”Europe” a continent that discovered rest of the world has a long history of rise and fall. No other continent has gone through so many ups and down, for illustration, Hitler has grown to the power to unite Europe as one, so did, Napoleon Bonaparte.
After the end of Second World War the need to unite Europe was more justified to counterbalance the growing power of Soviet Union. The communist regime work well and the experiment done on leftist doctrine was successful at some point.
Ukraine and Russia have really done great with the science and technology, weapon and artillery etc. But the west was always against it and the regime had no legitimacy from its people. Russia paid heavy cost for the failure of Soviet Union.
On the other hand, Europe; had a great foundation for next level of experiment to unite small nations together for the common interest. But this time, apart from Soviet Union, those member country will have their own choice either to join or not with the group of member states.
So far it looks good; by 1993 the treaty was signed between the countries with the common purposed name of European Union. But the epic tale begins when the idea of common currency Euro was on debate. By that time Germany was the player of EU and also it was the leading exporting country in the region. No dough, it pushed other to join Euro zone just to make sure that its export would be appreciated within the region.
However, the monetary policy of Euro Zone seems to be immature that was the only reason why country like Sweden, Denmark and Britain never replaced their legacy currency. There was a debate with in scholar and economist for long time predicting the future of common currency.
After the successful history of one decade now the currency is in trouble. Europe’s exposure of its financial institutions to American toxic assets was the first hint that Euro was not design to be immune from the crisis.
Secondly, PIGS nation (Portugal, Italy, Greece and Spain) was not playing with the same rule as other member state. Budget deficit of these countries were unsustainable due to zero or negative GDP growth rate. Borrowing cost was as high as 7 percent for Italy at some point.
The borrowing cost grew so high that it was literally pilling the trouble by selling its state bond. European central bank (ECB) intervened Iceland and forced them to take rescue amount of more than 80 billion. But this phenomenon didn't stop there soon; after Iceland, Greece was on trouble now the mess was so big that ECB has to issue its own bond to generate money. Soon this story continued with Spain, Italy and Portugal.
But what went wrong that Euro zone got in this scale of trouble. It was the fiscal policy of the member state that was not regulated at all or some point. Country like Greece and Italy didn't have a significant growth rate which could balance the interest and installment for its borrowing so to fill that gap they borrowed more till those states bond were rated to junk by the rating agency.
However, country spending on its social services like health care, education and infrastructure was not scale down in fear of job cuts. There is always a simple formula to understand this complex phenomenon: State earning (tax revenue) +borrowed loan (selling bond) should be always counter balance with spending (salary+ pension….) +interest and installment paid on borrowed loan.
The other strong reason for the failure of Euro currency was the tax legislation which was different for different member state. Global multinational company were using this loophole to redirect their earning to the safe heaven. Country like Netherlands enjoy this tag of safe heaven which was the fascinating story of Google and Starbucks in recent time in UK operation and Iceland invoicing.
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