The European Community established the convergence criteria. These criteria was established in order to allow its EU Member states to take part in the Euro Zone, and using the Euro, as an official currency. The members of the European Union formed the Maastricht Treaty in 1992. The principle goals of the treaty were to establish an economic and monetary union, strengthen the democratic legitimacy of its institutions, better the effectiveness of its institutions, come up with the community social dimension, and also establish a unified foreign and security policy (Charles 1998).
The criteria contain several principles governing inflation rates, government finance, exchange rate, and long-term interest rates. The percentage points for inflation rates should not be 1.5 higher than the average the top three members states in performance of the EU. Government finance covers both the annual government deficit and the government debt. Under the annual government deficit, the criteria talks about the proportion of annual government deficit to gross domestic product (GDP). This proportion, at the close of the leading fiscal year, must not get past 3%. It can, however, reach close to 3%, and it is only exceptional and temporary excesses that can be granted for such case of exceptionality (David 1999).
The criteria discuss the government debt under terms that the proportion of the gross government debt to GDP, at the close of the leading fiscal year, must not go beyond 60%. If specific conditions make this unachievable, then the proportion must have significantly reduced at a satisfactory pace to approaching the reference value. For applicant countries, they must have joined, for two consecutive years, the exchange-rate mechanism (ERM II) as set in European Monetary System (EMS). Also, during this period, the applicant country must not have devalued its currency. In the case of long-term interest rates, the criteria holds they must not go exceed the last three inflation member states by 2 percentage points (Emil 2009).
In March 2005, the Maastricht criterion was flexed more, under the great influence of Germany and France. This was for the purpose of taking into consideration both the economic and structural reforms. Thus, this paved way for authorization of exceptional and temporary excesses.
The European Central Bank (ECB) was created in June 1988. The currency rates for the 11 member states were fixed and the euro got brought in as the single currency. In 2001, Greece joined the euro area, Slovenia joined as the 13th member in January 2007, Cyprus and Malta joined in January 2008, and Slovakia on January 2009. The inflation convergence and introduction of single inflation targeting across Eurozone have encouraged investors to have homogenous inflation expectations across core and periphery and drove the borrowing yields down.
Current interest rates
Fiscal deficit deterioration
The fully-fledged forecast in May 2011 has led to deterioration of euro area. The extensive debt crisis has reduced confidence affecting investment, and consumption. The worsening environment in economic has discouraged exports. If these trends continue for several quarters, it will greatly affect the prospects of growth. The first and initial GDP improvement signs are anticipated for the second half of 2012. However, this recovery is anticipated to have limited effect on job creation (Charles 1998).
No economic growth is awaited in the current and coming quarters. Therefore, GDP is forecast to improve at a rate of 1/2% in the EU, and the euro zone in 2012. While rates of economic growth will vary across the Union, groups of countries will not be affected by the slowdown.
Extended doubt in financial markets pertaining to public finances' sustainability in some euro area economies, as well as, fears of infection affecting the core euro area countries will lead to inhibited growth. The global weakness the economy, even some of the most crucial partners for the EU, will strengthen this trend. The estimates assume that confidence will bit by bit get back in the second half of 2012.
Inflation is required to fall below 2% in 2012. This has resulted from the lessening pressure from energy prices. The subdued economic activities and increases in wages are meant to hold inflation in check in the course of the forecast period. The detrimental impact of the common currency can be witness in several scenes. For instance Britain has the following features: a lower degree of unfunded pensions; a larger volume of high tech exports; a business more orientated to services; an economy whose income from overseas investment is larger than it is from manufacturing exports; and a comparatively little agricultural, and a comparatively prominent gas, and oil sector. These differences are fundamental, suggesting that EMU is improbable to further British prosperity (David 1999).
The current situation involving the debt issues of Greek require additional thought concerning the sustainability of the Eurozone system. There must be something Primarily not correct if the most likely default of a given country fails to live up to the accounting and fiscal policy for only about 4% Eurozone's GDP can bring about questions concerning the Eurozone survival. Country engaged in irresponsible fiscal policy and in the year 2008, the California state gave to the employees' payment vouchers. This has, however not been given recognition as a default due to the fact vouchers have been honoured by the banks. This concept is seen in the extensions of the state bond swaps of default credit as well as bond ratings (Stephan 2008).
The economy of Californian is relatively large in comparison with that of the Greek. Despite that, there are no remote resemblances to the turmoil and concerns in the Eurozone concerning Greece have taken place in the United States. Any consideration of the problem for the dollar of the United States dollar cannot assist or be considered among the other parts of the nation. The government in Greek has already obtained a considerable help through the involvement of governments in the Eurozone to give loans at interest rates that are below those of the markets. There is no clause of bail out that exists in the Maastricht Treaty.
This must have been able to rule out a number of the recently held discussions. The economy of California may be much bigger inn comparison with that of Greek both in relation to common currency of the area as well as the absolute size. The system of finance may, therefore, be at lesser risk in the United States that in the Eurozone. This kind of reasoning can, however, is put to question. The states in the U.S.A. have got lower powers of tax than the national governments in the Eurozone. The default of California may possible be a threat to the other states in the U.S. through deficit financing. On a different hand, the ration of deficit expenditure to GDP by central governments within the Eurozone is comparatively higher than that of the governments in the U.S. Additionally, a lot of debt in California is held by the state, whereas around 80% of the debt in Greek is externally held (David 1999).
The federal government reserves a lot of power to solve issues of liquidity of individual banks of the United States. The problem in Europe is, by far, self-inflicted. There have been several affirmations by the officials of governments in countries that are members of Eurozone. The growth pack, stability and fiscal discipline are very key and fundamental in the Eurozone. This implies that the default of Greek is a major concern for the euro. The Euro zone is to some extent a victim of misrepresentation by itself. Several years ago, those who support growth pact and stability based their feelings and reasoning on mere politics and this could only improve the fiscal discipline, which happened to be largely desirable. Markets in the financial sector give a clear credence to the generally accepted view that any default of the central government in the Eurozone would make weak the monetary union (Stephan 2008). History may provide several examples of systems of monetary that have managed to go through government defaults but none of which is a resemblance of the Eurozone. If considerable political harmonization is the price that has to be given out for the Eurozone to survive, then the Eurozone most likely has no long-run characteristics.
The stability of monetary arrangement in the Eurozone can only be possible if the monetary arrangement can be able to stand occasional defaults from central governments that are members without extra political harmonization. Eurozone is appropriately armed to handle such Defaults. This is because its own major bank lacks high central government to comply with, the Maastricht Treaty. This in turn guarantees the independence of the central bank as well as explicitly forbidding member governments to bailout other members (David 1999).
Potential risks and solutions
Euro zone experienced a financial decline in 2008 following global financial crises by then. This made Europe to be a verge of collapse. In the Euro zone, there are many sovereign financial crises that emerge as a result of…