Smaller Economies want to share in Eurozone Monetary Policy Making – After the last major crisis in the eurozone – Greece’s close call with leaving the single currency in 2015 – a colleague predicted that within 10 years, the euro would lose at least one member. However, the opposite has occurred – the monetary union has gained a member, with Croatia joining at the start of the year.
Eurozone Monetary Policy Making –
During the toughest years for the monetary union, one Baltic state after another joined, and Bulgaria is expected to soon adopt the euro as well.
Smaller, open economies want to share in the monetary policymaking of the currency that dominates their trade. However, many Anglo-American economists believe that the euro in its current form is doomed to fail.
Recent years have shown that having one’s own floating currency is not as beneficial as it seems. A falling currency can offset negative shocks by boosting exports, but in a world with long and complex cross-border supply chains, a depreciation can make a population poorer by driving up import prices and not boosting export volumes.
Meanwhile, the advantages of monetary integration are highlighted by Europe’s energy price crisis. Take Slovakia, for example – it has similar inflation rates to its non-euro neighbors, but also has a much lower interest rate (2.5%) than the Czech Republic, Poland, and Hungary.
The size of an economy matters in the global economy, and only the unity of the euro economies gives the European Central Bank (ECB) independence from the US Federal Reserve.
The vulnerabilities that emerged during the eurozone crisis can now be seen as similar to crises that can affect any economy, not just those with the euro.
Many predict that Italy’s combination of high debt and low growth will eventually lead to the euro’s downfall. However, last summer it was not Italy, but the UK’s new populist government that caused market instability with irresponsible policies.
The ECB has an advantage over national central banks in being more independent from political leaders. For example, the Bank of England has greater reason to fear accusations of monetary financing and has been anxious to refute them, while the ECB has set up a permanent instrument to deal with similar occurrences without controversy.
All of this indicates that the euro will become more attractive over time. The appeal of different currencies will also change based on how they handle the introduction of an official digital currency. Currently, only small economies such as the Bahamas and Nigeria have fully adopted digital currency, while China is preparing to scale up its digital renminbi.
Among wealthy economies, the ECB has taken the lead in digital currency. Finance ministers supported the digital euro after Facebook’s 2019 plans for a private global digital payment system. But their support has been strengthened by the potential business opportunities in an economy with secure, “programmable” money.
Officially, the digital euro is still in the research phase. However, politically, the decision to move forward with it is irreversible. Croatia’s recent entry into the monetary union is just the beginning, and future members will also have access to the latest digital currency.
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