Can Euro Zone Survive and Long Prosper?

Abstract

The current problems on the aftermath of the global credit crunch left the weakest Euro countries in the turbulence of a debt crisis, which has been spread in five countries (Greece, Ireland, Portugal, Italy and Spain respectively) and raised the question of a Euro zone future survival. The surviving barriers have to do with limitations and restrictions on the single market, the lack of political union and different monetary policy targets. Incentives to secede are also present. However, a possible withdraw of a country would have high cost for all the participants and it could lead to monetary union’s demolition. The costs related with a possible withdraw are high, thus it is difficult for a country to leave a union. In the recent debt crisis, the countries accepted bailouts from their counterparts and international organizations in order to prevent the Euro zone collapse spreading the crisis further. Three possible Euro zone future scenarios are analyzed. The volunteer or not breakup of the union and reintroducing of national currencies, the breakup of the Euro zone to two currencies consisting Optimal Currency Areas (OCAs)is analyzed by using thirteen equally weighted optimum area criteria and the imposition of an interest equalization tax(IET) in order to make the Euro zone a single OCA. The results show that the asymmetries lead to the crisis persists in a possible two Euros area and this scenario cost is higher than union dissolution’s. An IET can help Euro zone in the short time to develop sustainable characteristics.