Eurozone Crisis
The Eurozone is currently facing a crisis on a number of fronts. The most pressing of these is Greece, which is heavily indebted to other Eurozone countries, creating a budget crisis in the country (Raman, 2011). As the risk of default on Greek sovereign debt increases, this puts downward pressure on the value of the euro. Other nations within the Eurozone are, in order to salvage the integrity of the currency, more or less obligated to back Greek debt. While Greece is a significant problem for nations within the Eurozone, the currency would not be considered to be in a state of crisis if Greece was the only problem. The reality is that many peripheral Eurozone countries are in various states of financial disarray -- Spain, Italy, Portugal and Ireland all have problems (Ibid). Spain and Italy are in particular a problem, because they are too big to be bailed out by the wealthier Eurozone economies. This paper will outline the antecedents and implications of the Eurozone crisis, beginning with the creation of the Eurozone and continuing through an analysis of the Eurozone's structure and the future of the Eurozone.
The Common Market and the Creation of the Euro
The philosophy behind the Euro began with the creation of the European common market. After World War Two, the political development of Western Europe was heavily influence by liberalization and by a new spirit of cooperation. The Common Market was the first step, as it brought multiple nations together to reduce customs and to streamline business regulations. The Treaties of Rome created the European Economic Community (EEC), which would later lead to the creation of a European parliament (NPR, 2010). Philosophically, this movement was driven by a spirit of partnership and the idea that if Europe was united politically the devastating conflicts of the first half of the 20th century could be avoided. Thus, while there is occasionally public skepticism about European integration, the idea has remained politically popular through the past sixty years.
The creation of the euro as a currency for the EEC was a natural extension of the substantial trade liberalization that had preceded it. The trade liberalization is believed to have had a significant impact on economic development in Europe because it streamlined the different regulations that businesses would deal with when attempting to do business across Europe's many nations. A common currency extends that theory by eliminating currency exchange rate risk. For nations with major currencies -- Germany and France in particular, this risk was lower than for smaller nations. By 2002, the euro was in place, with 12 nations in the EU adopting the currency, the abstainers being the United Kingdom, Sweden and Denmark (NPR, 2010).
The Treaty of Maastricht was signed, not only noting which countries were to join the Eurozone but what terms would be set for future nations. The treaty obliged new nations joining the European Union would adopt the new currency. These states would be allowed to join the Eurozone if they met certain economic criteria. As the EU expanded, so too did the Eurozone. However, aside from Greece all of today's crisis countries were original euro countries. There are a handful of small, non-EU states that have also adopted the currency. In its early years, the euro was highly successful, and has begun to compete with the American dollar as a global reserve currency.
Greece
Greece was supposed to be one of the original euro countries, but was forced to leave the Eurozone prior to the introduction of the currency because it had no hope of meeting the economic criteria (BBC, 2001). Inflation in particular was a significant problem. At the time that Greece joined the euro, the country's participation in the Eurozone was popular in Greece (Ibid). There was also concern at the time, because Greek inflation rates were still higher than those prescribed in the Treaty of Maastricht, as was the level of public borrowing. Greece was admitted, therefore, even though the country did not meet the basic criteria for being allowed in the Eurozone. The decision to allow Greece into the Eurozone therefore, was more political than economic. At the time, the EU was in a state of expansion, and its leaders wanted to show the new EU nations that if they at least tried to meet the Maastricht criteria, there would be some leniency with respect to joining the Eurozone (Ibid).
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