Implications of Reforms in the Euro-zone

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Table of Contents

Introduction
The Proposed Reforms
Implications
Conclusion
Works Cited

Introduction

The Euro-zone refers to the “monetary and economic union” (Jovanovic 23) that is made up seventeen European countries. The union was formed to facilitate faster economic growth and to ensure economic stability among the member countries.

Due to the dynamics of the political and economic environment in the region, the Euro-zone is currently facing governance challenges. It is against this backdrop that the leadership of the union is considering reform plans. This paper analyzes the proposed reforms and their impacts in the zone.

The Proposed Reforms

Peer Review of Budgets and Penalty Proposal

Following the effects of the recent economic crisis, most governments in the Euro-zone had huge budget deficits. Thus the leadership of the Euro-zone decided to put in place a mechanism for supervising the expenditure of its member states.

In order to achieve this objective, the leadership proposed that the budgets of each state will be peer reviewed by other members of the union (Filippaki, Mamatzaki and Staikouras 18). Under this proposal, the members will be expected to present their budgets to the commission for review. This will be done six months prior to the presentation of the budgets to the local parliaments for approval.

During the presentation, the member states will be expected to disclose their inflation rate, revenues, estimated growth and their expenditure. Countries that intend to run a deficit will have to explain to the EU the reasons as to why they have to do so. Besides, the countries that are not able to reach the “3% limit in the stability and growth pact will face sanctions (fines)” (Filippaki, Mamatzaki and Staikouras 19).

Establishment of a Bailout Mechanism

This proposal was meant to enable the Euro-zone to mobilize funds that can be lent to its heavily indebted members. Consequently, the member states and the IMF contributed a total of 22 billion Euros in support of the project (Filippaki, Mamatzaki and Staikouras 19). The proposal was also aimed at strengthening the governance in the zone.

Thus recommendations were made to have the European Council adopted as the economic government in the European Union. Under this proposal, the European Council will be responsible for supervising the economic activities in the region.

The council is expected to formulate rules and sanctions that will enable it to ensure economic stability in the region. A special organ known as the “European Financial Stability Facility (EFSF)” (Dickinson 56) will also be created. The EFSF will be based in Luxembourg and will be responsible for issuing securities (bonds) that will be backed by guarantors from member states in various capital markets.

Establishment of European Monetary Fund (EMF)

This proposal was meant to help the region to achieve a stronger fiscal union. The EMF will be responsible for identifying unforeseen economic crisis that might have serious negative effects in the region. This will help in maintaining stability in the region (Dickinson 45). A European Public Prosecutor (EPP) will also be established to handle legal issues in the region. Besides, a well established management organ will be formed to replace the Euro Group.

The Prudent Fiscal and Policy making proposal (PFPM)

The PFPM is a new principle for monitoring the use of public funds. The principle was proposed to help member states to achieve their medium-term growth objectives. The council will be responsible for the implementation of the PFPM principle by ensuring that the member countries are complying with it.

Warnings will be issued by the commission in the event that a country deviates significantly from the principle. Countries whose deficits are more than sixty percent of their GDP will be advised to formulate strategies of reducing their debt gaps (Filippaki, Mamatzaki and Staikouras 19).

Implications

Economic

First, the bailout mechanism will enable the members to reduce their budget deficits and achieve growth (Dickinson 34). Besides, the members can borrow money from the EMF to fund development programs. Second, the budget review proposal will enable the member states to use their resources in an economical manner.

Thus there will be stability in the region. Third, there will be uniform growth in the region as member countries adopt a common monetary and fiscal policy (Dickinson 47). Finally, the region will have a greater bargaining power in global financial institutions such as the IMF by selecting a common representative.

Political

First, the fiscal union will translate into better political ties between the member states. This is due to the fact that the union is based on cooperation among the member states (Jovanovic 67). Second, the establishment of EPP will simplify the process of settling legal and political disputes in the region.

Third, the political decisions of the member states in regard to development will be shaped by the policies of the union. This is because the political and economic decisions of the member states must conform to the regulations of the union. The sovereignty of the member states will be compromised as the union becomes more responsible for leadership and governance in the region.

Strict rules and regulations coupled with the terms and conditions that guide membership will compel some countries to amend their constitutions in order to comply with the union’s by-laws (Jovanovic 78). This is based on the fact that member states have different laws.

Thus cooperation among them can only be possible if they adopt similar laws and this is likely to necessitate constitutional amendments. Finally, the union will translate into high levels of solidarity among the member states. The members will be in a position to assist each other in addressing economic and political challenges.

Conclusion

The Euro-zone was formed to enable the members to achieve steady economic growth. The leadership of the union is currently facing economic and political challenges and this has necessitated reforms in the region. The proposals include the establishment of EMF which will be responsible for monitoring economic performance of the region.

A bailout plan will be established to help member states to manage their budget deficits (Filippaki, Mamatzaki and Staikouras 18). The union will also focus on monitoring the expenditure of the public funds among the member states. The Euro Group will be replaced with a well established governance body.

The economic implications of these reforms include economic stability, uniform growth and prudent use of public funds among the member sates (Dickinson 81). The political implications will include strong political ties between the member states, compromise on sovereignty and high levels of solidarity among the member sates.

Works Cited

Dickinson, David. Finacial and monetary integration in the new Europe: convergence. London: Edward Elgar Publishing, 2010. Print.

Filippaki, Anastasia, Emmanuel Mamatzaki and Christos Staikouras. “Stractural reforms and banking effeciency in the new EU states.” Journal of Policy Modelling 31(2010): 17-21.

Jovanovic, Miroslav. The economics of European integration: limits and prospects. London: Edward Elgar Publishing, 2005. Print.

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