MAIN CHALLENGES TO THE LONG TERM SUCCESS OF THE SINGLE CURRENCY IN EUROPE
INTRODUCTION
Europe houses some of the most affluent and powerful nations in the world. The continent boasts progressive economies that highly influence the process of international trade and investment. The United States serves as both the greatest competitor and ally of Europe in world power with its stable economy and high standard of living. Along with the United States, other powerful and highly developed nations have emerged throughout the years such as Japan, South Korea, Canada and Australia that also pose certain threats to the European power. Thus, the numerous states of Europe have always been confronted with the issue of unity if they are to stay as a dominant nation. Kirste (2007) claims that the call for unity was answered by the establishment of the European Union on November 1, 1993 which is an alliance of twenty-seven European states for the purpose of strengthening economic, social and political coordination. The European Union’s policy on unity has also led to the development of a single monetary policy among European nations as a response to the concern on stability of currencies in Europe. The birth of the European Union gives way to the transformation of majority of European Union’s member-nations towards an integrated unit that shares single fiscal, monetary and economic policies to ensure price stability and consistent economic success in the entire European continent.
THE MAIN CHALLENGES TO THE LONG TERM SUCCESS OF THE SINGLE CURRENCY IN EUROPE
The European Monetary Union (EMU) or Euro has been the official single currency of thirteen members of the European Union which are Ireland, Belgium, France, Germany, Greece, Spain, the Netherlands, Italy, Portugal, Luxembourg, Slovenia, Austria and Finland since January 1, 2002 and has been an important aspect of daily living for 315 million citizens in the euro area (2007). The Euro is considered as a vital element that would render immense opportunities and gains for Europe. However, anything that brings opportunities can be accompanied by risks and challenges (1999).
(1998) states that the future of Euro has always been in question as bankers and analysts doubt its sustainability. The most salient argument is that some policies governing the single currency do not have any element of security that may result to either uncertainty or lack of appreciation on the part of the participating countries and eventually end in withdrawal of membership from the union which would abolish the single currency system in the end. One very significant challenge confronting the sustainability of the Euro is that the thirteen participating countries have to comply with a single monetary policy advanced by the European Central Bank (ECB) but have to pursue independent fiscal policies on taxation, spending and provision of government debt. This requirement provides certain risks since if in cases that some of the participating countries encounter excessive fiscal deficit, it may result to a boost in the general level of inflation for the rest of the countries adopting the Euro. To counter this occurrence, the European Central Bank’s monetary policy has to implement higher interest rates which may lead to firm objection of some low-deficit countries to shoulder the costs of inflation incurred by countries with high deficits. Since the European Monetary Union does not offer any policy that would enable a member-country to refuse payment for high deficits by a fellow member-country, the low-deficit country has no choice but to share in the costs of the high-deficit country whereas this case is not possible if it has maintained its national currency (). Corollary to the independent fiscal policies administered by the countries adopting the single European currency, the governments of these countries are not guided by solitary mechanisms applying to various government expenditures especially in the aspect of pension and health care for the aging population. Although all member-countries follow the “pay-as-you-go” arrangement, the governments of the thirteen member-countries individually face and overcome financial pressures in the absence of a single policy to follow. The euro area is characterized by a rising number of aging citizens and a declining proportion of the working population. Hence, the member-countries are all suffering from an imbalance wherein contributions of employees for social benefits, health care programs and pension provision do not measure up to the number of aging and retired population who need these benefits. The imbalance forces governments in the euro area to either implement risky reforms such as reduction in social benefits or increase in taxes which eventually affect the people. Less social benefits while paying higher taxes would make the citizens think that the European Monetary Union is more a burden than a benefit because of lack of cushion against economic imbalances ( 2004).
Another inherent challenge in any monetary union that also threatens the long-term success of the Euro is the fact that the single monetary policies of the European Central Bank discourage any mechanisms responding to irregular economic shocks faced by any member countries (1998). First, (2004) states that the Euro puts an end to flexibility of prices among member-countries as dictated by flexible exchange rates. This characteristic jeopardizes the ability of any member-country to manage its trade relations and its economic activities. For instance, a member-country of the European Monetary Union encounters a drop in overseas demand for its leading export products and goods. The country is obliged to modify its existing external conditions for trade to respond to the problem by adjusting prices of its exports. Adjustments in prices can be done either by decreasing prices and wages in the prevailing currency or adopting exchange-rate depreciation. In a single currency system wherein a fixed rate arrangement prevails, the country can implement the first option while facing the consequences of depletion of its national monetary resources through a short-term balance-of-payments deficit. This situation would mean that the country using the single European currency has to be ready to suffer temporary economic burdens without intervention from other member-countries and has to be able to develop strategies during this stage (). Secondly, unlike the United States federal tax, the European Union does not have a solid redistributive transfer mechanism wherein tax receipts of developing countries are transferred to countries that have difficulty in fostering economic growth. The freedom of each member-country to formulate and administer its own fiscal policies is part of the purpose of the adoption of the single currency which is fiscal discipline. Fiscal discipline is encouraged in the sense that all member-countries have to independently oversee, manage and control their fiscal activities. No fellow member-country is allowed to intervene in case of economic conflicts. The absence of the redistributive mechanism in the European Monetary Union makes the low-performing member countries highly susceptible to the adverse effects of strict monetary policies. These countries have to get out of economic recessions on their own and are greatly pressured to cope up with those countries that are rapidly growing with the use of the Euro. Therefore, there is a possibility that citizens and officials of these countries would feel that the union does not protect them in times of recession and would result to three possible problems: mounting pressure to develop a new redistribution structure, lack of appreciation for the single currency and withdrawal from the union which would impact the stability of the entire alliance (1998).
