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Prisoners in Europe; The Spainundrum December 14, 2010

Posted by Avu in Section 4.

The Spanish situation regarding their recent economic issues brings into light the negatives of having a single collective currency. However, perhaps ironically, Spain was a primary backer of the Euro, at least in the 1990s when the endeavor was first underwent. Therefore, there are a slew of pros and cons of having a single shared currency.

Spain experienced massive economic growth directly after the integration of the Euro. This is because European funds could pour into Spain, facilitating the spending required to catalyze economic growth. This is naturally a positive point of having shared single currency. Private sector spending is extremely important for economic growth, and for that reason, the influx of European funds into Spain were a great positive, and a pro towards having single currency.

However, there are naturally negatives related to having a single currency, as exemplified by Spain’s economic struggles related to the Euro. Due to the housing bubble burst in Spain, there were huge deficits that subsequently had to be dealt with. This is similar to the crisis in the United States with one key difference. The USA, with its own currency, can use its policies to devalue its currency to bring it back towards balance. However, being part of the Euro, Spain cannot do that, and is therefore a prisoner to its fiscal situation as a member of the Euro. The lack of direct control is a clear negative in having a single currency. Furthermore, Spain is now in a situation in which it is worse off than it would be if it never adopted the Euro. However, should it leave the Euro, the repercussions will be even worse than before. The quagmire that Spain is in is the epitome of the negatives of a single currency.

To balance the pros and cons, with the historical evidence, mainly driven by Spain’s issues, seems to indicate that a single currency is not an economically suitable endeavor.



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