Analysis on the Existential Crisis on EMU

Running head: ANALYSIS ON THE EXISTENTIAL CRISIS ON EMU
Analysis on the Existential Crisis on EMU
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1ANALYSIS ON THE EXISTENTIAL CRISIS ON EMU
There were multiple crises that erupted since 2007 in the Eurozone, which continued to
evolve in the light of the crisis through gradual change (Beirne & Fratzscher, 2013). The advent
of Euro was mainly to ensure economic prosperity and convergences along with the setting of a
stronger European identity. However, R. Mundell’s analysis through his theory upon “optimum
currency area”, made it clear that European countries were far too diverse from each other to
share a currency that is common.
It was believed that having a common currency would reduce the asymmetries
subsequently so that stability and growth would prevail throughout the Eurozone. However, in
2008, when Iceland’s banking system failed, a severe debt crisis began which collapsed the euro
and put the whole Eurozone’s financial status in peril. According to a Documentary, “Europe on
the Brink” by Wall Street Journal, the senior officials around Europe in 2010, made the biggest
mistake in their way of handling the crisis (Wall Street Journal, 2012). There were a lot of
summits, meetings and rescue plans that was supposed to solve the issue, yet unfortunately none
of it was acted upon decisively so that the markets could calm down. This was the time when the
crisis actually spread on and beyond Greece, Portugal and Ireland, slowly clawing the infection
towards Spain and Italy. Private Sector was involved in briefing out Europe’s bailout fund and
also the setting of rescue funds. Yet the second bailout crafted for Greece was simply insufficient
and it starved the economy.
Panic set in when Italy found itself in the debt of almost 2 ½ trillion dollars and Europe
was compelled to bailout Eurozone’s third largest economy (Wall Street Journal, 2012). Italy and
Spain were bigger countries which had huge bond markets and multiple European banks were
highly exposed to these two countries. It was erroneous of the EMU to provide no penalty for
reckless spending resulting in the government drowning itself in more and more debt. The