Finally, the success of the adoption of the single currency is shadowed by nationalist tendencies of the member countries to protect sovereignty. Each country decided to participate in the union to partake of the social and economic benefits that it promises (1998). However, the prevailing structure of the European Monetary Union does not guarantee equality among participating nations. The overall membership includes heterogeneous nations that have their distinct demographics pertaining to per capita Gross Domestic Product, financial requirements and commitment to unified policies that discourage inflation. The possibility of additional new members into the union increases this threat to sustainability of the single currency. Lack of cohesion in the European Monetary Union entails higher probability of dissatisfaction and loss of interest for some member-countries (2004). When the citizens of these countries perceive that they are not enjoying any of the benefits that the single currency promises, they could encourage the government authorities to withdraw from membership and decide that going independently is a better option (1998).
LESSONS TO BE LEARNED FROM THE EUROPEAN EXPERIENCE FOR OTHER REGIONS CONSIDERING ADOPTION OF A SINGLE CURRENCY
The European experience of a single currency although confronted with challenges, is also marked by numerous benefits. First, the Euro provides practical advantages to Europeans as they do not have to change currencies when they cross borders within the euro area, they can compare prices since the currency applies to the entire euro area, and they can use the Euro in several places outside the euro area since it is an international currency. Secondly, the participating countries can reap the benefits of a single market wherein exchange rate fluctuations and transaction costs are absent, and price transparency, more attractive foreign investment climate and higher competition prevail. Thirdly, the single European currency symbolizes unity among the various states of Europe which drives continuous integration and coordination. Finally, the single currency serves as an important currency in international trade and investment which makes the entire European continent a powerful player in the global economy (2007).
According to (2004) the European experience with Euro conveys that adoption of a single currency as the culminating process in the pursuit of regional economic convergence does not take overnight to become established and successful. (1998) adds that to ensure that a single currency in Europe or in any other region of the world would be able to fulfill its purpose of fostering economic abundance, member-states that are using the currency should be able to grab the opportunities by promoting flexibility in policy making and strategic reforms in the product and labor markets. Policy makers in the member-countries must be able to understand that a single currency primarily aims for economic growth through fiscal discipline. Each country participating in a single currency union must be able to implement policies and strategies that would encourage price stability and address excessive deficits in order to guarantee that all member-countries would develop in equal pace. There is also a need for a commitment to achieving budgetary positions in a medium term period characterized by proximity to either balance or surplus to ensure that the countries would be able to confront normal irregularities in the business cycle and maintain a deficit in government expenditures lower than three percent of the Gross Domestic Product which is a requirement for sustainability of a single currency union ().(2006) assert that the value of fiscal discipline imbedded in the policies governing the adoption of the Euro communicates that the Europeans are committed to attaining regional integration in a win-win approach wherein each individual member-state of the European Monetary Union is given ample freedom and discretion in managing its fiscal transactions and economic activities while having allies to fall back on in case the country is unable to come up with potent solutions. The single currency serves as a form of discipline for all member-countries so that they would be prudent in harnessing their financial resources, not eternally depend on neighboring states during economic difficulties and contribute to an economically powerful European region.
Generally, there are four significant lessons that can be gleamed from the European experience of monetary cooperation namely the establishment of substantial institutional, legal and political foundations; the goal of achieving higher degree of economic convergence through a single market; the creation of a regional process of financial market regulation and oversight; and the aim of macroeconomic integration through coordination in the formulation of economic policies and mutual supervision. Firstly, the European concept of monetary union is a prerequisite for political convergence. The different member-countries are forced to establish legal frameworks that alter the arrangement and authorities of various social or economic organizations at the regional level to extend into the boundaries and jurisdictions of other member-states and ensure that the independent policies of each member-country do not counter the goals of the single currency system. The single currency became a basis for the member-states of the European Union to share and pool their resources, economic policies and sovereignty into one solid framework of governance applicable to the entire union. Secondly, the adoption of a single currency is an answer to the pursuit of a single market. This important requirement connotes that member-states of a monetary union like the European Monetary Union should be prepared and willing to eliminate customs and regulatory restrictions, fulfill their obligations as dictated by the European Union Law, accommodate all legally produced and manufactured goods from other member-states, and not veto any legislative proposals from other member-countries. Thirdly, the adoption of Euro as a single currency in Europe encourages decentralized and coordinated surveillance of the financial markets and enhance foreign investment. Each member state is given the autonomy to manage its economic and fiscal affairs consistent with the monetary policies set forth by the European Monetary Union by overseeing local markets and keeping track of developments and trends in the market. The intelligence gathered from local surveillance of various member-states is open for transfer or sharing to other member-states which strengthens the ability of each country to accumulate vital information from the economy that can be made accessible to other countries and improve regional coordination (2002). Furthermore, an integrated surveillance of financial markets makes the region more attractive to foreign investments. Foreign investors would be enticed to enter the market because of lower costs and absence of exchange rates due to the common currency utilized in the market ( 2005). Finally, the European experience of a single currency is a story of consistent coordination and fiscal flexibility in formulating important economic and fiscal policies that in turn render advantages to all member-states. The member-states that decided to adopt the Euro are able to develop certain exchange rate or monetary mechanisms that are parallel to the economic order being pursued by the entire European Union. The mechanisms are very flexible in the sense that they are open to modifications consistent with changes in the broader context of the Union. The key element in establishing and maintaining a sustainable single currency is the ability of countries participating in the endeavor to be thoroughly prepared in giving up some forms of national sovereignty, be able to readily implement adjustments in existing fiscal policies and develop unyielding commitment to a greater regional integration (2004).
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