Individual Assignment: Lesson Learnt from the euro debt crisis

The lesson that I’ve learnt from the euro debt crisis is economics and politics of the Euro
Crisis have mainly been predictable. The Euro crisis is, in no small degree, a version of the
balance-of-payments dilemmas faced by many countries in the last two centuries. Those
problems have come to the fore once again. In the run-up to the adoption of the euro in 1999,
internal politics in the member states of the E.M.U. made it challenging to find consensus on
policies and structures that should have prevented the crisis — such as tighter monetary policy
and regulatory cooperation. Indeed, the euro crisis has several peculiar aspects related to single
currency architecture. Such unique features of monetary union have contributed to the leading
causes of the crisis. A standard monetary policy for countries with the widely different
macroeconomic condition, the lack of fiscal policy cooperation between euro member states;
weak financial regulation; and the lack of a credible no-bailout pledge.

Both factors eventually worked together to put the eurozone near collapse. Given these unique
features of the EMU, however, the series of events in the euro crisis closely followed the series
of previous crises in Latin America, East Asia and elsewhere. In the Eurozone, broad movements
of capital from the north to the south have led to a peripheral boom, and then bubble. As the
global economic crisis intensified in 2007-9, this bubble burst, causing the eurozone crisis and
leaving periphery countries with debts they could not satisfy creditors in Northern Europe.Even
as the Euro crisis triggers and chronology closely mirrored previous financial crises and even
politics. We've seen bitter domestic and international disputes over the distribution of the
adjustment burden in the Eurozone, as in past crises. The crisis has sparked intensely
acrimonious negotiations at the international level about IMF / EU bailouts, financial integration,
immigration, and the distribution of adjustment between debtor and creditor countries.
The second key lesson is the aggregate demand mismanagement. The shortage of aggregate
demand worsened and prolonged the Southern European financial crisis. When struck by a
sudden halt, domestic fiscal policy has no choice but to become more stringent, and a credit
crunch can not be avoided as local banks are pushed into deleveraging. Effective aggregate
demand management at the level of the Eurozone as a whole is required to prevent a deep and
prolonged recession. That was not the case; the monetary policies have not reacted quickly and
strongly enough, and have even tightened up prematurely. The ECB finally did all right, with
substantial bank lending and quantitative easing. But those intentions came too late in the crisis
when Southern Europe 's real economies had already suffered massive losses.

The sudden stops in Southern Europe would have been easier to handle if the statement,
'whatever it takes,' had come at the start of the crisis. Nevertheless, even though the monetary
policy had responded more quickly, the zero bindings on interest rates set limits on what
monetary policy alone can achieve. In these severe circumstances, as is now well understood,
co-ordinated monetary and fiscal expansion is needed ( Giavazzi and Tabellini 2014). Yet the
eurozone does not have a standard budgetary policy, and the northern European countries have
had. They are running significant current-account surpluses, removing additional aggregate
demand from the rest of the eurozone. Mismanagement of this aggregate demand was not merely
the product of human error. It is a result of the Eurozone's structural architecture. The
lexicographic price stability mandate delayed response by the ECB. The ECB waited until the
entire Eurozone was in deflation before responding accordingly.

Next lesson that I’ve learnt is, monetary union raises the political stakes. What's very
remarkable in the euro area is that the crisis took place in the framework of monetary union and
European integration. The response to the crisis was from individual countries and the E.U. It
sparked heated arguments about the euro 's future as a whole. The European Central Bank, the
European Council and other central authorities have now taken a more critical role, as some have
pointed out in the Monkey Cage. And creditor countries like Germany now wield even more
influence within the E.U.The crisis has also sparked broader discussions on "Grexit" and
"Brexit"—the prospect of Greece leaving the eurozone and the UK. Can completely pull out of
the EU — which would rattle the very pillars of European integration. (Matthijs, M., Parsons, C.
and Toenshoff, C., 2019)

Lastly, Monetary union doesn’t work without fiscal and regulatory coordination. The final
lesson is that some significant changes are required by European policymakers to ensure the
viability of the euro. The eurozone needs a dependable borrower of last resort, deeper fiscal
policy integration and greater labour mobility among E.M.U. Members to preserve the monetary
union. European leaders will not be in a position to address the existing problems on the
continent. The biggest challenges are very economic-political ones. There are no technological
obstacles to any of the eurozone crisis solutions: debt reform, concerted fiscal stimulus,
harmonised financial regulation, only as a beginning. Yet the long-term future of the euro area
remains unclear until a political consensus reached on how to proceed.

In conclusion, The euro region is on a crossroads. Having serious contemplated Greece's exit
from the Eurozone, European leaders have altered the game 's rules, even if Grexit hasn't
happened so far. For now on, currency risk will be a significant financial market issue, even
more so than it has been in the past. Rather than a real monetary union, the Eurozone is
preserved correctly as resembling a currency board. In these conditions, it will take a very long
time for economic integration between the centre and the periphery, if at all. Not only because a
new financial crisis could erupt, but also because of the rise of anti-euro populist parties. Citizens
in Europe will turn to these parties if they see that the political system can not cope with the
problems that lie ahead.