalances is that the same economic policy cannot fit all Member States. For example, keeping the fiscal deficit at 3 percent may be difficult for a country that has been operating with larger fiscal deficits.
The country would not be willing to make a sudden change to the expenditure pattern. Eichengreen (131) explains that governments and financial institutions have a tendency to resist restructuring as an alternative to EU standards. They prefer bailouts and other alternatives, rather than restructuring their expenditure and balance sheets. One of the reasons for an ineffective euro is the inclusion of countries with more asymmetric imbalances.
Another reason is that countries have national politics on focus, in addition to regional politics. In the case of Germany providing €11 billion for the establishment of ESM, Eichengreen (133) elaborates that Germany proposed that the funding be spread over a period of five years, after prioritizing national politics over regional integration. Greece and Italy depicted that they were committed to EU standards. They were only interested in avoiding to be rated as countries with higher country risk (Eichengreen 125). The situation is different in the U.S. In the U.S., all federal states are focused on integration politics.
Less labor mobility is one of the reasons that limit regional convergence in the EU. In comparison to the U.S., the EU has higher differences in language and culture that limits the mobility of labor (Eichengreen 133). Mobility of labor and capital ensures that workers move towards areas with lower unemployment and capital flows towards areas with lower wage rates. Higher mobility of labor would have increased the pace of regional convergence in the EU.
The single currency was supposed to create regional convergence, reduce transaction costs, increase regional output, and improve the economy of poor Member States (Eichengreen 126). Two main reasons emerge for failure to achieve the goals. Member States compromised the rules of the union, and political leaders were complacent about national politics. For example, France and Germany compromised the deficit standards, despite being stronger economies in the EU (Eichengreen 128). The single currency would have been more effective if the Member States adhered to the standards of membership.
The first thing that comes to mind when a single currency is mentioned is the ability to create money by banks. Eichengreen (130) labels securitization as a threat that can no longer be controlled by traditional regulatory methods. Uncontrolled money creation limits the ability of regulators to create financial stability, which affects exchange rates and valuation of assets. Money creation and different inflation rates in the Member States would have been my major concern. However, Eichengreen (133) highlights more factors that could have caused the euro to be less effective in creating regional convergence. Member States need to abide by the rules, and major economies, France and Germany, need to lead by example.
Works Cited
Eichengreen, Barry. “European Monetary Integration with Benefit of Hindsight.” Journal of Common Market Studies. 50.S1 (2012): 123-136. Wiley Online Library. Web.
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