- European Debt Crisis
- Introduction
- The European economy started to shrink since 1930 although the real GPD indicated significant decrease by 4% in 2009. The projected shrink of the year 2009 is the worst that the European Union has ever experienced. The main cause of the debit crisis in European Union resulted due to a combination of various complex factors. One of these factors was easy credit conditions that the Union offered during the period 2002-2008. The conditions encouraged high-risk lending and borrowing practices that lead to debit crisis. The other cause of the debit crisis was international trade imbalances that caused a slow economic growth in countries that are members of the European Union. The depreciating rate of Euro creates the main question of whether it will remain the currency in the European Union or not.
- Euro will not remain as the currency of the European Union because of the debt crisis. The main cause of Europe debt crisis is the huge amount of debt that the European Union borrowed from other countries. Most of the countries that lend money to the European Union claim that they cannot manage to give more as they fear that the union may not be able to pay. European countries that face most pressure on the issue of default implicit in the financial market include Greece and Portugal. The two countries have banking problems that relate mostly to property boom due to debt crisis (Wignall & Patrick, 2010).
- The main reason that will make Euro fail to remain the currency of the European Union is that the continent has encountered several interrelated crisis. One of the crises that beset European Union is the banking crisis. The banking crisis is said to be stemming from loses that accumulate in various capital market securities, for example, US subprime. The other cause of capital market securities are problems that some of the European countries experience in the property markets (Wignall & Patrick, 2010).
- The other cause of debt crisis in the European Union is huge debt that most of its members encounter because of various issues. One of the main issues that cause huge debt in European Union members is the tax revenue exhibited by recession. The other cause of debt crisis is the transfer that the European Union make in order to help various banks. Poor management of finances in many of the European Union members also tends to be one of the causes of debit crisis. Poor fiscal management in the European Union results due to the failure of complying with the Maastricht Treaty. The treaty illustrates that the European Union ought to comply with the set rules and regulations concerning stability and growth of economic values. Failing to comply with these issues, the European Union will not be able to sustain Euro as the only currency to use in future (Wignall & Patrick, 2010).
- Another reason that will cause Euro fail to remain the European Union currency is the fact that some of the countries like Greece has contributed in causing a large extent to the debit crisis. The country has no indication that it will be able to get out of the crisis soon. This is because those who are required to help in this problem especially in the political arena fail to offer their contribution in solving this problem (Wignall & Patrick, 2010). When solving the debit crisis in European Union, there is a need to offer a positive contribution in order to have a successful monetary integration. For example, reflecting on a positive contribution means that Euro cannot remain to be the main currency without having a monetary union. There is also a need to have a political union in order to make the Euro remain the only currency in the European Union. The politicians have an obligation of contributing positive issues that will encourage more countries to accept using the currency (Wignall & Patrick, 2010).
- The Euro cannot be able to remain as the currency of the European Union because there is high internal imbalance that relate to financial stability in many of its members. For example, Greece, Portugal, and some of other European Union members acknowledge running a number of current account deficits. This means that it will be difficult for most of these countries to be able to stabilize and meet the financial requirements that they need. Most of the European Union members have downgraded their credit worthiness and therefore they continue to have a worse economy (Zahariadis, 2010). For example, countries like the Spain and Portugal already indicates that they have a negative reputation concerning the case of borrowing money.
- The other reason that will make the Euro fail to remain the currency in the European Union in future is that the monetary policy relating to the currency is complicated than before. There is minimal possibility for new members to join the Union. The benefit of a new member joining the Union is that she helps in solving financial problems of some of the member countries by lending them money (Zahariadis, 2010). The benefit that most of the countries considered to get after joining the Union has now decreased due to the negative reputation the Union has received within recent years. Most of the countries that do not use Euro fear that they may end-up having loss in the financial market if they start using the currency. Moreover, the countries that demonstrate to have a big share in the Union indicate that they might encounter an increase in the political cost in future. Some of these countries like Germany argue that by allowing new members to join the Union there will be future bailouts meaning more lose in interests in future (Zahariadis, 2010).
- Another reason indicating why Euro cannot remain as the currency to use in future is that the European Union leaders fail in maintaining credibility and trust especially in the market diversity. The European Union ought to help some countries like Greece improve their economic situation. However, the unwillingness of the Union to help countries most affected by the debit crisis gives the reason why most of these countries lose interest in using the currency. The leaders in the Union also lack the institutional capacity to tackle the threats that approach in nowadays banking strategy. The leaders in European Union fail to make quick decisions that contribute in making anticipated developments related to the increase in value of the Euro currency (Stein, 2011).
- Leadership is one of the most important issues lacking in the European Union. This illustrates that Euro will not be able to appreciate without the required necessary form of leadership. The European Union cannot be able to prevent Euro from depreciating (Stein, 2011). The Euro has indicated to depreciate for the last few months comparing to the rate of dollar. Politicians have also played a significant part in contributing to the losing in value of the Euro. There have been bloated and corrupt issues in the public sector that have contributed in making the leadership of the European Union deteriorate. Most of the politicians from the European members fail to make the required reforms in order to keep the Euro as the main currency. Their failure is one of the factors that will make Euro fail to remain as the currency in the European Union (Stein, 2011).
