Currency Policy and the Nations in the Eurozone

Every government in the world keeps an eye on its economy to make sure it is steady at all times. The government may control expenditure and taxes to stabilize the economy when it is struggling (De Grauwe, 2010). The government utilizes currency policy to encourage strong, long-term economic growth and to lower poverty. The recent global financial recession highlighted the roles and goals of currency policy as governments intervened to stabilize monetary systems, lessen the effects of the economic crisis on the populace, and spur economic growth. If a country is in deep financial debt, the policymakers look for ways to influent the economy to recover (De Grauwe & Ji, 2013). In most cases, they use two main tools: the monetary policy, and the fiscal policy. On the one hand, central bank’s target activities by manipulating the money supply through adjustment of interest rates and the requirement of the bank reserves, and through purchase or sale of federal securities and foreign exchange. Conversely, the government changes the levels and types of taxation, reduces the federal spending, and decreases or does away with any form of borrowing.

When a government is in massive debt, it may use currency policy to lessen the debt. Migitating or reducing debts is done in one of three existing ways: Subsiding government spending, raising taxes, or combination of the two (De Grauwe & Ji, 2013). During an economic crisis, a nation is financially hurt, and those that are in debt become plunged into overwhelming national debt. Here, the governments may decide to ultimately slash the spending and raised charges to shell themselves from external debts (Lapavitsas et al., 2010). The increase in revenue collected through the taxes and savings can be used to reduce the external debts and liberate slowly, step by step, from the problem. Moreover, selling of government property and bonds can increase funding that can be directed towards eliminating some of the debts.

Lastly, the government that is in substantial national debt can be eligible for a bailout from international organizations such as the IMF (De Grauwe & Ji, 2013). Through rescue, the country can get temporary funding to help tackle the liquidity shortages. However, bailout comes with strict instructions on cutting down the debt and often is enforced from outside. In a severely indebted country, the bailout may be insufficient, and applying internal efforts of currency policies can pull extra resources to help in paying out the debt.

Currency Policy and the Nations in the Eurozone

In 2015, Greece and Germany were on a collision course. With Greece being in an overwhelming national debt and unable to pay it off, Greek president Alexis Tsipras was hoping for Germany’s Angela Merkel to write off their charge (Chalaniova, 2014). Nonetheless, Merkel was hesitant to do that. Peculiar, Greece is a small country accounting for about 2% of the Eurozone, and it would appear that writing off its debt would be inexpensive (De Grauwe, 2010). While the decision may be straightforward and painless an obsession with deficit reduction had already stunted the growth of not only Greece but the entire Eurozone.

Since 2015, countries using euro have been paying the price of not having a standard resource transfer system from one part of the single currency country to another. While there are one currency and a uniform interest rate all over the union, the EU lacks a fiscal union that supports the monetary union (Lapavitsas, 2012). Dissimilar to other countries and unions such as the UK and the US, the Eurozone does not have a large-scale method to apply to recycle taxes raised from the parts of the union that are doing well economically into the areas that are facing economic deficits. Due to this fact, when one country such as Greece falls into a national debt crisis, the options to redeem themselves is massively limited.

When a country in the Eurozone faces overwhelming national debt, options such as cutting government spending do not contribute much to the economic recovery as it would in cases of countries outside the union (Lapavitsas, 2012). Instead, the countries with low economic growth get hampered which leads to lower tax collection rate and increase in debt to the GDP. Furthermore, since the Euro has fixed exchange rate, it cannot be devalued (Mody & Sandri, 2012). Hence, the spending cuts are ineffective for the countries in Eurozone as they cannot pursue a loosening of currency policy while the Eurozone is in recession. Instead of liberating them, spending cuts can push the country to further economic problems and higher national debt.

With limited options to bail themselves out of financial problems, countries of the Eurozone are in an unfair position when dealing with their national debts. Without an operational fiscal policy to govern the status of each country, the national fiscal policies are disadvantaged (Mody & Sandri, 2012). As it was evident, Greece tethered on the edge of national bankruptcy, the decision by other stronger European Union actors to bail them out so that they do not default on its debt obligations (De Grauwe, 2010). The idea did not materialize since these European giants were dealing with their own financial problems. Unlike the situation in the US, each country in the Eurozone seemed to have its own interest and dealing with Greece’s problem was not a priority. Such contradictory primacies in the Eurozone make it hard for members to bail themselves out of financial crisis.

