Euro Zone Is a Comfort Zone - Case Study Example

EURO ZONE - COMFORT ZONE Introduction Buffer zone offers the best avenue to defuse tensions or possible problems (S. Smith “Beyond Intractability”, version IV, 2003). It presents a space that separates opposing forces. In these demarcations, certain rules are to be respected if the aims of a buffer zone are to be achieved. Due to the ever changing world towards globalisation, it has emerged that those economic activities that take place in different countries all over the globe, may lead to far reaching consequences to many countries – on all continents. To mitigate this, there is need to adopt precautionary measures so as to cushion the local citizenry from such effects of the global forces. As a result of this, it is a worthwhile consideration to develop buffer zones and get fully integrated within the zone so as to reap the benefits that accompany such an arrangement. As an illustration of the above point, it is a fact that the financial meltdown is a consequence of what happened in the United States of America. This has gone on to negatively impact on the economies of a vast majority of the world countries. Nations that have formed a buffer zone are in a better position to handle a crisis of such magnitude.(Euro Zone which came to existence in 1998) As Smith (2003) has found out, there is need to get fully integrated into buffer zone so as to be in a position to tackle issues of common concern cooperatively and reduce their severity. If handled timely with cooperation, members stand to benefit from reduced effects. From the information above, it becomes necessary to find out if the buffer zoning provided by Euro zone is a clever tool available for countries in guarding against economic shocks that arise due to global activities. The focus of this report is : Britain who became EU member in 1973 and isn’t a member of the zone so far. Greece who joined EU in 1981 and became a part of the Euro zone twenty years later in 2001 Slovakia who became EU member in 2004 and joined Euro zone on 1st January 2009 The case of Great Britain There are several reasons why Great Britain is not part of the Euro zone but the primary reason is the fact that its monetary policy ( as determined by the British Monetary Policy ) has a different approach in achieving price stability which is mainly based on short-term base interest rates. On the other hand, the European Central Bank’s ( ECB ) policy tool is the Eurozone interest rate since it aims for better price stability leading to growth brought about by broad money supply ( Riley, 2006). The second major reason why Britain did not join the Eurozone because it has learned its lessons in the Exchange Rate Mechanism ( ERM ) that caused British economy to crash due to thousands of business that went bankrupt, doubled rate of unemployment, and “one and three-quarter million homes were thrown into negative equity” ( Herbert, 2000). Britain also realized that they needed to have an independent monetary policy that would allow them capital rate mobility in setting the exchange rates. Moreover, Great Britain has a unique economic problems such as unemployment which former leaders like Margaret Thatcher have solved through liberal economic reforms. So far, Britain is still in a good shape despite the onslaught of the world crisis. Another interesting part of this case is the ECB’s press release last year that deems Britain as unfit to join the Eurozone since the “Sterlings exchange rate is not yet sufficiently stable,"( Pritchard, 2009 ). This statement is valid since the Sterling pound still plays a major role in the European export rates. Nevertheless, Britain views the fall of the pound as not that important as achieving domestic stability. Until now, the Bank of England is true to its goal of helping the economy recover from the pressure of mortgage and credit problems. Because of such situation, it is recommended that further research be pursued in determining how Britain could further strengthen its economy on its own without joining the Eurozone. Its hard lessons from the past and the strong political leadership has made it independent from rest of Euro countries. Slovakia Slovakia has relatively been a developed economy before it even joined the Euro zone. In fact, it is now considered as an aid provider since 2008 by the World Bank since it has begun “allocating €11.99 million in strategic investments” in 2009 ( TASR ,2009) It is actually the 16th member of the said zone when it joined last January 2009. Slovakia became a member in the hope that its inflation rates would further be reduced. Being assimilated into the zone would mean adopting to changes as suggested: The best approach for the accession countries is to fix their currencies to the euro, with a currency board adjustment mechanism, and balance their budgets. A currency board system duplicates the monetary actions of an integrated monetary union, so that if a country cannot make a currency board system work, it will have difficulties with monetary union. ( Mundell ) Nevertheless, there are some drawbacks such as having the same inflation rate with the Eurozone which is similar to