Eurozone – Benefits & Constraints of a large monetary Union

Good Morning from a sunny Barcelona ! I have been saying this for last two years to mine friends in Europe and elsewhere. I often get a response from mine Northern European friends that its not sunny in their region and they are still waiting to see the sun. 
Lets take this non uniformity in weather pattern to the Economic & Political world through the path of culture and one could easily see a line dividing Europe into two. The upper Northern region with a distinct culture from the southern Mediterranean region. Inspite of the cultural difference 19 countries from the European Union decided to adopt a common currency. There were few notable exceptions such as Britain which had its one political reasons to do so. There were several potential benefits of the common currency:
a. Transaction Cost – No cost of changing costs and it made trade and travel easier.
b. Uniformity in price – More or less uniformity in price was achieved.
c. Greater Bargain Power – The single currency gave the individual nations a greater sense of bargain power and confidence.
The adoption of a single monetary union led to the formation of the European Central Bank with the mandate of maintaining price stability in the Eurozone. The ECB has representation from member nations with each nation having a chance to lead it someday. 
At the time of formation it was an open secret that the members of the Eurozone were not of equal class in terms of economic development. The Northern areas were more developed than the Southern areas. This made the task of the ECB that much more difficult. The fiscal and institutional mechanisms were not of equal level in all the countries. Hence all the nations were not equally benefited from the monetary policies of ECB. Sometimes the consequence of interest rate decisions were totally different in a country such as Spain from that of Germany. A single monetary policy made the central banks in individual nations lacklustre and deprived them from providing customised solutions. The monetary policy is just a tool in the hand of central banks but its not a cure for all economic problems. It needs to be backed by proper fiscal policy. 
In my next post i will highlight how the constrains of single monetary union was thoroughly exposed by the financial crisis of 2008-09. 


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