Abstract

Through the creation of the Eurozone, the member states to the agreement enjoyed a situation similar to a fixed exchange rate, although the use of the Euro had some distinctions. The Eurozone had a political and economic motivation for its formation. The general purpose of the formation of the Eurozone was to create a common currency that would, in turn, help in easing the transactions between the countries involved. Due to the unity created in the member states to the European Union, there arose a need for further easing of the conditions of the environment in which business could be carried out. Despite the ease of movement in movement across the borders of the member states, there was a need for them to develop means through which they could trade quickly and more smoothly. The economic prosperity of the members of the Eurozone is important for the overall performance of the union. The economic structures of the countries that are members of the ECU play a critical role in the economic robustness that they portray. The decision to form a monetary union was necessitated by the need to have a common currency that would enable the member states to engage more actively and effectively in trading and therefore bring about the possibility of the member states developing into prosperous economies. The Euro crisis was an unexpected situation that arose when the inability of some members of the EMU to pay off their debts resulted in economic and political effects in the region. This paper will examine the causes of the European crisis and the effects that may arise from the crisis in the short and long run.

Table of Contents

• The Eurozone

1.0 The Eurozone

Introduction

The idea of a common currency was first introduced by Robert Mundell, an economist. He envisioned the use of a common currency across regions that shared common political and economic characteristics. However, the idea was not ripe enough at the time of conception, and therefore, the notion of a common remained theoretic in the 20^th Century (Brunnermeier & Sannikov, 2017). Eleven countries that are members of the European Union allied on January 1^st, 1999, to start the use of a single currency in the states, the Euro. The Economic Monetary Union in Europe had finalized and actualized the efforts that dated back to 40 years to help in creating a common market in which the free transfer of goods, capital, and people could occur. Through the adoption of the Euro, the movement was further facilitated by the use of the Euro, since the flow of money would be made more accessible, and the economies would be helped to grow in the same stride in the countries that adopted the use of the Euro as their currency. After ten years of the Euro zone’s operation, the members increased to 15, and four more had applied to join the union. The first ten years of the Eurozone are considered to be indeed successful (Lees & Mauer, 2003).

Through the creation of the Eurozone, the member states to the agreement enjoyed a situation similar to a fixed exchange rate, although the use of the Euro had some distinctions. First, the cost of abandoning the systems and modes of previously held by the countries and adopting the new Euro system was expensive in the first stages of the process, since the nations had to make full adjustments to their systems of banking and financial setups to fit the needs of their nations as well as those of the member states to the Eurozone (Grauwe, 2015). Additionally, the Euro monetary system was different from a fixed exchange rate system since the transaction costs incurred when people are involved in the exchange of currencies is eliminated since the member states used similar currencies. The existence of monetary systems before the adoption of the Eurozone was not common, with a few examples such as the Latin Monetary Union between France, Belgium, Italy and Switzerland (Willis, 1901); the use of a common currency between Luxembourg and Belgium; and the Franc Zone, whereby former French colonies adopted the use of a common currency, the Franc. There were also instances of monetary systems whereby smaller and weaker countries adopted the use of a more prosperous country’s currency instead of formulating their own.

1.1 The Reason for Formation of the Eurozone

The Eurozone had a political and economic motivation for its formation. The general purpose of the formation of the Eurozone was to create a common currency that would, in turn, help in easing the transactions between the countries involved. Through the use of a common currency, the need for fiscal integration or other forms of oversight was eliminated since the common currency used provided the member states with overall control from a central point. The small size of the European nations also played a role in the adoption of the Euro, since the use of different currencies would create an additional need for exchange of currencies that would be tiresome and time-wasting, a situation that the Euro instantly fixed.

The adoption of the Euro also offered the member states to the pact an opportunity to enjoy conditions of fixed exchange rates. The European countries had been inclined and open to the idea of a system that offers fixed exchange rates. Therefore the Eurozone helped the majority of the interested countries to solve the issue. Before the fixed exchange rate conditions enjoyed by the Euro, the nations had attempted to achieve these conditions through the use of the gold standard system, which pegged the currencies to gold, resulting in an order of fixed exchange rates. There had been unsuccessful attempts in creating monetary systems such as the European Exchange Rate Mechanism, all of which ended in the failure and leading the nations to the adoption and use of the Euro system (Saint-Paul, 2010). Politically, the system would provide the member states with the stability of sorts, since countries using a common currency would have feelings of comradery towards each other, hence increasing the possibility of the countries collaborating on other projects and achieving common growth socially, economically and politically. Through the adoption of the Euro, the members of the agreement would enjoy the possibility of enjoying an even smoother way of transaction. Through the formation of the European Union, the members had achieved a situation whereby goods and people could freely move across the borders and therefore provide the member states with better opportunities of trading with each other without rigorous processes of accessing the countries they wanted to transact with. The European Union also offered the development of infrastructure that passed through the member states to ease the movement of people and goods further, and although the movement of people was easy, the use of different currencies had created a situation whereby people would have to seek means through which they could exchange the money from their home countries and acquire the currency of the countries in which they had moved into. However, through the Euro, the member states could finally enjoy the possibility of having a common currency that would enable them to trade in different countries comfortably. Through the use of a common currency, the +possibility of experiencing inflation was minimized, since the member states would be able to regulate the exchange of the currencies in the concerned countries.

1.2 The European Union and the Role of the Euro in the Development of Europe

The European Union is a union meant for political and economic benefits consisting of 27 member states. The member states constitute a total of 447 million people, and the Union has managed to develop a system of a single internal market which seeks to provide political and economic prosperity in the region (Dedman, 2006). The member states of the European Union are governed by a standardized system of laws that allow them to have a sense of unity and the common laws help in providing the member states the opportunity to guide the people moving into their borders and using rules they are used to in governing them. The formation of the European Union is mainly motivated by the need for free movement of goods and people across the borders in the member states, hence making the execution of business more accessible and more comfortable for the member states.

Additionally, the formation of the European Union was motivated by the need to form a union whereby the member states would be guided by similar legislations in the areas that their economies interact. The Union sought to develop common legislations that would guide the areas of trade, agriculture, fishing, and the development of the region (Directive, 2010). There was also the abolishment of restriction in movement in the countries in the Schengen area, which covers the areas occupied by the member states. Through the formation of the European Union, the system achieved was referred to as a Sui Generis system of government, since it was and remained a political system of its unique kind.

1.3 The Reasons for the Formation of the European Union

The main purpose for the creation of the EU was to bring the constant conflicts between European nations to an end. This came in light of the end of the Second World War, which saw the countries experience political, social and economic losses, and the possibility of the same happening created the need for the creation of a system which would help in solving conflicts and disagreements before they develop in magnitude and the need for armed responses. Therefore, apart from the political reasons for the formation of the Union, there emerged the need to form an economic union that would help the members overcome the harsh economic times of the day, and help further in developing a situation whereby the members could offer each other favorable terms of trade, leading to economic prosperity in the region (McCormic, 2017). To aid in the economic development of the area, the EU sought to create favorable conditions in which businesses could prosper in the member states. It is for this reason that the member states developed common infrastructures that passed through all the member states’ territories and also abolishing the restrictions to movement, increasing the movement in and out of the countries, leading to better chances of business occurring between the member states.