Impact of Currency Policy on a Country

The primary goal of the currency policy is to counter any economic changes in the government budget. When a country’s revenue is higher than its spending or running on a surplus budget, it applies a contractionary fiscal policy, and when the spending is higher than the income or running a deficit, it employs an expansionary budget (De Grauwe & Ji, 2013). Through its currency policy, the country maintains and controls its budget and monitors its overall expenditure. When in an immense national debt, applying fiscal policy helps the na to liberate itself.

The first impact of a currency policy is that it raises the demand for goods and services (Lapavitsas, 2012). By doing so, the government hopes to affect the total amount of outputs produced or the gross domestic product. By raising the demand, the production reduces while price increases - and depending on the degree of expansion, the state of the business cycle gets affected. When an economy is in the recession, the raised demand in the market leads to the production of more output (Lapavitsas et al. 2010). In the same way, when the economy has a larger number of employed people, the fiscal policy leads to changes in prices and little impact on the output.

Secondly, using currency policy, programs such as automatic stabilizers can expand or contract the economy depending on its state (De Grauwe, 2010). For example programs such as the unemployment insurance, lead the government to spend more during the recession. In the same manner, taxes can be used as economic stabilizers; their collection is higher during the economic boom and reduced during recess. Overall, the impact of currency policy on the economy is that it affects its aggregate demand and saving by changing the incentives and either encourage or discourage activities.

Question 2:

Comparing the American and the European Single Currency System

The United States of America one of the most successful currency system of all unions in the world. Evidently, the single currency system, the dollar, has underlined the American growth and prosperity over the years (Mody & Sandri, 2012). During the formation of the Eurozone, the primary idea was to create a similar currency union that would improve their international relations and enjoys further prosperity and growth that Europe had experienced ever since the Second World War. The single currency system worked well until 2011 when the countries experienced financial difficulties such as the huge fiscal deficit (De Grauwe & Ji, 2013). Different to the United States’s system, Eurozone’s single currency system was becoming a burden to the economy and a major hindrance to countries such as Greece to overcome the massive financial debts they faced during the recess. While both the US and the Eurozone use a single currency system, there are significant similarities and differences in the political, social, and cultural points of view.

Similarities

The most obvious similarity is that both in the USA and Eurozone, the borders are completely open to their members. They can trade, move around, and exchange goods and services using the single currency (Lapavitsas et al. 2010). Similar to Eurozone, the United States has some responsibility for its members and govern the Highway Code, social welfare, set minimum wages, necessitate particular legislation, and even produce certain taxes (De Grauwe, 2010). At the political level, both the United States have some that champion for the independence of the nations, while others champion for more control by the union. Moreover, both the Eurozone and the United States have no common monetary policies. However, the European Central Bank and America’s Federal Reserves have the powers to necessitate price stability in case of any economic changes solely.

Differences

First, the United States of America was born over 200 years ago out of the goodwill of their colonial masters to release the member states from their crown (Lapavitsas et al. 2010). On the contrary, Eurozone was built less than two decades ago by the joint effort of their member countries to foster economic progression. Over the years, each nation has depended on its laws and strategies and has had separate governments protecting its citizens (Tanzi, 2016). In contrast, the United States elects a single president and has a higher federal government that legislates on matters affecting the country. There lacks a unifying figure unifying Europe the way the American presidents have done over the years. In fact, while the voter turnout has been on the rise for over five decades in the United States, Europe’s parliamentary elections have been marked by a decrease in participation rates over the years.

Secondly, there is a significant difference between the United States and Europe regarding the favorite language (Tanzi, 2016). Even when there is a case of a plurality of accents among the member states of America, English is the standard language. In Eurozone, however, the countries have no common language. In contrast to the United States, Europe has about 23 official languages around it. Though united by territory and partnerships, there is no connection, mostly culturally, among Eurozone member states.

