The Eurozone as a Flawed Currency Area

Abstract

Advocates of membership in the eurozone argued that a European single currency could unleash economic potential that would increase economic growth and investment, achieve low and stable inflation and build a strong European economy through: encouraging greater trade; reducing transaction costs; and increasing price transparency. In terms of new institutions, the European Central Bank (ECB), through ensuring price stability, would result in lower inflation and interest rates, thereby again boosting investment and economic growth. Additionally, the euro would establish itself as a major world currency, conferring economic advantages and political prestige based upon the European Union’s combined economic strength. Finally, arguments that eurozone membership reduces national sovereignty were rejected on the grounds that, due to the globalisation of financial markets and to voluntary limitations imposed by international treaties, sovereignty is not absolute any more (Baimbridge et al., 2000).However, many critics have argued that the costs of entry into the eurozone were, in fact, potentially far greater where the loss of monetary and exchange-rate policies weakens national economic management, which is further constrained by the restraints upon fiscal policy. Further, the lack of prior cyclical and structural convergence created strains such that unsynchronised business cycles and/or structural differences magnify the effects of asymmetric external shocks.