1.4 The Role of the Euro in the Development of Europe

Due to the unity created in the member states to the European Union, there arose a need for further easing of the conditions of the environment in which business could be carried out. Despite the ease of movement in movement across the borders of the member states, there was a need for them to develop means through which they could trade quickly and more smoothly. The need for a common currency had been seen, and there had been attempts of the development of common currency systems between Belgium and their neighbors Luxembourg. Still, the efforts had not been successful due to the lack of proper structures that would allow for the adoption and consequent success of the monetary system. Through the formation of the Eurozone, the use of the Euro was adopted, creating a smoother way through which the member states to the agreement could transact with each other (Cini & Boragan, 2016). Through the Euro, there was the establishment of a fiscal integration which eliminated the need for constant regulations in different countries. Through the use of the Euro, the rigorous process of exchanging money once one crossed borders would be eliminated, therefore increasing the amount of time spent in engaging in trading activities compared to the time that would be spent exchanging the currencies to use for trade.

Through the use of the Euro in the EU, the economic condition of a fixed exchange rate was achieved, hence enabling the member states to avoid instances whereby situations in countries other than your own would determine the exchange value of the holder’s currency. Previously, the use of gold to create a fixed exchange system had been in practice. However, the system was not reliable and accessible for the smaller transactions which occur within the concerned economies (Olsen & McCormic, 2018). Therefore, the Euro provided a more comfortable way through which operations would be carried out, and one whereby the member states could enjoy faster transaction, hence increasing the business transactions enjoyed within the borders. It can, therefore, be conclusively agreed that the use of the Euro has helped in bringing more development in the region through the establishment of easier terms of business. When business transactions and the environment in which the transactions occur are improved, the possibility of the concerned parties experiencing economic prosperity increases, causing the region to grow into a robust economic bloc, which would attract more business from the other areas.

 

1.5 The Snake in the Tunnel

The European Economic Community has had a long-held goal of achieving monetary union. The most important feature of such an arrangement would be to adopt a common currency between the member states to the European Union. The adoption of a common currency would come in handy in ensuring that the existence of fluctuation of prices of goods and exchange rates would be ultimately removed since a common currency could be successfully regulated from a central location. The need for a common currency was felt by the European Economic Community from as early as 1962 (Wittich & Shiratori, 1973). Still, the actualization of the same would only come to be achieved much later.

After a meeting between the heads of states in 1969, the decision to set the idea into motion was decided upon. The council of ministers in the European Economic Community was tasked with the duty to formulate research on the possibility of the formation of an economic and monetary union that would bring about the economic and political stability and prosperity that the region needed. The committee tasked with the duty to undertake the research concluded that for the rolling out of the monetary systems, there would need to exist a system that would help in the reduction and, finally, the elimination of the exchange rates between the currencies of different economies (Crawford, 2016). Also, there would be a need for the liberalization of the movement of capital, goods, and people across the borders of the member states in the European Economic Community.

In 1971, the member states to the European Economic Community agreed that the banks of the member states should ensure that they reduced the exchange rates and fluctuation to levels that were considered to be `community levels.’ These `community levels’ would mean that the exchange rate for the US dollar would be reduced from the 0.75 cents to 0.60 cents, which was subject to review by the member states as the need arises (Goodhart, 2011). The maximum spread of the currencies of the two communities was therefore reduced from 1.5% to 1.2%, which provided favorable environments in which the communities could trade. Sadly, the implementation of the directive was interrupted by the development of the exchange rates markets later in 1971.

The German Mark and the Netherlands Guilder were granted permission to float in the currency exchange market in mid-1971. In retaliation, the United States suspended the ability for the conversion of the dollar, and this led all members of the European Economic Community, save for France to permit their currencies to be featured in the exchange markets. While others floated their currencies in the currencies exchange market, France continued to observe the margins that had been prescribed before in their exchange rates with the US dollar. However, they formulated a different market for the transaction of capital (OOPEC, 2009). The member states to the European Union, yet continued to uphold their policy of limiting the spread of their currency across the maximum, that is, the agreed-upon 1.5% on both the positive and negative side of the parity rate of exchanges.

The signing of the Smithsonian Pact in December 1971 saw the temporary suspension of the restrictions on the decision to float currencies and the permission of the fluctuation of the rates up to 2.5% on both sides of the parity side of exchanges when it came to currency intervention. The decision to lift the suspension on the floating and the decision to increase the fluctuation rates affected the European Economic Community since the exchange rates within their member countries grew by almost more than 3%, from 1.5% to around 4.5% on both sides of the disparities in fluctuation. The rates of fluctuation were also increased to a flexible amount of up to 9%, giving the member states more differences, especially those that did not have as much economic development as their counterparts (Mills, 1998). The decision to conform with United States’ demands was not in line with the European Economic Community’s initial plans for the union. Therefore, grievous problems in the operation of the community arose. The most affected operational department was the policy on common agricultural practices since the costs of production went excessively higher than had been projected, leading to the final products reflecting the findings. To reduce the effects suffered, the council of ministers in the European Economic Community set up measures through which they could intervene to save the situation from worsening for the member states.

1.6 The Snake in the Tunnel as an Intervention Method

The Snake in the Tunnel Intervention Method was an intervention method developed to help in a bid to increase the intra-community spread of the member state currencies. The adoption of this approach was crucial since it helped in the use of the margins permitted by the governing community. Through the arrangement, the maximum spread of the quotation of dollars between communities was reduced, which was coined as the snake. While the `snake’s’ movement along the communities was restricted, there were quotations made to help the dollar become free to move in reaction to the way the market played along with the agreed Smithsonian value of 4.5% (Mayer & Mayer, 1974). This was what was referred to as the `tunnel,’ resulting in what is popularly known as `the snake in the tunnel.’ The result of the interventions was the achievement of a deviation of 2.5% in the positive or negative side of the trade.

The discrepancies between the quotations of the valuation of the dollar in the New York currency exchange and the European Economic Community currency exchange was corrected through arbitrage, whereby there arose transactions that stood to benefit from the transactions, hence raising the need to eliminate such transactions from existence. The `walls’ of the `tunnel’ in which the `snake’ was contained were formed and sustained through the deviation of the numbers from parity of the US dollar, which is the intervention currency (Mayer & Mayer, 1974). The `snake’s’ skin is the quotations which the US dollar received in both the strongest and weakest member states in the European Economic Community. The position of the `snake’ in the `tunnel’ and its width is centrally determined by the agreed limits of the markets. The spread of the currencies between the strongest and the weakest community members becomes stronger or weaker, depending on the demand for the currencies in question. However, the snake’s positioning within the tunnel remains flexible.

