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The Euro Will Not Survive Beyond 2020

Essay by   •  March 20, 2012  •  Research Paper  •  2,143 Words (9 Pages)  •  790 Views

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The Euro will not survive beyond 2020

Since its introduction On January 1st 2002, the Euro has become the official currency of 17 of the 27 member states of the European Union. "It is used daily by 332 million Europeans" (Eurostat, 2011), making it the second most traded currency in the world after the United States Dollar. It may therefore seem difficult to comprehend why the Euro should not survive beyond 2020. In its relatively short existence, the Euro has been riddled with problems. These will be analysed and discussed with a view to a coherent conclusion as to whether the Euro will survive beyond 2020. I shall examine why countries are endeavouring to retain the Euro despite the mammoth current crisis which threatens its very existence and also reasons why their efforts could be thwarted.

There are basic economic benefits for countries who have adopted the Euro. New Euro zone member Countries such as Estonia and Slovakia have benefited greatly from trading with other Euro zone countries. Krzysztof Rybinski, the Deputy President of the National Bank of Poland, has argued that companies trading with other Euro zone companies save money as there are no exchange rate fluctuations. He stated "that after calculating the amount his company would save in transaction costs, it would be 0.2% of GDP in Poland" (Rybinski, 2000). Smaller countries such as Estonia and Slovakia have benefited greatly from trading by cutting down transaction costs which contributed to lowering their country's GDP. This trading advantage is a major reason why European countries are striving to save the Euro. Future Euro Zone members such as Poland and Romania are both expected to switch to the Euro in 2015, to benefit from this trading advantage.

Adoption of the Euro has benefited smaller countries by increasing their international trade. A. K. Rose has stated that "joining a currency union may boost cross-country trade by over 200%" (Rose, 2000). By adopting the Euro, countries can minimize the uncertainty that the exchange rate movement can cause and therefore reduce the risk of foreign trade. Firms who did not previously export goods have been encouraged to start exporting across borders due to the reduction of fixed/variable costs of exports. An investigation for the European Commission concluded that "the increase in trade due to the Euro is likely to have been generated by a rise in the number of exporters and products traded across borders". (Baldwin, DiNino, Fontagné, De Santis, and Taglioni, 2008). This strengthens the argument that adopting a single currency has increased international trade which has in turn economically benefited all member countries. "From 1999 to 2006 extra-euro area exports and imports of goods rose to 33% of euro area GDP, from about 24%" (Tumpel-Gugerell 2007), an increase in trade of 11% in seven years between the EU member states, China and other Asian countries.

Due to the collapse of the Greek economy, the Euro zone is preparing for the possible exit of Greece. Would such an exit affect the survival of the Euro? Vanessa Rossi has argued that the Greek economy is too small to have a major effect on the Euro. 2000. Her argument is that the Greek economy was not in a good position before joining the Euro, and that "its prospects outside the Euro zone did not look bright" (Rossi, 2011). Currently, over 175 million people worldwide use the Euro or use currencies pegged to the Euro (Eurostat. 2011).The currency currently has over €890 billion worth of banknotes and coins circulating the world, making the Euro the largest economy in the world according to the IMF. There is the view that that as long as the core countries remain in the Euro, it will not fail despite the possible exit of smaller countries. Provided these countries have enough growth they will have sufficient revenue from taxes to repay their debts. Whilst in theory this could work, however the current crisis has shown that several countries have let their debt go out of control, a recent example being Italy. In November Silvio Berlusconi stepped down as Prime Minister of Italy due to Italy's current financial Crisis, following in the footsteps of the Greek Prime Minister, George.A.Papandreou. The financial crisis in Italy escalated after borrowing rates in Italy rose to an all time high. Italy which used to be one of the most financially stable countries in the world now needs a Euro zone bailout. James Chapman stated in a recent article that Italy has a debt of £1.6 trillion, an all time high. (Chapman, 2011) "Italy's debt accounts for 25% of all debt in the Euro zone" (Hannon, 2011). Another ailing economy is that of Portugal. "Portugal's economy shrank in the third quarter and has now been in recession for a full year" (businessweek, 2011).

Trade has been badly affected by the crisis. September saw a 2% drop in Industrial production within the Euro zone in both smaller and larger countries. Trade reduced as a result of decreased output. If production continues to decrease, the positive economic advantage of joining the Euro is minimized and hence smaller countries could decide to exit the Euro. They may consider that returning to their old currency would be a better option. The devaluation of their old currency could expedite their recovery. The dangerous cycle of a reduction in productivity, possibly resulting in the exit of member countries, may also deter other possible future members joining. Furthermore, an exit of members brings with it the prospect of a Great Depression as seen in the 1930s.

Italy's huge debt had a detrimental effect on the value of the Euro. In November the Euro fell over 2.2% against the U.S Dollar, which was quoted to be" the worst one day fall for 15 months" (Chapman,2011). Markets around the world have been badly affected with billions being wiped off the stock markets. The Euro has fallen against the value of Sterling by 1%, making £1 worth approximately €1.17. Brian Battle suggests that Italy's problems will now be passed onto France and the problems with the Euro would be felt in countries outside the Euro zone such as Australia, who recently saw a drop in unemployment to 5.2% (Battle, 2011). The problems created by the Euro are now starting to roll over worldwide into countries that previously had a stable economy. If these countries decrease their trade with countries in the Euro zone, this could further jeopardize the survival of the Euro.

The Euro crisis has had a detrimental effect on the sympathies of the larger member countries. The Germans have shown their reluctance to lend money in the sovereign debt auction on November 23rd. Germany were supposed to sell "6 billion Euros of 10 year German government bonds, however, they only sold 3.6

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