Question

Do you think replacing several EU members' national currencies in 1999 with the euro was optimal? Will euro survive? Why or why not? Discuss costs and benefits of a single currency area. Compare the Eurozone and the United States in terms of the 'optimum currency area' criteria. (Hint: view the US as a currency union of 50 countries or independent states). Use the textbook and outside sources where appropriate.

Answer 1

Replacing EU members national currencies in 1999 with euro in 1999 was not optimal because some countries who were not meeting the full criteria were included in the union and also there was no parity among the countries of the union in 1999. This affected some of the countries badly. Thus, at the time the union was formed it was not an optimum decision to include countries with different parameters and values of inflation rate, fiscal deficit etc under one currency.

But currently it has been observed that apart from the monetary union , the Euro area should also be made a fiscal union where fiscal policies coincide that can prevent the crisis that occurred recently in these countries. Also, the United kingdom has left the union, However, the union will survive as it is a large union of many countries and European Central Bank is a strong agency to take care of the countries that default and thus the union will survive in the long run.