Is a Common Currency in Europe Sustainable?

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The continued existence of the Eurozone is in question, as demanded bond yields in Italy and Greece ascend to new heights, and governments are unable to budget their future outlays. Austerity is often proposed as a means to allow these troubled governments to pay back their debts in the future, but many question whether it can truly lead to growth. The breakup of the Eurozone, while very possible, threatens to spread financial instability to other European nations and even the United States. Originally designed to ensure financial stability, the common currency area appears to restrain policymakers both fiscally and monetarily in these times of economic depression when they might benefit most from expansionary policies. A key problem exists with the European Central Bank dictating a unified monetary policy for states experiencing different economic scenarios. How could the European Central Bank effectively meet the needs of Greece and Italy by providing a lower interest rate without fueling inflation in Germany and possibly France? This paper argues that Europe may not be suitable for a common currency, and the central bank, in its current form, faces an insurmountable task in attempting to meet the needs and desires of every policymaker and member-nation in the Eurozone.

There is little question that a common currency can spur economic growth. Mundell was the original author on the topic, wondering how large of an area would be optimal and what criteria would be most useful in determining such an area. He argued labor and capital should be mobile between states for their use of a common currency to be beneficial (663). It is important to note that labor in the Eurozone is clearly not perfectly mobile due to language barriers, ...

... middle of paper ...

...: 109-15. Web.

02 Dec. 2011.

Lapavitsas, Costas, Annina Kaltenbrunner, Duncan Lindo, J. Mitchell, Juan Pablo Painceira, Eugenia Pires, Jeff Powell, Alexis Stenfors, and Nuno Teles. "Eurozone Crisis: Beggary Thyself and Thy Neighbour." Journal of Balkan and Near Eastern Studies 12.4 (2010): 321-73. Web. 01 Dec. 2011. .

Massmann, Michael, and James Mitchell. "Reconsidering the Evidence: Are Eurozone Business Cycles Converging?" (2003). Web. 05 Dec. 2011. .

Mundell, Robert A. "A Theory of Optimum Currency Areas." The American Economic Review 51.4 (1961): 657-65. JSTOR. Web. 28 Nov. 2011. .

Obstfeld, Maurice. "EMU: Ready, or Not?" (1998). National Bureau of Economic Research. Web. 01 Dec. 2011. .

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