Thirdly, the American culture, beliefs, and ways of life are attributed to the Founding Fathers (Tanzi, 2016). They are responsible for the formation and the ideology of America as a whole and are popular in political discussions and forums. It is common to hear things such as the “American Dream” in the United States, and all the citizens appear to have similar goals in life. Such ideologies are not as common in Eurozone as it is in America. Moreover, the presence of American thinking makes it typical for an American citizen to feel entirely American, but a European can only identify by his state and not the Eurozone.

Lastly, the Eurozone lacks a common fiscal policy. However, there is a policy that central revenues of the members need not exceed 1.7% of the GDP, while the federal expenditure need not exceed a certain level (Lapavitsas et al. 2010). Differently, the United States has a national government whose revenues are 21% of the GDP, and a limitation of the expenditure is not emphasized upon. Through a common fiscal policy, the changes in the budget of the federal government are monitored, and deficits or surpluses lead to stimulation or restriction on the overall spending on both goods and services. Help to member states is brought about automatically through the federal programs as 12% of the federal budget are transferred to state and local government in the form of funds (Tanzi, 2016). These differences ensure that member states in the US are covered during an economic recess and that they do not individually fall on overwhelming debts similar to those in the EU.

Can Eurozone Replicate the United States Single Currency System?

Given the differences in culture, history, politics, and social points of view in the United States, I do not think that Europe can replicate the single currency system (Tanzi, 2016). Although there are some similarities between the United States and Eurozone, the differences make it hard for a single currency system to be sustainable in Europe. There lacks of a unifying principle in the Eurozone such that of the Founding Fathers of the United States. Thus, it becomes hard for Europe to operate as a “nation” rather than individual member states. Moreover, its late formation ha a negative aspect to the economic status of nations, as some members such as Germany already had much stronger economies than those of Greece and other small states. In the event of economic collapse, it becomes harder for one member to bail out another (Tanzi, 2016). The feeling is worse during the economic recess, as small members are placed at a point where they cannot climb out of their overwhelming debts. All in all, if Eurozone want to replicate the single currency system like that in the United States, they need first to give more political substance to the zone and unify the member countries through a single vote.

Question 3:

Definition of National Sovereignty

National sovereignty refers to the power of a government to carry out any necessary actions to govern itself– such creating, executing, and applying laws; imposing and collecting taxes; forming treating; and engaging with other foreign governments (Favero & Missale, 2012). With sovereignty comes the independence of a state as well as its recognition by the international community. Thus, a sovereign nation acts as a recognized entity on the world stage and is not subjected or submissive to any foreign powers. Moreover, the more a nation independently carry out its activities, the more sovereign it becomes. As such, a sovereign nation must be supreme vis-à-vis alternative sources of authority and claim comprehensive jurisdiction over its citizens.

The sovereignty of a state has always been associated with a nation having four distinct features (Favero & Missale, 2012). It forms a polity, has its own system of the regime, a ruler with his government, and the people. The proper interaction between the four features gives the nation its sovereignty. First, for the government or the ruler to be considered sovereign, they must be supreme with regards to the activities of the people within its polity. Additionally, all the four features must uphold its functions even when interacting with other nations. Whether independently or within international unions, a sovereign state maintains its mandates to protect its people, its territory, and to make decisions on how to function as a nation.

Sovereignty in the Eurozone

About 150 years ago, Europe was made up of big empires; the Ottoman, Austro-Hungarian, the Prussian and Germany Empire, and then the British Empire (Favero & Missale, 2012). Geographically, Europe has transformed from the large empires to small and medium-sized states. It is no longer the Europe of Empires, rather Europe of small states that join together to form the Eurozone. Each nation in Europe had its own government and sovereignty. Nations would engage with other countries to strengthen its international relationships. In 1999, through the negotiations between eleven member states, Eurozone was created. Eurozone was a monetary union between the member states, and through the use of a single currency, all the nations under it would benefit.

