Happy Birthday to EU

Oblivious to the typical celebrations that occur on the last day of the year, the Euro celebrated its tenth birthday at the dawn of 2009; the year of the financial crisis. Initially questioned and doubted, the Euro has thrived; it is the second largest currency reserve in the world, limiting currency runs in the Eurozone economies to a minimum and ushering in a tidy number of supply-side reforms. However, it is not without its sceptics. As the credit markets shrivel and shrink, the countries within the Eurozone wondered: did they make the right decision in joining the Euro?

In 1992, the Maastricht treaty was signed, conceptualising an idea of a united Europe with one, single ‘European’ currency. The ratification of this treaty by the member states of the European Community that followed confirmed the inevitable introduction of this currency: the Euro. The ideology was simple. Under a united currency, each country benefits from an expected inflow of capital. If, say, a country like Italy or Spain was not in the Euro, the price of borrowing would be significantly higher because there is a greater risk of these governments defaulting on their loans. However, under the umbrella of the Euro – supported by the European Union with resilient and formidable economies such as Germany’s – the risk of defaulting is smaller. Further, the introduction of the Euro was intended to reduce transaction costs. For companies that engage consumers in different countries, the costs of exchanging currencies are high and regular. Consequently, businesses either reduce profit margins as it internalises this cost, or it forces consumers to pay more if businesses are not willing to.

However, the introduction of the Euro also brought with it complacency. As the countries engaged in active economic reform to meet the criteria created for the adoption of the Euro – such as low inflation and interest rates, amongst others – reform fatigue set in, leading to successive governments of Eurozone countries resting on their predecessors’ laurels, ignoring the structural problems in their economies. Spain, for instance, neglected its mounting budget-deficit because the Euro created an aura of stability, keeping borrowing cheap. Italy, who experienced sustained, low labour productivity prior to adopting the Euro, disregarded economic reforms as it experienced the benefits of the Euro. Now, however, its businesses are woefully un-equipped to deal with rising competitiveness in and outside the Eurozone and its population is enduring ever higher unemployment rates.

For Britain, the allure of the Euro grows ever stronger. But, like the rest of Europe, the unique problems that plague its economy will not be cured by adopting the Euro. The problems that afflict Italy and Spain were not resolved by the Euro, and so Britain’s financial sector will, similarly, suffer in or out of the Eurozone. However, the currency unabatedly remains powerful. Its users increase day by day and it is now the currency with the highest circulation in the world.

The Euro is a haven from financial troubles. The reserves for the pound and the Swiss Francs are dwindling with ever more investors realising the safety that the Euro offers. In a world stung by defaults and frauds, investors have prioritised safe returns. As the financial storm brews, the Euro is the titanic that will not hit an iceberg – well, as long its captains watch the seas ahead.