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The Economic Problems of the Euro

In the past few years there have been massive amounts of news about the effects the Euro is having on Europe. Some of the news has been about the negative effects of the Euro. Like most good things, there is always something negative that comes along with the benefits. The Euro has been extremely influential in uniting parts of Europe. The main reason the Euro was created was because most of the nations of the European Union agreed that they needed to form a currency to compete, and eventually, dominate the American Dollar. Although the Euro has many benefits to the EU, the problems of the Euro are something that can not be overlooked.

When someone is faced with a problem, it is always the best move to look at the roots of the problem in order to fix whatever is wrong. With this in mind, for us to fully understand the economic problems of the Euro, we must first observe the history of European conflict and the influence of the European Union (EU). The European Union is a group of twenty-five nations that are known as member states. The nations involved in the use of the Euro are: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. A very strong bond, known as a currency union, was formed when these twelve nations united to create the Euro. (www.wikipedia.org)

Although it might seem that these nations have great relations with one another, the history of European conflict tells a different story. For decades, the nations of Europe have argued, disagreed, and have even fought wars over differing views of certain issues. They have also had differences over varying cultures and the occasional presence of a fascist leader. From WWII to the Russian uprising, Europe has been separated by years of wars and hatred. Despite attempts, it is this reason which has hindered the coming together and agreeing upon many common goals needed for Europe to grow and thrive as an economic contender. Since these post war years, Europe has seen many steps taken to unify Europe. We have seen the formation of the European Union which has been a crucial step and huge driving force in the thought process behind the Euro itself and many more pieces of legislation and plans for future European monetary policy.

"One of the unique characteristics of Europe that make it different from any other region in the world is the extreme political fragmentation that has existed and the diversity of its population. People that travel Europe can be amazed by the fact that every few hours they can enter into a new country with a different language and culture". (Soto)

Despite these differences, the European Union came together in the 1970's to adopt two plans that would ultimately alter the monetary face of Europe as we know it--the Warner plan and the subsequent proposal statement on the prospects of a monetary union (EMS). Many analysts have said that these two plans are the most important and ambitious plans proposed and passed by the EU.

"It [Warren plan] stressed the need to move forward simultaneously in coordinating policy, and in narrowing exchange rate margins, the integration of capital markets and the establishment of a common currency and a single central bank"(Urwin )

Even though this movement was so ahead of it's time, it created the vision of a united Europe and set the foundation for other EU developments toward European integration. The EMS was not as ambitious or as idealistic as the previous Warren plan was, but rather it was more of a realistic set plan that laid out how to complete the journey of establishing a strong integration. The EU moved closer and closer to integration throughout the 1980's and the 1990's as many more agreements and treaties were introduced and signed.

Finally, five decades after the end of the WWII, Europe was in the final stage of essentially accomplishing the "inconceivable". On January 1, 1999 the European Union and its 12 pioneering nations composed of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain accepted the Euro as their new currency.

There is no doubt that the major players within the European Union had good intentions and brilliant, idealistic, plans for the Euro and for the uniting of Europe. The Euro was not just thrown together in a day, it has been worked on since the 70's and to say it was poorly thought out would not really be the truth. The Euro does have many underlying benefits but as the saying goes, "there is no such thing as a free lunch". Currently standing at $0.78, the value of the Euro is far from its $1.17 introduction in 1999. (Soto) Using thorough researching and economic knowledge, it is obvious that the benefits of the Euro come with significant costs.

Theoretically, there are two basic requirements for a Monetary Union to succeed; there should be an optimal currency area, and there must be a convergence of the economies of the participating countries.

Krugman and Obsfel define an optimal currency area as "groups or regions with economies closely linked by trade in goods and services and by factor mobility". (1994) If the conditions of the OCA are met, the area involved will hypothetically benefit from the fixed exchange rate system as proposed by the Euro. And likewise, if Europe did not constitute an OCA, the costs to the Monetary Union would exceed the benefits from it. Based on this information, many people have wondered if the Euro zone is an OCA. Lars Jonung, from the Stockholm School of Economics does not think so: "Europe is not an optimal currency area--that is, a geographic area well suited to have only one currency. There is no common currency cycle, at least not yet."(Soto)

Martin Feldstein of Econ Log explains why Europe is not an optimum currency area, even though the United States is one. "First , American employees move within the country when demand is relatively weak in a particular region, facilitated by a common language and culture that regards moving across the country as perfectly normal. Germans are not leaving Germany in large numbers for areas of Europe with faster growth or lower Unemployment. Second, wages are much more flexible in the US than in Europe, reducing the decline in regional employment that occurs when demand falls. And third, the US has a federal fiscal system that directly offsets about 40 percent of the relative decline in any state's gross domestic product by a lower outflow of taxes to Washington and a higher inflow of transfer payments. European fiscal systems are still largely national."(Feldstien)

One of the most important characteristics that

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