Has Euro failed as currency?

When Euro was created in 1992, it was considered to be one of the most significant moves by the Europe to facilitate free trade area and mobility of the labor. The Eurozone considered this move as a steppingstone towards integrated European market and their participation as a block in the international affairs. However, heterogeneity in the different countries economy has been ignored and Euro crisis is the perfect example of how Euro failed as a currency.

It was believed from day one by the Economist that Euro will fail as the currency. This is because of the fact that it contained one fatal flaw- it brought 17 economies under the single monetary policy without creating single fiscal policy and strong governance to make them behave responsibly.  In order, for a currency, to meet the needs of several economies at the same time; all those economies should have some economic structure. However, there existed substantial disparity between countries in Euro. Consequently results were devastating.

Creation of Euro created a currency which was stronger than local currencies of few of the countries like Spain, Italy, and Greece. This caused increase in the cost of exports of these countries and thereby making them less competitive in the international market.  The export fell down and the Consequence was high fiscal deficit.

Euro currency is issued by ECB which considered whole union as the parameter to decide the interest rate rather than the individual countries performance. Due to Germany and high performing economies, low interest was made available to even economies which were in debt. Thereby countries like Italy and Spain kept on borrowing and spending unless fiscal deficit became too high to control.  This led to Euro Crisis. Real estate bubble was one of the examples of this.

gold-euro-symbol

If local currency would have existed instead of Euro then import and export cost for the low performing country (in Eurozone) would have remained optimum. They would also have devalued their currency, as required, to reduce the cost of production and export to ensure their competitiveness in the international market. However, it cannot be done since value of the currency was managed centrally by ECB. Moreover, before the monetary union was formed, large fiscal deficit generally lead to high interest rate and declining exchange rates. These market signals lead the country to reduce its borrowing. Euro as a common currency eliminated those market signal and result was these currencies borrowed too much.

Considering above factors, we can assume that Euro has failed as a currency.

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About abhiequal

I worked as IT engineer in TCS, Bangalore. Currently I am pursuing MBA in MDI Gurgaon
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