European union and its impact on Germany

Abstract

Since January 1, 1999 the world has witnessed one of the most profound and far-reaching economic events of modern history. On that date the European Union (EU) launched the final stage of Economic and Monetary Union (EMU), thereby creating a new trans- European currency, the Euro. On one extreme, the introduction of the euro has been called “an opportunity to achieve the biggest welfare and efficiency gains of any economic event or system in postwar European history” and a “watershed for European business”. From this perspective the euro will unify Western Europe, encourage competition, revolutionize finance and usher Europe into its greatest economic era. On the other extreme, monetary union has been called a “leap in the dark”,” a flawed scheme” and even “an economic and political catastrophe”. Advocates of the euro have maintained that a single currency would stimulate trade and investment, and promote travel, since businesses and tourists who will no longer have to exchange money whenever they cross borders. A single currency would also eliminate monetary fluctuations or devaluations. In addition, the euro was expected to become a strong international currency, able to compete with the dollar and the Japanese yen, fostering a European identity. On the other hand, opponents of the euro fear its effect on increase in inflation, at least inthe short term. Critics also charge the euro would erode national independence, especially in economic policy. Previously each nation had its own central bank to set monetary policy. The Euro zone would have a single European Central Bank that will act on behalf of all members, despite the fact that different nations will have different business cycles. One of the major European economies, Germany, has been reeling under the adverse effects of adopting the euro. German average YoY growth has been just 1.1% compared to a 2.2% average for the euro zone as a whole. For the past three years its economy has hardly grownFor a country with enviably low rates of unemployment in the 1970s, it had over 5 million of its population unemployed by the end of 2003. And though Germany itself had insisted that all countries adopting the euro should never run a budget deficit of more than 3% of GDP, broke the 3% limit itself in 2002. This paper attempts to analyze the impact of the euro on the entire euro zone, while dwelling on its impact on Germany as a case in point. Also the study shall delve into verifying if the reverse effect is true, has the economic weakness of Germany in turnimpacted the economy of the Euro zone.