2.0 Literature Review

2.1 Mundell Optimum Currency Area Theory

The optimum currency area theory was developed by Canadian theorist Robert Mundell. It was based on the earlier works by economist Abba Lerner and sought to provide even further clarification on the much-needed issue on the use of common currencies in areas. The theory posits that economies sharing a common geopolitical area should also share a common currency (Dellas, 2018). The geopolitical area should not necessarily be an area sharing a common border, but rather the economies should share common values and goals as the reason for their decision to use a common currency. This being so, an optimum currency area could be made up of several countries, parts of different nations, or some parts of a nation. The central point on which the idea is based on is that the economic efficiency of an area stands a chance of gaining maximum benefits and efficiency through the economic collaboration with their neighbors, primarily through sharing common currencies.

The theory operates on four main points that guide its operations. First, the theory works on large numbers. For the theory to be operationalized, there needs to be the existence of large numbers concerned with the application of the theory. The theory operates on the availability of majority support for its operation since, for a currency to be effective, a majority of the population needs to be in support of the project (Eichengreen, 2018). Additionally, there has to be more than one region in support of the idea, since the more countries in support, the better the chances of the program being successful. Also, there needs to be an available and supportive labor market that supports the movement of people and the exchange of the currency being suggested across the borders.

Secondly, the theory operates on the existence of flexible prices for goods and payment for labor, so that the pricing responds to the changes in the economy. Therefore, it is expected that an economy would react to the existence of more work by providing more remuneration for labor, and reflecting in the pricing of the goods and services in the market. This increase will result in the circulation of the common currency so that the results will be the growth of the economy through the strengthening of the currency in use (Jablonski, 2017). More importantly, the theory operates on the notion that the integrated areas will operate on the notion of the existence of a centralized location from whence the economic control of the integrated region will be done.

The theory further states that the central power is responsible for the budgeting of the regions’ economic needs in light of the finances that they have at their disposal at the end of their financial years. Additionally, the central location would also play the role of fair redistribution of wealth in the region, so that the marginalized areas can get to enjoy the benefits of the union, with the proceeds from the union coming back into the region’s members’ economies, creating the needed grounds for economic growth. Finally, the theory operates on the existence of a common economic cycle and timing (Garcia, 2018). Therefore, the region has to have almost similar economic activities, needs, and goals, so that the existence of a common currency would bring about eased environments in which the region could attain maximum levels of economic prosperity.

The existence of fixed exchange rates and pricing and rigid wage levels will lead to the continuous crises witnessed in the world economies due to the excessive and imbalanced wage bills. The rigidity of the pricing and pricing systems gives rise to the existence of resistance to growth from the economy, leading to the slow economic growth rates that are witnessed in the world economies today. It is, therefore, important that the relevant parties come up with means through which they can address the issues that face the regions that have not embraced common currencies, and how the development of a common currency could enable the regions to develop economically. A system whereby a region has adopted a common exchange rate will help in reducing the rates of unemployment through the use of substitution of the possibility of unemployment with the depreciation of the currency, hence helping the people in the region to continue earning from their jobs, although in fewer amounts, thereby creating a situation where the currency will continue to be in circulation hence helping in the strengthening of economies.

The use of a single currency relies on the existence of a central bank for the region, with the power of issuing currency to the member states, and hence providing the countries with the possibility of accessing an elastic supply of regional means of payment for the trading activities that may have occurred between the two countries. If a region lacks a central bank, the region suffers from chaos and excessively long processes of exchanging currencies in case of trade between two economies with different currencies (Garcia, 2017). This also means that the region will suffer from the possibility of inflation, since the changes experienced in one area may be transferred to the others in the event of a trade, creating a situation whereby the parties concerned share in the excessive pricing. Due to the possibility of inflated prices, economies may end up losing their trading partners due to the pricing of their goods, thereby reducing the country’s economic activities and prosperity, resulting in developing countries who cannot meet the needs of the people due to their loss of trading opportunities. The existence and use of a common currency in a region reduce the possibility of these events happening since the economies are regulated by the region’s central bank.

2.2 Mundell’s Optimum Currency Area Theory: A Case of the Euro

The optimum currency area theory has a set of qualifications that must be fulfilled for a country to be eligible for membership in an optimum currency area. There are two categories of criteria used in the determination of a country’s eligibility to join an optimum currency area. The first category consists of areas that reduce the possibility of the country exposing the other members of the union to asymmetric shocks due to the events happening within their borders. This means that a country’s membership to an optimum currency area should not put the other members at risk of experiencing the economic shocks that may occur in one country and making the others share in the financial implications. Therefore, a country’s membership should not increase the liability of the other countries or the possibility of them having to suffer the same outcomes as them (Bolton & Huang, 2018). Secondly, the membership of a country should be able to facilitate the region’s adjustment to the asymmetric shocks that it may experience. Therefore, the membership of a country should assist the shocks in the homogeneity of the products or services preferred in the region, in that the changes in the preference of some products can be acted upon instantly and create the possibility of the effects being felt across the board and being managed so that the results are not as detrimental as they should have been if the countries were not in an alliance.

Referring to the first criterion for the entry into an agreement for an optimum currency area, the countries joining up to ally have to have similar economic structures, hence increasing the possibility of compatibility in fitting into the requirements of the union. The possibility of asymmetric shocks affecting a country and the region is reduced when the states in the union share common economic structures, since the existence of a central bank will help in better management of the shocks when the commercial structures and systems are similar since it would mean that the region faces similar problems and hence the solutions offered will help in solving the issues experienced across the board (Marthinsen & Gordon, 2019). The adoption of an openness criterion does not necessarily mean a loss of independence in individual members’ power in making policies that affect the country’s economic prosperity.

The second criterion for membership to an optimum currency area is analyzed in the light of it being an important prerequisite that will help guarantee the efficiency of the region to manage the crises that may be experienced. Therefore, the union of countries in addressing their common issues will provide an agreed-upon method of dealing with the existence of asymmetric shocks in some economies which are member states, through the formulation of a common policy that can help in reducing the possibility of economic shocks in the member states, and offering possible solutions for the possibility of the situations happening to the members (Amalia, 2018). The union of the region into an optimum currency area will also lead to the ability of the nations to undertake activities that will enable them to facilitate the free movement of economic factors of production that will further increase the robustness of the member states’ economies through the movement of the common currency across borders to help in the growth of the region.

The idea of the integration of some European countries into the Eurozone region is based on the hypothesis of endogeneity, which posits that the political union of nations automatically creates room for economic integration and partnerships that will allow for the growth of the region exponentially. Through the formation of the European Union, the possibility of the political union being transformed into an economic one was opened up and exploited by the relevant authorities. Therefore, the union’s initial goal of reducing the occurrence of war also created an optimum environment through which the member states could engage in trade and increase the possibility of economic prosperity.

Through the formation of the EMU, optimists believe that the possibility of opening up the region to more economic prosperity was increased since the common currency used, the Euro would increase the probability of free movement achieved through the European Union’s formation. Therefore, the possibility of the member states of the EMU enjoying eased transfer of factors of production across their borders increased the possibility of the countries experiencing through the use of common currency in the member states. The use of common a common currency in the member states of EMU would, therefore, increase the possibility of economic integration in the region, hence the possibility of economic advancement (Hudec, 2018). Pessimists against the idea of the EMU being used to increase economic progress of the regions argue that the use of common currencies would increase the divergences already being experienced in the individual economies and that the use of the Euro should have been postponed until the EMU members had achieved a perfect state of the requirements to join the optimum currency areas.

