Tuesday, October 25, 2011

The Euro is NOT the Villian

In Antonio Fatas’ Article “The Euro’s Role in the European Economic Crisis,” he disputes the theoretical argument that manipulation of exchange rates can be used to smooth the ups and downs of business cycles.  The world economy, including the United State’s economy, is threatened by conditions in several small European countries.  In Ireland, Italy, Portugal and Greece, liberal governments have historically provided generous entitlements to the citizens of the countries.  However, their government expenditures have been far greater than their tax revenues collected.  As a result, several of the smaller European economies, especially that of Greece, are currently threatened by government debt default.  Apart of the creation of the European Union involved the creation of a standard European currency, based on the Euro, with individual countries releasing control of their historical currencies in order to encourage free trade throughout the European continent.  In several European nations with marginal economies, the loss of control over currency has added to their economic woes.  In the old system where each country controlled the value of their own currency, each sovereign nation had the power to devalue their currency in order to promote growth of their GDP, allowing them to make their debt sustainable.  In his analysis, Fatas fails to conclude that currency valuation has a major impact on the economic health of the EU members, using Sweden, one of the best performers, and Greece, one of the worst performers, as examples.  The economic health of European countries appears to depend primarily on their ability to produce products and services for export rather than on currency exchange rates.

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