other areas in the world like Panama which has the same inflation rate with the United States. In fact, this is the reason why sound fiscal health that is balanced is crucial for a member country of the Euro since it does not have an independent monetary policy anymore that could possibly correct budget deficits. This is exactly the reason why Britain does not want to become part of the said zone. It is then recommended that while the economy of Slovakia is strong, it must find ways and means to strengthen its fiscal policy such as implementing expansionary policy so growth would continue. It must also strengthen its Research and Development which could provide stimulus to the economy. Further studies can be pursued in this area . The case of Greece This report couldn’t have been more timely with the current situation of Greece’s financial crisis. Due to its spiralling debt, the country is expected to plunge in a month’s time into deeper fiscal woes. Greece pleaded for a bailout that sent the Euro members coming up with a plan, as “earlier this month, an agreement hammered out with the 16 eurozone members put together a €30bn (£26bn) emergency package of three-year loans with interest rates of 5 per cent. “ which would be supplemented by additional funding from IMF worth “€15bn” ( Arnott, 2010). When Greece was finally admitted into the eurozone in 2000, ECB noted that it is concerned with the “country’s progress towards key economic targets” despite the fact that it was able to lessen its budget deficit, lessen debt and manage inflation ( Greece Can Join Euro Zone”, CNN, 2000). This just shows that Greece wanted to prove itself yet it was not that stable enough ; indeed, the anxieties felt by the critics then came true as Greece’s debt went out of control after almost a decade. Inside Greece, there were efforts to reconstitute itself as : Greek state agencies involved in state gambling expansion and tax code reform have framed their projects as founded with the aim of recouping "lost revenue" and bringing all economic activity in Greece under the aegis of the state apparatus ( Mallaby, 2002). Unfortunately, such actions did not merit any point from rescuing Greece from its crisis. Although the eurozone has committed its help in bailing out Greece, Germany is delaying its decision thereby delaying the legislation for release of funds since it is skeptical about the situation in Greece. Sadly, time is the essence since Greece cannot hold longer until May since its debts are spiraling. Civil unrest has already aggravated the situation and political turmoil would turn off investors. Assuming that the emergency package is released, there is still no assurance that Greece would regain financial stability as Collin Ellis, a European economist argues “The aid package will buy Greece time this year. Thats all it has done. Greece still faces a herculean task to show that it can get its public finances in order and reduce its deficit." ( Innman, 2010). In this case, it would be quite late to recommend actions for Greece for all it needs is to keep its belt tight and bite the bullet. However, the financial cancer has given Greece many lessons : 1. National debt should be a priority in budget allocation; 2. The government must impose severe budgetary cuts in budget and that may even include social services in order to survive the economy; 3. Taxes must be raised so that the budget deficit can be slowly and painfully reduced; 4. The government must encourage saving from all its citizens to build up a capital for the nation’s economy; 5. The government can impose regulations that would tighten measures for financial institutions that give credit; Indeed, the problems of Greece are not much different from America; however, America is still a stronghold of global power that gives it leverage to correct its mistakes. On the other hand, Greece is now entirely dependent on the eurozone. References: CNN Money. "Greece Can Join Eurozone." CNN money [Chicago] 3 May 2000, sec. International : n. pag. CNN money. Web. 22 Apr. 2010. Dyson, Kenneth. The Politics of the Euro-Zone: Stability or Breakdown?. Oxford: Oxford University Press, 2000. Questia. Web. 23 Apr. 2010. Evans-Pritchard, Ambrose. "ECB deems Britain unworthy of euro." Telegraph [London] 8 Jan. 2009, sec. FInance: 1. Telegraph.co.uk. Web. 20 Apr. 2010. Herbert, Nick “Great Britain and the Euro v. Sterling Debate”. The Great Heritage Foundation Aug 16, 2000. ( accessed 15 April 2010) Malaby, Thomas M. "Making Change in the New Europe: Euro Competence in Greece." Anthropological Quarterly 75.3 (2002): 591+. Questia. Web. 23 Apr. 2010. Mundell, Robert. "The Significance of the Euro in the International Monetary System." American Economist 47.2 (2003): 27+. Questia. Web. 23 Apr. 2010. Riley, Geoff. ” Globalisation Effects “ September 2006 .< http://tutor2u.net/economics /revision-notes/a2-macro-european-monetary-union.html> (accessed 15 April 2010 ) S. Smith Beyond Intractability, version IV (2003) TASR. "Slovakia Supported Strategic Investments With €12 million in 2009." TASR [Slovak] 23 Apr. 2009, sec. Export: n. pag. TASR- The News Agency of Slovak Republic. Web. 12 Apr. 2010. Read More