The member states of the EMU do not have as many common factors as needed, and this has led to the union of the countries in the economic union and use of a common currency to be ineffective in its operation. The member states do not have similar commercial structures, with some members having above-average GDP earnings (Durre, 2017). In contrast, others struggle to meet the minimum requirements of the GDP, therefore increasing the possibility of the member states having to help out one of their members for their inability to meet the needs of their economy. The countries also do not have similar patterns in the area of labor productivity and costs, hence leading to the possibility of free movement of labor across the region being helpful in the development of trade. Therefore, the members’ inability to achieve the bare minimum requirements of joining the union has presented the area with a reduced fighting chance that they need to help in reaching the economic goals that they have in place.

2.3 Mundell’s Triangle and the Euro

The union of different countries to form a monetary union requires the provision of situations in which the union can maintain a common monetary union and policy which also considers the existence and need for independence of the countries in their financial programs and even the provision of the option of the bailout should they fail to experience the economic freedom that the other nations experience from the union (De Grauwe, 2020). Since a monetary union is a culmination of different countries, the possibility of the existence of a failure in the coordination of the unions is possible, leading to strains in the process of economic freedom and prosperity by the members of the monetary union and the union itself. The Eurozone also faces the challenge of debt crises in the member states, hence bringing about the need for bailouts, which may not be forthcoming since the challenges in one member can cause aftershocks for the other members.

The debt crisis in the member states of the Eurozone and the existing deficiencies in the macroeconomic balances of the member states bring about the existence of imbalances in the operation of the country and the monetary union to which they are members. Therefore, the difference in the countries in terms of their fiscal policies and modes of operation has created a situation whereby the member states to the EMU have had to experience rates of growth, which was not the original idea for the formation of the union since growth was supposed to be equal across the member states (Aizenman, 2019). Therefore the disparities experienced are not supposed to exist. The union of the member states to form EMU has been brought about by three factors, which have been named as the Mundell’s Triangle.

In theory, a monetary system consisting of three variables existing independently can exist, and at any given time, two of the three factors can be found to be true. In economics, the existence of such a situation is known as the impossible triad, and the formation of the EMU brought about the need for achievement of a balance in the economic triad of the economies. The trinity has an operating model whereby a member state to a monetary union can manipulate two of the three factors in the trinity, that is fixing the exchange rates in their country and maintain significant control of the flow of capital in their economy (Sapir, 2018). In case this is done wrongly, there can be a change in the arbitrage possibilities of the exchange rates of the member states will create situations whereby the interest rates in the individual countries and the region at large will rise, which will lead to a rise in the capital inflows, leading to inflation of the money in circulation in the individual countries and the region in question.

When countries join a monetary union, the impossible trinity of monetary unions becomes void since the existence of monetary unions negates the existence of exchange rates. In a monetary union, the exchange rates are voided, and the restrictions on the movement of people, capital, and other factors of production across the borders of member states help in achieving the fundamental agreements used in the formation of the EMU. Another critical aspect of the trinity is the requirement that none of the member states should default in payment of their national debts owed to the other members of the monetary systems (Pires, 2019). The reason behind this decision is that the defaulting will lead to a breakdown of the financial policy set in motion through the formation of the EMU and therefore leading to a ripple effect since the economic systems and operations of the member states are tied to each other and thus creating the need for bailouts which derail the progress that the member states desire for their optimum economic growth and development.

The member states have to address three critical aspects of their membership to the EMU, which help in creating a trinity for the member states. First, the members need to have economic sovereignty over their economies. The countries need to determine the debts that they can take out and comfortably service without putting their financial wellbeing into jeopardy. Additionally, the countries have to address and manage their national budgets and ensure that they are not too expensive to the point of needing constant funding from the other member states to the union (Gajdošová, 2019). The better a country manages its national debt and its budgets, the more smoothly the running of the association will be. Secondly, an alliance needs to have the existence of a central bank that has the power to set its monetary policies that will help in guiding the running of the monetary union and help the member states to stay on the course of achieving the economic independence that they desire. Therefore, the member states have to be willing to give up some of their financial powers to the central bank, which will work towards creating an environment in which the members can achieve a state of level ground in terms of streamlined policies in which they can interact with each other. Finally, the trinity calls for the member states not to bail out any member state that has become heavily indebted. Through the inclusion of a clause that calls for no bailouts for the stranded members, the stranded member states will not be required to incur any more expenses in their repayment of national debts. This provision will also ensure that different risk premiums are offered depending on the risks that the country faces in its economic setting.

3.0 Analysis of the Eurozone

3.1 GDP Growth of the Member States and Competitiveness within the Eurozone

The economic prosperity of the members of the Eurozone is important for the overall performance of the union. The economic structures of the countries that are members of the ECU play a critical role in the economic robustness that they portray. The decision to form a monetary union was necessitated by the need to have a common currency that would enable the member states to engage more actively and effectively in trading and therefore bring about the possibility of the member states developing into prosperous economies (Dias et al., 2016). The ability of the members of the EMU to achieve their initial goal of achieving economic prosperity will be strengthened by the availability of the members to accept and integrate innovation in their operations so that they can effectively use the available resources to achieve the best results when it comes to growing and increasing their competitive advantage in the market that they are in.

Additionally, integration between the member states will bring about cooperation and opportunities for economic growth and development, hence increasing the possibility of the members creating a cooperative interdependence that further enhances the members’ chances of achieving economic prosperity in their endeavors with the members of the community or external partners. The member states to the EMU must raise the levels of competitiveness in the region, which will, in turn, result in high levels of productivity, employment opportunities, and economic prosperity for not only the individual members but also the region as a whole (Pegkas et al., 2020). There is also need for more stringent measures to be taken in the policy formulation for the pertinent issues in the region’s success story since issues such as the unprecedented migration into the region is affecting the wages and salaries, since natives are left unemployed due to the low rates offered by the migrants. Therefore, the policies should address how they could turn the migration issues to their advantage, hence emerging even stronger from the situation that was supposed to ground them.

To increase the competitiveness in the member states and the region at large, the member states should engage in practices that will further enhance the chances of market integration being successful, stronger cohesion and convergence opportunities, which will, in turn, lead to the development of new markets and strengthening the existing markets so that the member states can reap the benefits of being part of the economic union (De Grauwe & Ji, 2016). Openness to innovation, technology, and other ground-breaking ways of doing business will also help the member states remain competitive in their operations in a way that will enable them to grow their GDP, and the possibility of the union gaining the competitive advantage of the union should bring to the concerned countries.

To further increase the possibility of prosperity through competition and investment in the relevant areas that would help in development, the EMU should invest in ways through which the fragmented market structure that they have could be integrated and help them unify the market’s operations to the point of achieving a perfect state of competition and prosperity (Pradhan et al., 2017). They should also invest in practices and policies that will help them make a state of investors’ confidence that will, in turn, help in increasing the rate of investment into the region, bringing the region to the state of prosperity that the original union had intended. Also, the member states should invest in the reduction of the structural gaps that the Eurozone crisis left in the region, hence removing the barriers that may bring about issues whenever they want to increase the productivity of the region through the increased competition of the products and factors of production in the region. The Central Bank of the EMU should also come out in support of the member states, and extend loans and other grants to help them in rebuilding from the effects that they suffered when they were affected by the Euro crisis of 2012. When the Central Bank avails the needed finances, then the member states will be able to undertake further investment and other practices that will stimulate the growth of the region as a whole.

