The Eurozone is an economic system set in motion by 19 European countries within the European Union, which have all adopted the use of the Euro as their primary and sole legal tender. It’s been criticized for many reasons, but critique means very little without contrast. Therefore, the following gives a comparative viewpoint between the economic sustainability of both The Eurozone and The United States.
Fiscal Federalism Network
This is the term used to describe the complex economic relationships between a central government and its subcentral governmental bodies.
As an example, let’s assume that the U.S state of Kentucky has a statewide economic failure, leading to high unemployment rates, decreased GDP, etc. Since the majority of the remaining states are unlikely to be in the same position, the federal economy can shift its spending to aid the wounded appendage.
All of the countries within the Eurozone are separate federal entities. This presents several issues, but one of the largest is this lack of a fiscal federalism network.
In the U.S, we have two federal insurance agencies that back our depositors and our financial institutions, no matter where they’re located in the U.S.
The FDIC (Federal Deposit Insurance Corporation) and The NCUA (National Credit Union Administration) both ensure every dollar that is deposited into a U.S bank or credit union.
Each country in the EZ only insures banks within that country, without exception. This means that losses can go unnoticed from one country to the next, ultimately leading to discrepancies throughout.
The lack of fiscal flexibility under the EMU is detrimental to its sustainability. Participating countries are prohibited from printing their currencies to pay off debts, or competing with other European currencies.
With each country having its tax policies and spending priorities, it’s impossible to balance sovereign debt under the ECB.
Contrarily, U.S centralized banking abides by the federal tax policies and other factors which allow for debts to be paid (even if they go defaulted for a period).
As a direct result of decentralization, early in the Eurozone adoption, each participating country could take out low-interest loans from the ECB. When it was time to collect, it was soon realized that the bond yields differed dramatically from country to country.
This could have been avoided if each country would have submitted monetary power to the ECB and collaborated on taxation policies.
The U.S certainly knows about the extremism of politics and it has shown in numerous ways. Still, it remains mostly a happenstance occurrence or a sideshow of propaganda.
With rising tensions in the Eurozone and strong nationalist demeanors toward key factors such as immigration, it’s not unlikely to see a very turbulent societal shift as we’ve witnessed in the previous century as a direct result of similar nationalism.
With Europe’s indecisive attitude toward immigration, they leave a lot of weakness in terms of a sustainable workforce. The aging populace of Europe coupled with the decreasing birth rate and unemployment among the younger demographic sets the stage for a grim economy; even negating the Euro altogether!
By allowing immigration, the U.S benefits in many ways. This not only guarantees a loaded workforce but also a constantly growing young demographic, willing to work.
Let’s face it, Europe is surrounded by places that have no regard for the well-being of their neighbors. The Middle East, Russia, and Africa are just a stone skip from the European border. These are not exactly the friendliest next-door neighbors to have. Realistically, many European nations aren’t even on the best of terms with one another.
By contrast, the U.S has mostly like-minded civilizations bordering it, with a fair understanding of what each hopes to gain from the other. This alone is a huge benefit in terms of economic stability.
Freedom Of Movement
The United States has a very advantageous ability which it takes for granted quite often. The ability to move freely within the country, and facing little or no repercussion from doing so.
You don’t require a passport to move from Ohio to Colorado and even if you did, the language doesn’t change. Neither do the overall belief systems or culture.
By contrast, moving from Greece to Finland poses a great obstacle! Passports are the obvious portion, then account for the language barrier, culture, even ethnicity poses a much greater boundary.
Spending vs Saving
In the United States, it’s hard to conceptualize an idea such as one state affecting another simply by its financial habits. For instance, imagine that Nebraska is known for its population that would rather save its money than spend it. California on the other hand loves to spend every dime it receives. Hypothetically, if an economic collapse were to take place, the spending in California would dramatically decrease, whereas the dollars being saved in Nebraska would never dip even slightly.
Without our federalized economic system, this could create a massive imbalance in the flow of currency throughout the fiscal system. Fortunately, we never have to worry about such an instance.
The Eurozone, however, runs this risk almost every year and will continue this trend unless there is some creation of true fiscal centralization.
The Bottom Line
Eurozone is a young concept with very little planning for long-term sustainability and even less preparation for any possible hindrances. When contrasting the possibility of financial stability with that of the U.S, it’s almost unfair.
At the current rate, it’s looking rather grim for the Eurozone and what it hoped to achieve. Nevertheless, we will all bear witness to the result.