The second major way in which economies recover from asymmetric shocks is through exchange rate adjustments. Yet for individual countries, the euro eliminates this monetary policy instrument, because the euro is now the common currency for eleven different countries. Therefore, currencies can no longer be devaluated at the national level. Another way in Euroland economies dealt with asymmetric shocks before the euro was through fiscal policy adjustment. Usually, when asymmetric shock send a country into recession, government spending increases. As a result governments go into debt during difficult economic times so that they can spend more money on social programs. Such spending introduces large amounts of money into an economy, increasing consumption and economic growth once again and pushing the economy out of a recession. However, the euro restricts such fiscal stabilizers because members must adhere to the new Stability & Growth Pact, an agreement which requires all Euroland government budget deficits to be less than 3.0 percent of GDP. Therefore, it is evident that the euro has three primary impacts on the ability of countries to respond to asymmetric shocks: “it precludes independent interest rate movements: it prevents currency devaluations; and it restricts the ability of government spending to stabilize and economy.”
There is a second major ongoing risk to monetary union. It stems form the fact that European political integration is still not complete. This poses two significant threats to the euro. The first is that member governments may become financially wasteful. This endangers the viability of a single currency. Any single authority does not directly control the daily spending habits of the eleven members. Therefore, some nations may exceed the annual budget deficits outlined in the Stability & Growth Pact without notice, refuse to pay their fines, and become political outsiders to the union. “In this way, fiscally conservative and stable countries may be hurt by the excessive borrowing of others, because the excess demand non the capital market of a heavy borrower push up the cost of borrowing for everyone else borrowing in euros, even though distinct national interest rates still exist.” As a result this may destabilize all Euroland economies.
The euro officially came into being on January 1, 1999 under the full leadership and support of eleven heads of state, thousands of politicians, and hundreds of prominent economists. Whether the euro’s economic advantages outweigh the risks posed by economic shocks and political instability is unknown. The great gamble the EU (European Union) leaders have taken is that modern Europe is entering a new era of adaptability and flexibility that ensures the success of monetary union. So far the advantages of the EMU have come through and are showing positive signs towards the probability of a well-stabilized European economy that will benefit not only domestically but also internationally through economic stability, reform, and growth. Although its success cannot be determined until the next economic downturn, the EMU (Economic Monetary Union) is one the most exciting economic events in recent history.