Advantages And Disadvantages Of The Eurozone

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Eurozone: A failed experiment? Classical economic theory tells us that there are five types’ of regional trading agreements that can be created to bolster trade amongst nations. The most binding of these agreements is the monetary union, and the only large scale example in contemporary times is the Eurozone. In this type of trade agreement, all barriers to import and export of goods and services are removed, and the member countries establish common economic policy for the union as well as adopting a single currency. It is a great boon to the member nations’ economies, by removing several of the impediments of international trade such as trade restrictions, and foreign exchange rates on the viability of business.
The Eurozone took shape in 1998, when eleven of the EU member nations met
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Spain, after the collapse of 2008, saw a rise in the levels of personal debt. Although the public debt stood at 60% of the GDP, the problem was due to foreign exposure of private debt. Spanish banks were relying heavily on whole sale finance from abroad. Portugal had a large current account deficit and external debt which was fuelled by private sector borrowing. Greece, Portugal and Ireland were the worst hit whereas Spain & Italy were considered fiscally vulnerable economies.
As evident from the graph, the bond yield rate for Greece was the highest. This meant that the Greek government had the costly credit, due to lenders’ scepticism of the Greek economy. The factors contributing to this was the current level of debt held by the government as well as its ability to return it rather than defaulting on it. Source: Thomson Reuters Datastream as on 11/08/2015

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