European Monetary Union part 2 - explained
When the Euro was introduced on January 1st 2002 many things changed for Jonas. Today he has gotten used to the new currency. He thinks the advantages are numerous. His friend Rocco from Italy however does not agree with everything concerning the Euro and the transnational currency merger.
They agree on several things:
- When traveling to other countries that use the Euro, they don’t need to exchange their money and can pay everything with Euros. This is convenient for both of them.
- Online-Shopping has also become easier for customers and producers. There is no exchange rate and financial transactions cost the same as national transactions.
- Generally speaking prices and salaries can be compared on a European scale more easily. This enhances the competition among companies and benefits the customers.
- The countries sharing one currency also need to collaborate
- more closely with each other. They grow closer and can support each other during difficult times.
Well, in theory that is.
The European Central Bank’s main goal is the preservation of stable prices within the EU. That sounds lovely in theory, but Rocco tells Jonas about the disadvantages as well. Those mechanisms benefitting one country might for example hurt another one.
- This mainly concerns economic and financial problems of the participating countries and their inhabitants.
- Countries give up part of their control and parts of their governmental autonomy. Before the introduction of the Euro, they could help themselves first in difficult times. To stimulate economic growth, they could print more money or devaluate their currency. Selling cheaper products was thus possible and more products were being exported to other countries. The tourism industry would experience growth, providing cheap vacations. Since the currency is now the same in all countries, all of this is no longer possible for struggling countries.
- As a matter of fact, not every country complied with the mutual stability pact. Which lead to shortages in the national budget and rising debt. They had to get expensive loans with high interest rates to close this financial gap. Investors are now concerned the pending bankruptcy of one country could influence all other Euro States. This is called the Euro-Crisis.
- The ECB buys government bonds of indebted European countries for low interest rates, to offer those countries cheap loans.
- A debt limit for all members was installed.
- Moreover, fines are automatically due, if a country does not abide by the criteria of the mutual stability pact.
To prevent this from happening, the European Central Bank has implemented several solutions.
However these measures have yet to be met and controlled. Whether they help stabilize the union has yet to be proven.
Jonas and Rocco have different opinions on this issue, but they still remain friends. Next summer, they decided to travel Latvia, which they always wanted to see. And there, they can pay with Euros too.
For more information about the introduction of the Euro, check out our video clip the “European Monetary Union – explained”.