Troubled times for euro zone

PUBLISHED : Thursday, 03 June, 2010, 12:00am
UPDATED : Thursday, 03 June, 2010, 12:00am

The euro is one of the most ambitious economic projects of our time. But during the recent Greek financial crisis, there were fears about its ability to survive as the shared currency of most European Union countries.

The euro recovered strongly from the near collapse of the world's banking system last year.

Some may argue the exports of larger economies, particularly Germany's, have grown because of the euro's relatively low exchange rate.

But doubts about the Greek government's ability to repay its debts has caused the cost of borrowing for the other weaker euro zone countries - such as Portugal, Ireland, Italy and Spain - to rise.

And the countries with stronger economies, especially Germany, now have to find the cash to keep Greece afloat. This huge operation breaks a key rule agreed by the euro zone countries - one which banned bailouts for nations which lived beyond their means.

Over the past decade, the euro zone has expanded rapidly to include many developing economies in eastern Europe.

But given the stresses and strains resulting from the credit crunch, can economies of such widely different strengths continue to share a single currency?

For debt-plagued countries, such as Greece, being in the euro zone means that monetary policies like devaluation are simply not an option. Greece has had no choice but to raise taxes and cut government expenditure.

If Greece had its own currency, devaluation would have made its exports cheaper and therefore reduced its trade deficit.

Now, euro zone countries have to rely on boosting their imports - probably by lowering their prices by cutting wages - to improve their trade balances.

However, if countries such as Greece had their own currency, any depreciation would have also meant an increase in the value of their foreign debt. This could lead to bankruptcy.

For the richer economies such as Germany, the mere thought of footing the bill every time a crisis arises puts political pressure on their leaders. The loss of control of monetary policies to a central European commission makes things more difficult for them.

Despite the current troubles, the euro has brought more good than harm to the world. Europe needs to gain some sort of negotiating power at an international level with the United States and possibly China in the future.

There is no doubt regional trade has been facilitated by the adoption of the euro as a common currency.