 

Eurozone Development Rates (Thistimeitisdifferent.com, 2018)

3.2 The Euro Crisis of 2012

The Eurozone debt crisis started in 2009 on the realization that Greece would be unable to pay off the loans that they had taken from the regional and international lenders. However, the crisis was not as potentially dangerous as it was between 2011 and 2012 when the real effects of the defaults in payment by Greece were felt in real-time. The defaulting by Greece caught on to other countries, and therefore by 2012, there were fears of default of payments from Greece, Portugal, Italy, Ireland, and Spain (Hobolt & Tilley, 2016). The other member states of the Union, especially Germany and France, led the efforts to bail out their comrades, but their efforts did not bear any significant fruits. There were attempts to get help by initiating bailouts from the European Central Bank and the International Monetary Fund. However, the damage had already been done, with the Euro depreciating in the process.

The Euro crisis was caused by several reasons. The first cause for the crisis was the lack of penalties for the violation of the debt-to-GDP rule that had been set when the Union was formed. Even the countries that performed well economically like France and Germany were spending above their limits, although they managed to pay their debts. The excessive expenditure by France and Germany also made the possibility of setting penalties on the countries that went over their limit of debts since it would be hypocritical of them to do so. Yet, they were also defaulting on the initial agreement (Jones et al., 2016). Additionally, the setting of penalties on the defaulters or the expulsion of the defaulters would lead to the weakening of the Union. Therefore, by not addressing the set penalties on exceeding the debt-to-GDP rule, the member states sought to achieve the goal of strengthening the Euro.

The second cause for the Euro Crisis was also based on the confidence expressed in the power of the Euro. Member states of the ECU were also set to enjoy reduced interest rates of the invested capital. The majority of the money invested in the region was coming from Germany and France, and the company played a role in the liquidity of the wages and prices offered in the region, which especially made the exports less competitive. The member states of the EMU were then unable to control the effects of the inflation that was being experienced, which led to the raising of interests of borrowed amounts, and reduction of the money printed in the region (Henning, 2017). Due to the recession experienced, the revenues collected on taxes fell. However, the public expenditure remained intact, thereby creating the occurrence of unemployment and other situations that would go on to aggravate the crisis.

Furthermore, the Eurozone crisis was caused by the austerity measures put in place to contain the crisis. Despite the individual governments and the Union at large, reducing their expenditure to minimize the effects of the crisis in the region, there were still consequences of the crisis being felt. The measures on the restriction of the budget worked against the members of the Eurozone since they were too restrictive to the point of slowing the chances of the nations experiencing any economic growth that would help in reversing the effects of the crisis (Brutti & Saure, 2016). The austerity measures in place reduced the employment rates in the Eurozone region, which in turn led to consumer spending, which was responsible for the circulation of money and wealth in the area. In the process, the needed capital for lending was reduced to the point of reducing the ability of the member states being able to engage in any activities that would stimulate economic growth and development. The most affected country by these austerity measures was Greece since the country was sent into a financial crisis, which built up into a political crisis. There were, therefore, unrests experienced in the country, which led to the ousting of the government in place, which the people associated with the economic strain that was being experienced in the country.

 

Losses in GDP (Ross, 2012)

3.3 Asymmetric Shocks of the Eurozone Crisis

An economic shock is the occurrence of activities or events that lead to unexpected changes in the normal running of the economy. The incidents may affect a country, region, and the world, depending on the magnitude of the changes experienced and the sector that they affect. When the experienced modifications are symmetrical, the effects will be felt by the industry, country or region in equal measures, therefore leading to the impact of the events being felt equally by all the concerned parties (Apostolakis et al., 2019). However, when the effects are asymmetrical, it means that the effects of the changes experienced are not felt equally in all the regions since only a section of an industry, country, or region is affected. The possibility of dealing with asymmetric shocks, especially in areas using common currencies, has been a subject of major debates since the common currency shared in the region will lead to the shocks felt in one region to be felt across all the countries using the currency equally.

The effects of the Euro crisis were asymmetric and felt only in the lesser developed countries of the union. Therefore, the countries that were worst-hit by the crisis were Greece, Ireland, Spain, and Portugal. The major effects suffered by these countries were the reduced growth and development rates of the economies, reduced productivity of labor in their countries, and the decreasing levels of competitiveness for the countries’ economies, since they would not be able to engage in production and other economic activities that would help them in the advancement of their nations (Sapir, 2016). The occurrence of the Eurozone was not expected by the countries since the philosophers who had suggested the formation of monetary unions had not foreseen the occurrence of such situations.

The shocks were caused by illegal, unsanctioned, and unrecorded financial transactions that were responsible for the inflation and drainage of the finances that would have been used for development in the regions concerned. The illicit transactions reduced the confidence of local and foreign investors who, in turn, removed their investments from the countries, hence weakening the economy base of the countries concerned (De Grauwe & Ji, 2017). The investors turned to other members of the union, such as France and Germany, therefore weakening the others while strengthening a few of the members in the process. The loss of investment and investment opportunities in the region meant that the countries with the reduced investments experienced situations where the long-term interest rates were affected, with the rates being much higher than if the hemorrhaging of investments was not being experienced. The proposal by Mundell had not foreseen the loss of investment in the member states as a possibility, and therefore, there was a lack of preparation for such an eventuality.

The process of rolling out the EMU faced practicality issues, despite there being lifting of barriers that would have threatened the smooth running of the union. For example, the union failed to address the issue of a language barrier between some of the member states, hence creating situations where there still existed restrictions to the movement of labor across the region, despite there being availability for free movement in and out of the member states (Yin & Yeh, 2017). Another issue on practicality was the disparity in skill sets in the member states, hence restricting the labor forces to their regions, thus indirectly enforcing restrictions in the movement of the laborers from one country to the other. Differences in employment laws also played a critical role in the disparities experienced, since the workers had a hard time in assimilating to different labor laws other than those that they were used to in their home countries, with some of the workers avoiding moving into other regions due to the labor laws that they viewed as unfavorable to them, thereby creating situations where the laborers opted to stay in their countries, despite the crisis has affected their countries. Due to the barriers in practicality, there were, therefore, difficulties in rolling out of the integrated economic systems, which would ultimately lead to the asymmetric shocks in some regions of the union, especially those which did not have sufficient financial muscle to handle the issue.

