July 10, 2015    4 minute read

What Threatens the Stability of the Euro?

   July 10, 2015    4 minute read

What Threatens the Stability of the Euro?

The Euro was officially launched in 1999 with 11 countries joining it. Today, 28 countries are members of the European Union and 19 of them use the Euro. Upon joining the Eurozone, these countries had to sign the Maastricht Treaty and strict conditions had to be met. Indeed, budget deficit and debt ratio had to represent respectively less than 3% and 60% of GDP. The Euro was introduced in order to have one unique and stable currency, as well as to make trades between member countries easier, cheaper and less risky.

However, this currency wasn’t even introduced on strong bases, so one could predict that the Euro would be destabilised from the first financial crisis. Many countries joined the Euro without respecting all the rules and flawing their numbers. For example, Greece entered the Eurozone with a budget deficit of 3.38% of GDP, exceeding the 3% limit. Moreover, the Euro was launched without fiscal policy, which makes the Euro adopt a policy of Laissez Faire. The lack of fiscal policy gives less control over the currency and the overall economy, especially during recessions. This lack of control helps countries to hide their true numbers using intricate derivatives. This is the case of Greece that used Goldman Sachs’ derivatives swaps; buying other currencies and selling euro to disguise their numbers. Further, one may think that the low cost of borrowing that countries of the Eurozone benefited from was a great advantage of the currency. But as Spain entered the Eurozone, it became eligible to borrow at very low interest rates, which considerably raised its debt, and it is also the case for other European countries that sunk in debt and are now in crisis.

Corruption and culture clashes among Eurozone countries are a threat to the stability of the Euro. Transparency International, an anti-corruption NGO, found that there is a strong correlation between corruption in some countries such as Spain and Portugal and the Eurozone crisis. This corruption is neither controlled nor sanctioned, which makes countries use it more. In the 2014 corruption perception index, Italy and Greece were ranked 69, having the lowest position in the European Union. Concerning culture, Kissinger predicted that these differences would threaten the stability of Europe by saying in 1970:

“If I want to call Europe, who do I call?”

In 2013, Allan Greenspan, ex-Chairman of the Federal Reserve, claimed that:

“The Euro can only be saved via a real political union. I don’t believe that a common economic and currency area can function in the long term if it is made up of 17 countries with 17 different social systems. The Eurozone needs a complete political union, comprising either all member states or a core Europe. That is the only way the Eurozone isn’t going to break up”.

That is to say those different beliefs, cultures, religions, made countries have different political views and way of managing crises, which is a threat to Euro. Culture differences should then be surpassed and for the Euro to survive, one should base political decisions on an agreed upon treaty instead of each country’s beliefs.

Countries that may seem to threaten the Euro are commonly remarked as the PIIGS (Portugal, Ireland, Italy, Greece, Spain), since they accumulated large deficits from the financial crisis of 2008. However, Madison Marriage, a Financial Times Fund Management Reporter, said that if these countries happen to leave the Eurozone, the Euro would drop by 40% on the yield curve. Furthermore, if one of the PIIGS happens to leave the Eurozone, there will be a contagion effect that may lead to a financial crisis worse that the housing bubble of 2008. Indeed, even if the PIIGS have very weak economies, their exit from the Eurozone would greatly depreciate the Euro.

The Euro will be more controlled if a fiscal policy is created. In fact, the creation of a European Monetary Fund would control the currency in times of crisis and prevent its unsteadiness. Nonetheless, one should not forget that Germany plays a big role in the strength of the Euro and helps many Eurozone countries. For instance, it was the biggest lender of Greece. Despite political reasons, Germany’s economy and currency will appreciate if it leaves the Eurozone. This is why the question should be if the Euro will survive if Germany happens to give up on the Euro.

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