However, when governments joint with other governments in either political bloc or trade, they surrender some of the national sovereignty. The concept applies to Eurozone as well. At first, Eurozone started as a trade union, but with many political integrations the will to unify the states continues (Favero & Missale, 2012). In the globalized world, the pressure to join trade and political pacts are ever on the increase. Often the international associations seemingly erode the governments’ democracy while increasingly diminishing accountability in a wide-decision making process. However, in the Eurozone, while there is apparently an imbalance between bigger states -Germany and France -, and smaller ones –Greece and others -, the notion of national sovereignty still exists to the member nations. Nations have their own governments and carry some of the mandates, except executing monetary policies.

Under the Eurozone, the European Central Bank (ECB) is the key player. Covering the nineteen Eurozone countries, the ECB’s primary objective is to maintain price stability while supporting their general economic policies (Favero & Missale, 2012). ECB defines and implement the monetary policies, conducts foreign exchange operation, holds and manages official foreign reserves of member nations, and provides a smooth operation of payment systems. While each member of the Eurozone maintains its sovereignty, ECB provides the oversight to all the issues affecting the Euro and overrides the fiscal policies each country comes up with. It is the sole custodian of the power to influence and control the euro. Each member is required to formulate their own ways of government operations, and ECB would provide direction to control inflation. Thus, countries are not controlled entirely but Eurozone bodies, but rather seek support from them.

While Eurozone operated fine, and no cracks were visible in its international relationships, and national sovereignties, the economic and financial crisis revealed major weaknesses in the Eurozone’s monetary governance and threats to the sovereignties. More stable economies of Germany and France recovered easily while those of struggling economies too so long to recover. In the end, the countries have to part with some of their national sovereignties to improve and restore a long-term stability of the single currency. For example, Greece, deep in sovereign debt had no means of paying for its debts. It could either leave the union by defaulting the debt or have other countries in the Union bail them out. As it turns, the countries under Eurozone decided to go with the second option and form a pool to contribute towards pulling Greece out of debt and keep it in the Eurozone. However, the country now will have its sovereignty on matters of finances externally controlled until they show that they have kept their house in order.

Greece’s financial situations laid grounds for the manifestation of the sovereignty on trial. Greece showed that the euro crisis was more of a sovereign crisis than a financial one. The recent election of the anti-austerity Syriza party demonstrated that the Greek were committed to maintaining their government’s sovereignty by standing up against external control over their country by the European Central Bank, European Commission, and the International Monetary Fund, and even Germany. While Greece has foreign taxpayers to thank for its efforts of overcoming the national debt, its fight to preserve their democracy is a call that all the parties have had to respect.

Moreover, the Greece situation showed that the Eurozone, as a monetary union, is not working as it has failed to provide a possible way of reconciling each country’s democratically legitimized sovereignty against exploitation by others. The demands of Germany for example over Greece jeopardizes their sovereignty and bowing down to the pressure will not only hurt Greece but the power of the union altogether (Favero & Missale, 2012). Moreover, the lack of solutions towards states and the monetary union affects all members of the Eurozone. Just as the situation in Greece indicated, nations risk losing their sovereignty when seeking the help of other countries as the better economies impose their rules on, the smaller economies; a situation that may erode the independence of the given unions.

Currently, the Eurozone is subjected to three conflicting political demands. First, there are calls by the members for the return of the powers to the national governments. Secondly, there is a suggestion that sovereign powers be given to the Eurozone level and support a dispersal of those powers across multiple layers. Thirdly, providing an inclusion plan where national minority groups within the Eurozone can have more or equal powers to the national majority groups. Each of these demands reflects a different evaluation of sovereignty that would promote and ensure respect among the member states. Each nation in the Eurozone needs to feel that they are respected and included in the decision-making of, not just their nations, but the Euro in general.

In conclusion, the Eurozone needs to acts as a supranational institution with selected centralized features with capacities to bring about national interconnectedness while maintaining their external sovereignty. As a result, I do not serve as a source of one country’s domination over another, but rather a platform where member states interrelate with one another while respecting each other’s sovereignty.

