Pros and Cons - Debbie Newman, Ben Woolgar 2014

Euro, abolition of the
Section D. Economics

At the time of writing, in 2013, the euro is on a precipice, with the Greek financial crisis threatening its very existence. It is currently used in 17 EU member states and five further countries that have unilaterally adopted it. Interest rates are set by the European Central Bank (ECB), which aims to keep inflation at or below 2 per cent, but its mandate has now generally broadened to other crisis prevention measures. The euro is also the model for the proposed African and Gulf area single currencies.

Pros

[1] The fundamental problem with the EU is that monetary union without fiscal union is unsustainable. Because they share a currency, the other member states cannot allow a highly indebted economy like Greece or Portugal to crash. But they also have no means of preventing Greece from running up unsustainably high levels of public debt. So there will always be members who take advantage of this to overspend.

[2] The benefits of the Eurozone are fairly minimal. As long as the EU retains the free movement of goods, the barriers created by having different currencies are fairly minimal. They simply require conversion and careful hedging of currency risk.

[3] A single interest rate for an area as large and diverse as the Eurozone is simply impossible to set correctly. At any given time, there will be some economies growing faster that need inflation strictly controlled, and others that need growth boosted; these two goals are contradictory. Moreover, in countries with high home ownership, raising interest rates has a much bigger impact (as mortgages become more expensive). The rates set will tend to reflect France and Germany’s priorities, rather than being a fair reflection of need.

[4] Abolishing the euro will allow exchange rates to settle at a level which is far better for international trade. Major exporters like Germany will see their exchange rates rise, making imports cheaper; while Greece will be able to reap the benefits of a fall in its interest rates by increased tourism and exports.

Cons

[1] The answer to the lack of a fiscal union is not abolition of the monetary one, but either to go all the way and accept full fiscal union, with the ECB collecting taxes centrally and then redistributing them to the states for spending; or to impose tighter sanctions for states which breach the Stability and Growth Pact, the EU’s existing fiscal control mechanism.

[2] The Eurozone increases cross-border trade by reducing the costs related to having separate currencies. For instance, tourists are more willing to spend if they can readily identify how much things are worth, and businesses will invest more in other countries where there is no risk that currency fluctuations will devalue their investments.

[3] The setting of a single interest rate is undoubtedly challenging, but that does not render it impossible. Indeed, it simply represents a compromise between different interests. Moreover, by allowing smaller states to ’borrow’ the credibility of experienced central bankers from larger states, markets gain greater confidence in the promise of low inflation and stability in smaller states.

[4] There is always a downside to currency revaluations. Member states will experience rapid shocks as the costs of their imports rise; that is particularly problematic for a country like Greece, where people are already very poor, as their cost of living shoots up.

Possible motions

This House believes that the euro has had its day.

This House would abolish the euro.

This House believes that one currency means more problems.

Related topics

United States of Europe

European Union, expansion of the

Regional trade blocs over global free trade