The idea of a unified currency was created in Europe in 1992. In 1999, the Euro was officially announced as the currency for the 16 participating countries in the Euro-zone. The idea behind it was simple and intelligent. The single currency brought the benefits of integration and scale to its members thereby improving their trade efficiency. When small parts integrate to form a larger part, then the scale helps garner better bargaining power.
It also helped bring economic stability in the region as member countries were required to adhere to strict guidelines on deficits, inflation and debt ratios.
However the recent crisis in Greece and the subsequent explosion in Ireland, provide a totally different picture. Economists from across the world have blamed the single currency regime for the problems in Greece and Ireland and other small member countries in the zone. They claim that the savings flowed from economically stronger economies like Germany into the economically weaker economies like Greece and ended up creating asset bubbles there. This has led to the crisis situation that is now being witnessed by most of them.
While it is true that creation of the Euro allowed countries like Greece and Ireland to borrow money at interest rates that were cheaper than what they were before the creation of the Euro. This created cheap borrowing that fuelled the boom in their economies. However, this is not the only thing that landed them in the mess that they now face.
The main problem is that the money so raised through these borrowings was used for investing in property bubbles rather than productive investments like infrastructure. It is common sense that it is the latter that provides future economic growth. Investment in property bubbles just creates profits for a short time. When the bubble bursts, everyone feels the heat. And this is exactly what is happening in these economies. Greed, herd mentalities and pure foolishness of both banks as well as the government led to this mistake.
But even now, they do not accept their fault and blame the Euro for the crisis. We wonder when would they wake up and smell the coffee. Unless they do, we can expect more crisis related news from Europe to flood the headlines in the coming days.