Question

The Euro has been an important addition to the foreign currency markets. Using the internet and any other sources you can for information, please discuss in your own opinion what the most important current issues associated with the Euro are. Also, discuss from a US perspective your perception of the pros and cons associated with this currency

Answer 1

One of the defining economic features of European Union is that it is a monetary union and not a fiscal union. This means that Eurozone has a common currency and a common central bank ECB. But on the expenditure side, each country has its own policies and there is no central authority to control debt and fiscal deficit. Noble Prize winner American economist Joseph Stiglitz in his book "The Euro: How a Common Currency Threatens the Future of Europe" , wrote that the euro was a flawed system and it was designed to fail. A common European currency took away the European countries' power to use tools such as interest rates and exchange rates. Due to different fiscal policies, the economic situation is different in different countries. In the absence of adjustment mechanisms of interest and exchange rates, the countries find it hard to deal with the difficult economic situations under a common central bank.

US perspective

Pros: 1) European union created a large single market and this facilitates doing trade and business with Europe. It becomes easy for US firms to comply with one just set of business rules and not different rules of different countries.

2) Dealing with a common currency is also more business friendly than dealing with multiple currencies.

3) Being a strong currency, Euro currency lessens the demand for US dollar. This is beneficial for US industries as high demand for US dollar would have increased the value of US dollar vis-a-vis other currencies and this would have hurt the US exports. High demand for US dollar would have also increased the interest rates in US to very high levels.

Cons: 1) A common euro currency gives more power to countries like Germany and France which are economically more powerful. This economic domination sows the seeds for resentment and discontent among European countries. For example, Italy has major differences with European countries on many polices in economic and political sphere.

2) With a powerful currency, European Union has the economic wherewithal to go against the US interests and policies in international political matters. e.g Iran