DMPQ- . What was Euro zone crisis? Point out the structural problems associated with the crisis.

Earlier, European Union represented one economic market as an economic union with free  trade with each other. The Euro zone came into existence with the signing of Maastricht  treaty signed during 1992, of a monetary union, one central bank and single currency,  replacing country specific currencies in the European Union. As a result, the Euro as  common currency came into existence during 2002, but of the twenty-seven member  countries only, seventeen members of the EU accepted Euro as the common currency and  became part of Euro Zone.

Some of the members not opting for Euro (10) especially Sweden, UK and Switzerland  which while accepted Euro, also had their own respective currency and not part of the  Euro zone even though part of European Union. There are six other countries which have  Euro as their currency but are not part of the Euro zone resulting in twenty-three countries  in the world having Euro as their currency with seventeen as part of Euro Zone.

The Euro zone had structural problems ever since it came into existence. They are as  follows:

  • Of a union of dissimilar economies, difference in sizes, economic activities, resources, technology and levels of development and incomes. On the one hand, the stronger  economies of Germany, France and Italy and the other ‘peripheral economies’ such as  Greece, Portugal, Spain, etc.
  • Some of the Euro zone member had strong currency before Euro came into existence such as Deutsche Marks (Germany), French Francs and the Italian Lira, while other  had a weak currency such as Greece (Drachma), Portugal (Escudo) and Spain (Peseta).  Thus, monetary union was not across similar monetary strengths of economies.
  • The larger economies especially Germany had a current account surplus while others had a current account deficit largely with Germany.
  • There was a growth with stability pact’ amongst Euro zone members which was more of an understanding rather than a ‘fiscal union’ of debt to GDP not exceeding 60 per  cent and deficit to GDP of not exceeding 3 per cent, which was never adhered to by  the member countries resulting in ‘fiscal excesses’, high levels of deficits resulting in  large borrowings especially by what is referred as PIGS economies, which comprises  of Portugal, Ireland, Greece and Spain.
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