- The Euro will remain the European Union currency because it will be able sustain the deterioration of the world economy. Most of the countries in the world have indicated to have experienced deterioration in their economy for the last few years. The deterioration is due to low rate in focusing on the economic activities in most of the governments. The Euro has indicated to be an oasis of stability for the last several years (Cetin, 2011). The European Union has helped most of its members by lending them financial support in order to tackle the issue of unemployment. Statistics collected in most of the European Union members indicates that the more a country have low rate of employment the more there is low rate in generating the Euros. Therefore, in order to raise the amount of Euro generation in most of its country members, the European Union has been lending them financial support (Cetin, 2011).
- The Euro will remain as the currency in the European Union because it launches against the weakening finances in most of the world’s economy. According to the new amendments made by the European Central Bank, one of them is that there is an opaque monetary system ought to make the Euro gain more legitimacy with members of the public. The amendment will contribute in making the Euro change its reputation that damaged by most of the politicians through various media houses (Cetin, 2011). The amendment will also be of significant importance to most of the banks because it will offer a considerable lending amount that will help them achieve their target zone. The advantage of the amendments made by the European Central bank is that they will offer an opportunity for most of the banks to lower their lending rate to the public and therefore there will be more economic activities. Even after lowering the interest rates, the Euro will be able to remain strong and therefore there will be no negative effects (Cetin, 2011). The fiscal policies will also have to remain cautious despite the governments’ of the European Union members to have unusual spending ambitions. The only requirement members of the European Union from smaller countries will be required to do is tighten their fiscal policy. By performing this requirement, they will be preventing their economy from weakening by depreciating and overheating.
- Another illustration that demonstrates that Euro will remain to be the European currency is that it indicates to be performing well since it was introduced more than ten years ago. The Euro indicates that it has been gaining momentum every year even when there are severe global market disruptions (Nelson, Belkin, & Mix, 2011). The Euro has demonstrated that it will be able to survive most of the economic strength gauges in the future and therefore it depicts to remain the European currency (Cetin, 2011). Compared to other currencies in other countries, Euro has demonstrated that it is powerful and has a positive effect towards economic growth. The main reason that indicates Euro to have more strength is that it is the second from the dollar in total area gross domestic product. The Euro area depicts to be increasing in reigning GDP leader and this means that it will manage to achieve this target within a short period. According to the strategy in the European Union, more countries are willing to join the Union and this will boost an increase in the GDP calculations (Cetin, 2011). When this will be done, Euro will be able to catapult in area and this will make it to be the world’s largest economy. If the Euro manage to become the world’s largest economy after following the above strategy, many of the transactions in the whole world will be performed using the currency and this will create a large market share.
- Another issue that will contribute in making Euro to remain as the European currency is the fact that it holds a strong current account. Reflecting on the current accounting of the Euro depicts that it will be able to sustain the disruptions that might occur in future. The current account of the Euro depicts that it has received a lot of payment from other countries (Cetin, 2011). These payments are a result of export and import and that they European Union manage to get at the end every financial year. Foreign investments that the Union has managed to make also constitutes to the increase in the Euro current account. The current account of the Euro has also stabilized in the past few years due to various macroeconomic factors. Some of these macroeconomic factors include trade policies, interest rates and the exchange rate conducted on foreign rates (Nelson, Belkin, & Mix, 2011). The advantage that the Euro gets from the dollar is that the latter have increased demonstrating an increase in its current deficits every year. While in the case of Euro, it has continued increasing its current account every year (Cretiel, 2010). The most predictable outcome is that the deficits will continue weakening the dollar and therefore many countries will decline using it in economies financial market. This derives to the point that Euro has a high chance of becoming the world’s largest currency in the entire financial market share.
- The other reason that will make the Euro to remain as the European currency is that it depicts to have a great currency usage. This means that the Euro have a wide rate of usage in all the markets in the world (Nelson, Belkin, & Mix, 2011). Several factors contribute in making Euro have a significant market usage. One this factors is the availability of the currency. The currency is available at almost all countries in the world. The other factor is the pricing stability of the currency (Cretiel, 2010). This means that Euro is able to stabilize at a certain rate with a long period. This factor contributes to the meaning that many countries may prefer using the currency in future compared to the dollar due to the issue of stability.
- Conclusion
- Many countries preferring to use Euro are increasing day-by-day. This means that the currency will continue to overshadow any other currency that would tend to be competitive in the market. More countries in Europe are admitting the usage of Euro as their main currency. This means that Euro will be the most preferred form of currency while performing most of financial operations. The foreign market share seems to be very promising and most of the countries in Europe have showed positive interest in joining the European Union.
- References
- Cetin, C. (2011). Information transmission across currency futures markets: Evidence from frequency domain tests. International Review Of Financial Analysis, Volume:139.
- Cretiel, P. D. (2010). High times for currency options. Futures: News, Analysis & Strategies for Future, Options & Derivatives Traders, Volume: 39, Issue: 9, Pages: 30-33, 4p
- Nelson, R. M., Belkin, P., & Mix, D. E. (2011). Crisis Responses. Congressional Research Service: Report, 5-11.
- Stein, J. L. (2011). THE DIVERSITY OF DEBTCRISES IN EUROPE. CATO Journal, Spring/Summer: Volume: 31 Issue: 2, Pages: 199-215, 17p.
- Wignall, B. Patrick, A. S. (2010). A Market Perspective on the European Sovereign Debt and Banking Crisis. OECD Journal Volume: 2010, Issue: 2, P: 9-36, 28p
- Zahariadis, N. (2010). Greece's DebtCrisis: A National Tragedy of European Proportions: Mediterranean Quarterly; Volume: 21, Issue: 4, P: 38-54, 17p
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