 

Asymmetric Shocks as experienced in Belgium and Italy (Boltho, 2012)

3.4 Target2

Target 2 is the abbreviation for the term Trans-European Automated Real-time Gross Settlement Express Transfer System, which is a real-time system of settlement that was developed and monitored by the Eurosystem. Members of the Eurosystem are the Central Bank for the European Union and the Central banks for all the member states of the European Union. According to the initial agreement that led to the formation of the EMU, there was to be no extension of overdraft facilities or any other forms of credit to the member states from the Central Bank of the union, to avoid the possibility of the members defaulting of the members from paying the expected dues by the banks (Hristov et al., 2020). However, due to the lack of legal provisions for the allocation of credit under Target2, the ECB engaged in the buying of public and corporate bonds of over 80 billion Euros, which ultimately led to the imbalances experienced in the Eurozone in the long run. The existence of Target2 placed a challenge on the possibility of breaking up the Euro since there would be huge losses experienced in the process. for this reason, the real threats posed on the economies of all the member states of the union was real.

To help in solving the imbalances in the Eurozone due to the implications of Target2, there have been suggestions that the amounts of borrowing should be reduced to the minimum, so that the challenges experienced would be minimized fully, thus reducing the possibility of the crises as those experienced in 2012. Also, the possibility of the introduction of an annual redemption plan that involves the use of marketable assets from the borrowing country should be introduced, so that the lending should not be abolished, but the introduction of collaterals would help in the reduction of risks associated with the defaulting of payment, which is the cause of the crisis in the first place (Papsdorf et al., 2017). Additionally, the Target2 can also be improved through the adjustment of the monetary base of the Eurozone, with the members of the Eurozone being allowed to withdraw their investment from the Eurosystem by reflecting their withdrawals against the capital that is paid up by the countries in the Eurosystem. The system must however be strategic in its operation, since the main aim of the intervention is to stop the current imbalances while also preventing the possibility of the same happening in the future.

In order to get rid of the imbalances being experienced currently, the concerned parties should undertake the following processes: first, they should ensure that the monetary base has been adjusted based on the allocation of liquidity and capital. Secondly, the process of redeeming the marketable securities in the relevant countries so that when unable to pay the required loans advanced to them, they would be able to have assets that would be used to cover the defaulted loans, without causing unnecessary problems to the countries or the unions that they are members to. The imbalances can also be overcome through converting the debts owed by some of the member states into equity, hence reducing the immediate risks of a financial crisis occurring, while also offering the lending entities the opportunity to enjoy increased profits when the final payments come through. The relevant institutions should therefore address issues such as the monetary operations and the limits to which Target2 can be allowed to operate in, which will offer the affected countries the opportunity to borrow within the limits which they can pay (Muller et al., 2017). Additionally, there should be improved requirements for collateral, since the lack of collaterals that could be used in settling the defaulted loans will lead to the reduced possibility of the defaulters causing an economic crisis, since their collaterals will be used to cover the damages that the unpaid loans will have left in the region’s economy. Finally, the Target2 can be used to cover the damages of unpaid loans through the use of strictly verified bonds, so that they can be properly regulated to ensure that there will be a regulated system through which assets can be regulated and stretched out.

 

 

Target2 Explained (Digressions & Impressions, 2015)

 

4.0 Analysis of the Euro Crisis

4.1 The Fiscal Union Suggested by France

The use of a common fiscal union has been in play since the monetary integration of 1970 after the Werner report highlighted the benefits that the EMU would reap from using a common economic unit that would help in stabilizing the economy to the extent of overcoming the challenges that led to the Euro crisis of 2012 (Bénassy-Quéré et al., 2016). The initial attempts to gain the support that the report called for failed, although there were similar attempts on the same in 1988 by Jack Delors to revive the call for a fiscal union in the Eurozone, although they still experienced failure, opting to turn the campaign into a political one and applying the same principles in the field of EU politics.

The term fiscal union has different meanings, mostly depending on the person defining it and the policy that they are referring to. The definitions vary from the basic budgetary rules to the formulation of a fully-functioning federal government with the authority and power of expenditure and ability to set taxes and interest rates on borrowings. However, the broadly accepted definition of the term fiscal union is the transfer of the fiscal resources and powers of a country by giving them up to a supranational authority that serves the interests of more than just the single country that has given them up (Asatryan et al., 2018).  Therefore, in the case of the EMU, it can be interpreted to be the decision by willing members to give up even more financial powers to the parties in the EMU responsible for the economics of the region and give the central party the authority to make critical decisions such as the power to share resources and the decision-making abilities on issues that touch on all the members of the EMU. Therefore, by joining a fiscal union, the concerned parties would be given the central location the power to work on means through which they could ensure the reduction of risks associated with the union and the absorption of the shocks related to unexpected eventualities.

The formation of a fiscal union would come with the need for a banking system that would address the needs of the member states so that they would be able to successfully have a regulatory location that would ensure that the running of the region financially goes as smoothly as possible. Therefore, with a competitive banking system in the fiscal union, the possibility of further fiscal integration is increased since the central banking institution will have the necessary powers and structures to undertake the required financial decision-making that would help in the streamlining of the region’s economic well-being (Schlosser, 2019). The French and Italian governments have been the most vocal supporters of the fiscal union, since they are for the idea of pooling of resources, a practice to which the other nations are unwilling to partake in. For example, the opposers have suggested for a union that seeks to form an alliance that is more inclined to sharing of sovereignty instead of sharing fiscal responsibilities.

The main motivation for the formation of a fiscal union is the optimum currency area proposed by Mundell. With the optimum currency area policy in place, the monetary policies will not be handled domestically by the countries in question and therefore the low mobility of labor and the rigidities of pricing and wages, there is need for a fiscal policy that will address and buffer the shocks that may be experienced in the union (da Costa Cabral, 2020). Therefore, the domestic and regional policies must be in sync so that they can be operating in a counter-cyclic manner that would ensure the provision of buffering conditions in both the good and bad times in the economy.

 

 

4.2 The Positive Balance Enjoyed by Germany Compared to the Negative Effects Felt in the Southern Countries

While other member states continue to suffer from the effects of the Eurozone crisis, Germany surprisingly continues to enjoy benefits from the situation. Germany’s membership to the EU and EMU presents them with three major advantages. The first one is the lack of transaction costs for the member states of the union, which reduces the expenses that the country would have experienced if they undertook trade activities that involved the exchange of currencies whenever they needed to engage in trade with their neighboring partners (Schoeller, 2017). The country, therefore, saves on the expenses associated with the exchange of currencies, as well as the risks of having the currencies fluctuate as they interact in the trading field. Through the use of common money, the possibility of transparency in prices is increased, since the products are priced in a single currency in the region. Through transparency, the likelihood of competition of prices is increased, leading to the exponential development of the economy. Through the competitiveness of prices, the German economy has been able to achieve the international competitiveness that it needs to prosper both in the regional and international fields of business.

While all the member states to the EMU enjoy the benefits mentioned above, there is a third benefit that only the countries with an economic base as large as Germany can access. Germany enjoys robust competitiveness in its economy, which creates a surplus in its current account, putting them at an advantage in terms of economic growth and development. The excess exports that the country has helped in the appreciation of the Euro in the case of the countries that Germany exports to that use other currencies (Storm, 2016). The payments received from the countries that Germany exports to create, therefore, a demand for the Euro, which is paid to Germany, which leads to an increase in the exchange rate of the Euro. These results in an increase in the profits that Germany receives, hence increasing their advantage despite the Euro crisis that the other countries of the union face, especially those in the Southern Part of the continent.