Question Four:

The feud between Germany, Greece, and Italy, stems to that of lazy spender supported by a generous saver. While Germany has prided itself in its ever-increasing economy and enormous financial power, Greece and Italy are in the deep financial crisis brought forth by their own culture. Moreover, while Germany has a trade surplus, the two economies are under heavy debts. Since all countries in the Eurozone need to maintain a certain percentage of the GDP, Germany (the best financially) has chipped into the discussion concerning countries that are faring poorly in the Union. In essence, the problem Germany has with Greece and Italy is due to their cultural outlook affecting their economic performance to the point of national economic crisis.

Greece

Greece’s economic crisis was as a result of their culture – including, but not limited to, unproductiveness, Tax evasion, Corruption, Negative perception, and lawlessness. These negative cultural aspects undermine the economic progress the country aims at achieving each year (De Grauwe, 2010). All over history, the Greeks are known to glorify the culture of denial. Even when the country was considerably doing badly economically, the country fixed its books and cheated its way into the Eurozone (Chalaniova, 2014). The government and state officials knew that the country was not doing well economically before the economic recess, but they fixed their financial reports until the problem had blown out of proportion.

Secondly, the Greeks operate in a culture of lawlessness. Typical cases include the banks extorting their customers through hidden clauses under their contracts or biased laws to drain the customer’s economic situations (De Grauwe, 2010). Moreover, they park cars on the sidewalks, double park on wrong avenues, have little regard for the traffic laws. The culture depicts them as people with no regard to any law, including those imposed by the fiscal policies; after all, they do not answer to anyone.

Thirdly, the Greeks culture of corruption places Greece among the top contenders on each list of the Transparency International (De Grauwe, 2010). Nearly everyone, from politicians to tax inspectors, finds a way to extort money from the government and as well as the people. Additionally, collection and distribution of resources follows the corruption lines, making it impossible for the country to grow economically. The institutions bleeding on corruption oversees a country where acts of corruption are the norm.

Fourthly, Greeks are perceived as lazy, inefficient, and super corrupt. Statistically, they have the world’s highest political chain smoking rates (Chalaniova, 2014). Moreover, it is assumed that Greeks perpetuate every action with their laissez-faire attitude, where they believe that they can do nothing, get away with it, and feel nothing about the whole situation - whether at work, at home, or at the streets. As evident, they were ready to default the federal debt without care for its impact to the whole Eurozone.

Next, Greece is unproductive. Less of than 50% of the population under 25 are unemployed in a government where over 42% of its national funds is directed towards social benefits (Chalaniova, 2014). Besides, while on average the countries in central Europe produce $55 per hour per person, Greeks produce around $35 (Chalaniova, 2014). The problem with productivity is that it limits the country’s sources of revenue, and with less taxable income, the issues efforts to recover from recessions become almost impossible.

Finally, the biggest injustice Greece does to itself is the problem of tax evasion. On average, the country loses more than $60 annually and $13 more by evading their tax obligations (Chalaniova, 2014). The culture of tax evasion in Greece is not limited to the citizens alone, but politicians, big corporations, and other prominent personalities in the country.

Italy

In Italy - especially in the southern part of the country- cultural tendencies contribute to the economic depression are facing at the moment (De Grauwe, 2012). Similar to Greece, Italy has a culture of corruption, lawlessness (especially the Mafia), tax evasion, and gender discrimination. To start with, Italy is engulfed in a culture where corruption has consumed the country (Memoli & Pellegata, 2014). Dissimilar to Greece, Italy image is that of organized crime lords who traffic drugs, sex slaves, and even control of some of the public systems such as transport. The black economy estimates fall to a region of about $12 billion (De Grauwe, 2012). Moreover, corruption in the government institutions siphons from the economy an average of sixty billion euros. Italy’s failure to deal with the issue of corruption continues to push it towards economic sabotage, and the current crisis can only be attributed in large part to that.

Secondly, women in the country have been trying to overcome the issue of sexism for years (Memoli & Pellegata, 2014). The Italian culture does not equate women and men. In fact, while they are very educated, the female employment rate is 12% below the EU average, and only better than Greece’s, Mexico, and Turkey in the Eurozone (De Grauwe, 2012). The employment of more women would improve the resource collection from taxes, as well as work towards equality.

