Eurozone Struggles

Mark Tuminello eurozoneThe economic outlook for the Eurozone isn’t pretty. Growth isn’t growing, deflation looms, and economists once on the fence about the future of the region are now deeming the initiative as a failure. That said, there are still a lot of economists and politicians keeping their fingers crossed that the Eurozone could still become an optimal currency area.

The euro was born during a major transition of global currency. When the IMF was first established, they established exchange rates more or less based off the value of the US dollar. US currency was in turn based on gold reserves, with direct convertibility. Nixon changed all this when he led the charge for the US to abandon the gold standard. Now world currencies free-floated against one another.

Part of the hope of the euro was that it would boost the economies of Europe by expanding their local market past each nation’s borders. Costs would go down, and trade and information would flow more freely. Sure, they were giving up monetary independence, but it felt like a good trade back then. After all, the dollar was doing so well back then that the currencies of Europe just couldn’t keep up.

Now, with some countries struggling much more than others, the lack of independent financial instruments have made it difficult to respond to negative economic shocks. Recovery from the tumult of the last decade hasn’t been smooth.

The fact of the matter is that the eurozone is now part of the global community. It isn’t likely to be disassembled, and so we need to learn how to optimize it to meet new challenges. It seems that countries that are struggling right now, like Greece, ought to develop some kind of financial instruments to prevent a continual state of crisis. Countries in better economic shape, like Germany, need to encourage this bit of independence, as they will also face the consequences if something should go terribly awry.

And then, the next step is probably for the economies of Europe to consolidate politically. The only way a union thrives is for it to be truly unified. Otherwise the citizens of Europe may be stuck with an economic environment whose benefits don’t outweigh the costs.

from Mark Tuminello – latest post by Mark Tuminello

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