The Southern European countries have been worst hit by the effects of the Euro crisis, with the impact coming in political and economic forms. Greece, Italy, Spain, and Portugal have experienced the economic implications of the Euro crisis, which has, in turn, led to the need for political responses, which lead to economic implications, creating a cycle in which one intervention leads to the other automatically happening. In light of the economic crisis faced in the Southern countries, the EU compelled the nations to engage in austerity measures, which have ended up working against the nations, instead of the expected positive effects that would have occurred in an ideal situation (Currie & Teague, 2016). The countries accepted the calls for the implementation since the EU used the application as grounds on which they would help them in dealing with the situation at hand.

The execution of austerity measures had negative effects on the economies of the nations since the economic activities in the nations significantly reduced, leading to increased rates of unemployment in the areas, which cut the circulation of money, automatically leading to economic damage suffered by the governments (Redeker & Walter, 2020). The decision by the EMU to maintain the parity between the US dollar and the Euro created a situation whereby the economies of the Southern countries were affected even further. The worsened economic situations in the countries triggered the political unrests experienced in the countries, which has only made the economic situation worse since the economy cannot grow in the absence of political stability.

4.3 Application to the Covid-19 Crisis

The Covid-19 pandemic has brought about an unexpected socio-economic situation that has affected the normal activities of the global economies. However, in the spirit of the solidarity that the union set to achieve in its formation, the EU and EMU have been working in unison to enable the adversely affected countries to handle the issue in the required manner and avert the adverse effects of the pandemic on their economies. The EU has been in continued research programs that are aimed at providing short term and long term solutions to the economic damage that will be experienced when the pandemic is over (Botta et al., 2020). The union has taken these initiatives in light of the linkage of the economies in the region and the ripple effect that the economic damage may have when one country is affected and is left unattended.

There have been action plans set into motion in light of the pandemic, intending to reduce the effects suffered by the countries and increase the possibility of bouncing back despite the challenges that the epidemic will bring even in the wake of its elimination. The member states have pooled together their resources to help in the containment of the pandemic, intending to assist the most affected members of the union, as well as other countries in the world. This is being achieved through the release of a fiscal stimulus that will go a long way in helping the affected countries to cope with the effects of the pandemic, especially on their economy (Copelovitch, 2020). The union has been working towards channeling funds to the public sectors of the member states so that the essential sectors are not paralyzed in light of the pandemic. The funds are mainly directed towards supporting the healthcare sector of the member states and also in payment of essential public workers who continue to provide services during the pandemic.

The union has further accepted the proposal to provide support in terms of liquidity to the member states so that the sectors in the region facing economic disruption do not meet stoppage or paralysis during and after the pandemic. The member states have also expressed their openness to accepting further changes like the development of the pandemic continues, and necessary actions will be taken depending on the severity of the effects suffered from the pandemic (Dermine & Markakis, 2020). This means that the union is open to loosening their rules to include the possibility of the previously-rigid rules governing them being relaxed to allow for access to emergency funds if need be. This being so, the union has agreed on the approval of the general escape clause of the association, which allows for the member states bound by contractual agreements to loans and other contracts to be excused from the need to be committed to honoring them even when they are due in this period that the pandemic is still ongoing (Vaitilingam, 2020). The union has sought to accept these terms even with the negative economic implications that this decision poses to the parties concerned. In light of the pandemic’s scourge, the union has also decided on directing the funds meant for other projects to the fight against Covid-19 and postpone the plans that are not directly in line with helping in the fight against the pandemic, since all the union’s efforts are aimed towards the maintenance of a safe society even in the presence of the Covid-19 purge, and also setting up plans that will enable the region to bounce back from the effects of the pandemic soon as the virus has been dealt with. In the meantime, the main priority remains the provision of methods through which the union can act as a shock absorber for the issues that the member states may face economically during this difficult juncture.

4.4 Hypothetic Situations of the Eurozone Membership

4.4.1 Situation 1: The Voluntary Exit of a Member State

In the emergence of the Eurozone crisis of 2012, there were calls for the countries affected to exit the union and revert to the use of their currencies. This move would lead to the depreciation of the currency against the Euro, which would, in turn, lead to the return of competitiveness in the countries in question. Despite the attractiveness in the exit of the members from the union, the benefits would not be becoming as the theoretical aspect suggests (Lapavitsas, 2018). This is because the move would mean that the partners left in the union would be adversely affected, leading to the shocks being felt in the countries that left the union, creating the same issue over again.

The process of leaving the single currency union and adopting the use of another currency is not easy, and it would involve complex and rigorous processes that may turn out to be detrimental to the economies concerned in the long run. Adoption of a new currency would put the economy of the nation in jeopardy, since the domestic demand for the money would increase, given the existence of foreign debts owed by the country in different currencies, leading to detrimental effects depending on the size of the external liabilities owed by the state, harming the country’s financial wellbeing even further (Hofmeister, 2018). The exit would also mean that the debts held by the country would remain sub serviced and that they would collect high-interest rates in Euros, hence making the loans even more expensive to service. The country’s new currency may not be fully accepted by the other nations of the world during trade, since its stability will not have been confirmed, hence forcing the government to transact using the Euro or other universally accepted legal tenders, thus increasing the demand for the local currency and affecting the country’s economy.

4.4.2 Situation 2: The Involuntary Exit of a Peripheral Partner from the Union

The failure to fulfill the requirements of the rescue plan set by the EMU may force a member to exit the union. The cause of the exit may be the poorly-designed programs by the individual countries or the association, hence leading to the collapse of the union’s ability to safeguard the country from the economic shocks that they may experience. Additionally, the exit may be forced by the lack of sufficient sources of bailouts and the inability by the political units of the countries to address the issues that they face in their struggles (Malinen et al., 2018). There may arise the existence of sovereign defaults, which may come in different forms but result in the same end. The governments will be left with insufficient Euros to address their expenditures and remain unable to regulate the spending that they incur or the ability to raise the needed revenues required for the development of the economy.

In this scenario, the governments may opt to postpone the payment of the debts that they owe. However, this solution is only applicable in the short term, leaving the nations with tough decisions to make on how to handle the situations in the long run. The debts owed would accumulate excessively, especially considering that these payments will be made in Euros (Aslett & Caporaso, 2016). The inability to sort out their debts as well as the inability to access more credit will affect the nation, in that they will have to engage in a deliberate austerity measure to help them reduce their expenses, which will, in turn, lead the nations into a state of tension since the rates of employment and incomes will be significantly reduced, leading to economic pressure in the country.