Thirdly, the nepotism is a problem. Instead of employment by merit, most Italian jobs are based on the relation one has to the top management (Lapavitsas, 2012). Moreover, most of the Italian companies are family owned. The reluctance to cut ties between family and firms encourages the culture of nepotism to a point where the social progression is not equally allocated to all citizens of the country (Memoli & Pellegata, 2014). The problem manifests itself in the lack of civic culture normal in Italy. Due to an obsession with family ties, tax evasion, justice, and all legal proceeding follow the path of those that have people “up there.’ Italy is thus robbed of collectible revenues each year while fighting social ills without getting any amount of money back. The poor political and economic stance promoted by the Italian culture makes it impossible for the country’s GDP to improve over the years.

Dissimilar to both Greece and Italy, Germany’s GDP has been on the rise year each year, and they were able to overcome the effects of recession almost immediately (Memoli & Pellegata, 2014). Germany is one of the least corrupt countries in the world due to their strict adherence to the rules, and harsh repercussions towards corruption (De Grauwe, 2012). The German culture roots for a strict adherence to rules and regulations and for that, the rule of law applies to all and sundry. Thus, cases of tax evasion and lawlessness are almost non-existent. Moreover, due to the horrors of the Holocaust, the country is forbidden to have a standing army; the money saved from the directive is invested directly into building solid infrastructures that power the economy. Germany owes its development to discipline, the culture of strong adherence to rules, and punishment to the law-breakers. Consequently, Germany looks back at Greece, Italy, and even Spain with distaste, as most of their problems come from their lack of such a discipline.

Question 5:

Jean Monnet blueprint for European integration was based on a model that promotes free trade and economic dependency between each other; a model that made any European country to lose if they initiated war against another (De Grauwe, 2012). Soon after, constantly warring countries such as France and Germany learned to live interdependently under the Eurozone and ultimately reduced the possibility of war between them. The bad amongst countries under the union vanished, and economic integration led to a booming economy between the countries. Before the economic recession, the member state GDP was rising each year (De Grauwe, 2012). However, even though physical wars ceased, more needs to be done to promote integrity among the member states. Only then all countries under the Eurozone truly integrate politically, socially, and economically into Euro’s ideology.

The Progress

In the first century, Europe was unified under the Pax Romana. It had functional legal systems, as well as conventional monetary currencies across its territory. After several years, the policies were challenged by different political ambitions of smaller states that had cropped about its territories. The resulting internal and external from pressures subsequently led to the total collapse of Europe into individual states that fought one another over resources. Despite the never-ending wars gauged against each other, the dream of European integration never died (De Grauwe, 2012). After several years of the attempt, the dream was realized in 1992 with the Single Internal Market Directive. Later in 1999, Eurozone was born and the cases of war among the member states ceased.

Euro has had a positive impact on the member states, both through interdependences and trade (Metiu, 2012). Currently, the likelihood of armed conflicts between the countries is almost non-existent due to the political and economic advantages of being a member of the Eurozone. People freely move from one country to another with a single passport, and the driving license is valid through the union. Such an action reduces any tension between the people as they interact with one another in the different countries. Moreover, the Eurozone countries share more common views and interests than those outside the Union, keeping those outside the Eurozone with a different economic and social structure. The advantages of sharing common interests are that it promotes regional coordination - something that positively affects the international relationship between countries.

The political dimension of the monetary union realized through the Maastricht Treaty stressed on the need for the integration of the union members (Metiu, 2012). The Euro would combine the functional and economic elements with the already set institutional elements of each member state. The political decisions led the formation of ECB which would introduce the fiscal policies and control prices and inflation amongst the member state (Lapavitsas, 2012). The political decision meant that countries such as Germany and France, and others such as Spain and Italy would need to co-operate on issues that affect them as members of the Eurozone. Such actions bring the nations together and necessitate the need for dialogue between member states.

Lastly, member of the Eurozone increasingly participates in the political decisions of each member country (Metiu, 2012). They keep an eye on one another and help each other out. Recently, members of the Eurozone joined hands to bail out Greece from the economic crisis and massive national debt it was in. In a scenario that Greece was not a member of the Eurozone, then the country would have had no choice but default. In fa