 

5.0 conclusion and Recommendations

5.1 Conclusion

Through the creation of the Eurozone, the member states to the agreement enjoyed a situation similar to a fixed exchange rate, although the use of the Euro had some distinctions. First, the cost of abandoning the systems and modes of previously held by the countries and adopting the new Euro system was expensive in the first stages of the process, since the nations had to make full adjustments to their systems of banking and financial setups to fit the needs of their nations as well as those of the member states to the Eurozone. Additionally, the Euro monetary system was different from a fixed exchange rate system since the transaction costs incurred when people are involved in the exchange of currencies is eliminated since the member states used similar currencies. The existence of monetary systems before the adoption of the Eurozone was not common, with a few examples such as the Latin Monetary Union between France, Belgium, Italy and Switzerland; the use of a common currency between Luxembourg and Belgium; and the Franc Zone, whereby former French colonies adopted the use of a common currency, the Franc. There were also instances of monetary systems whereby smaller and weaker countries adopted the use of a more prosperous country’s currency instead of formulating their own.

The optimum currency area theory has a set of qualifications that must be fulfilled for a country to be eligible for membership in an optimum currency area. There are two categories of criteria used in the determination of a country’s eligibility to join an optimum currency area. The first category consists of areas that reduce the possibility of the country exposing the other members of the union to asymmetric shocks due to the events happening within their borders. This means that a country’s membership to an optimum currency area should not put the other members at risk of experiencing the economic shocks that may occur in one country and making the others share in the financial implications. Therefore, a country’s membership should not increase the liability of the other countries or the possibility of them having to suffer the same outcomes as them.

The economic prosperity of the members of the Eurozone is important for the overall performance of the union. The economic structures of the countries that are members of the ECU play a critical role in the economic robustness that they portray. The decision to form a monetary union was necessitated by the need to have a common currency that would enable the member states to engage more actively and effectively in trading and therefore bring about the possibility of the member states developing into prosperous economies. The ability of the members of the EMU to achieve their initial goal of achieving economic prosperity will be strengthened by the availability of the members to accept and integrate innovation in their operations so that they can effectively use the available resources to achieve the best results when it comes to growing and increasing their competitive advantage in the market that they are in.

The formation of a fiscal union would come with the need for a banking system that would address the needs of the member states so that they would be able to successfully have a regulatory location that would ensure that the running of the region financially goes as smoothly as possible. Therefore, with a competitive banking system in the fiscal union, the possibility of further fiscal integration is increased since the central banking institution will have the necessary powers and structures to undertake the required financial decision-making that would help in the streamlining of the region’s economic well-being. The French and Italian governments have been the most vocal supporters of the fiscal union, since they are for the idea of pooling of resources, a practice to which the other nations are unwilling to partake in. For example, the opposers have suggested for a union that seeks to form an alliance that is more inclined to sharing of sovereignty instead of sharing fiscal responsibilities.

5.2 Recommendations

I would recommend that the Union loosens its requirements and guidelines to operation so that the possibility of the Union coming to the rescue of members can be increased, hence reducing the risk of financial ruin to the members involved. Had the Union had flexible laws around the provision of bailouts to its members, the events that led to the Euro Crisis of 2012 would not have occurred. The nations concerned would have committed themselves to help the Greek loans, therefore avoiding the possibility of the loans causing unnecessary problems as those experienced in the Euro crisis.

I would also suggest that since the EMU offers other financial solutions, they should also provide loans for the member states. This way, the members would be able to enjoy consolidated banking solutions, hence providing them with the necessary financial advice and information for any given time. Through this recommendation, the member states would be able to borrow against their saved capitals, hence ensuring that the loans they take are manageable and payable without the country experiencing problems when they do. Additionally, I would recommend that the Union undertakes more research into the possible solutions to the occurrence of unexpected eventualities such as the novel Coronavirus so that they can have specified kitties that would come into place in the event of the unforeseen contingencies. Through preparation, the Union would be able to handle emergencies while also being able to control their set goals without any interruptions.

The Union could also work towards achieving a more economically stable being by offering its members more stable and reliable financial solutions. This can be done through formulating systems in which the profits and benefits gained from the membership to the Union are shared according to the economic needs of the nations, with the least developed ones receiving more funding than those that have a higher development rate. This way, the most affected countries by the Euro crisis that is the Southern European nations would have a chance of rebuilding their economies.

Finally, I would recommend the use of a common education system throughout the Union, should the Union be successful. The lack of common languages is a practicability issue in the Union since, despite the freedom of movement, the workforce is unable to agree on a common language of communication, leading to the reluctance of movement. The competencies and skills of the workers in the region are also different, therefore creating a situation whereby the workers of a country are only relevant in their country. However, through the use of a common education system, the learners can be equipped with the necessary education needed for the development of the region.

5.3 Limitations of the Study

First, this research proposal suffered from the lack of time to conduct as much research as it would have been ideal to conclusively confirm the issues that were responsible for the Euro crisis of 2012. With limited time, the research proposal had to ensure that it covers the basics of the study, without conducting the in-depth research that would help the researchers to explore the reasons behind the Euro Crisis experienced and pick out every cause of the crisis, big or small, and rank them according to the role that they played towards the Euro crisis and hence formulate contingency plans that would come in handy in dealing with the issues in the future.

Secondly, this research proposal lacked the availability of the necessary data that would, in the end, limit the findings of the research. The data available for the research was mainly from the library sources and not from first-hand sources that would have offered better and more reliable data for the study. The use of first-hand sources would help in getting different perspectives from the various sources, hence coming up with a more balanced outcome compared to the findings of data sources from the library sources, which may be biased and only from one perspective. Finally, this research suffered from the lack of finances needed for the conduction of proper research findings. Had there been appropriate financing for the project, then the project would have enough funds for the researchers to travel and conduct one on one interviews with the representatives of the member states in the union so that they can capture all the needed data in the course of the research proposal.

5.4 Areas of Further Research

The future research activities could concentrate on the possibility of how to avoid the reoccurrence of the same outcomes experienced in the Euro crisis in the future. Through extensive research, there can be useful answers found through analyzing the issues that resulted in the crisis in the first place, thereby allowing the researchers to establish the conclusive reasons why the disaster happened and how the reoccurrence can be avoided. When this is done, the possibility of identifying the characteristics that lead to the full-blown existence of the problem can be identified and therefore even when the signs of a crisis occurring are subtle or negligible; the concerned parties would still be able to identify the characteristics and work towards eliminating the danger while it is still at the initial stages that are not dangerous for the economies of the country or the union.

Secondly, I would suggest for studies to be done on the ways that a member state can successfully leave the union without having to suffer from the financial and economic effects that the hypothetic studies confirmed on the exit of the association. The exit from the union meant economic doom for the countries that left as well as the existing members. This situation creates an image of the possibility of joining the union and the impossibility of leaving it, thus creating an uncomfortable situation whereby the countries that are not benefiting from the union are forced to stay to avoid the imbalances that they may experience if they leave the union. The inability to leave the union and still experience economic freedom should also be addressed since the formation of future unions will still be faced with the same issues. It will be another area of learning if research is conducted on the ways that the implications suffered from the less developed countries in the unions can be reduced and how the more developed countries could act as shock absorbers for the issues experienced by them. This way, the more developed countries in the unions could provide the financial cover that the less developed countries need for their success in the regional and international trading activities. Finally, there is need for research to be concentrated on the ways through which the formation of common currency areas could address the areas left out by the Mundell theory, therefore reducing the risk of the members suffering for the lack of foresight into issues such as the inability to repay the loans that the members take out.