The disadvantages of joining the euro: lessons for Romania

• Author: Tierean, O. M. - Tierean, S. H.
• Position: Dept. of Marketing, Tourism and International Relations, Transilvania University of Brasov - Dept. of Business-Society Management, Erasmus Research Institute of Management
• Pages: 163-168

Bulletin of the Transilvania University of Braşov • Vol. 6 (55) •No. 1 - 2013

Series V: Economic Sciences

THE DISADVANTAGES OF JOINING

THE EURO: LESSONS FOR ROMANIA

O. M. IEREAN

1 S. H. IEREAN2

Abstract: The article covers the disadvanta ges the countries that ar e

currently within the Eur ozone a re facing at the moment and how these

disadvanta ges will impact the Roma nian society if it joins the Euro. The

article is divided into 3 chapters: the deflationa ry impact, the decline in

competitiveness and asymmetr ic shocks.

Key words: Euro zone, deflation, competitiveness, asymmetric shock.

1 Dept. of Marketing, Tourism and International Relations, Transilvania University of Braşov.

2 Dept. of Business-Society Management, Erasmus Research Institute of Management.

1. Introduction

The experience of the past few years has

been that membership of the Euro can

devastate an economy. Given a chance,

half of the members of the Euro countries

would wish they had never joined. Greece,

Spain, Italy, Portugal, Ireland would all be

better off outside the Euro [7]. But leaving

the Eurozone is even more difficult.

Membership of the Euro dooms an

economy to inflexible exchange rates and

can create a very strong deflationary

tendency.

The result is mass unemployment,

political instability and a feeling of being

squeezed and ordered around by European

Union officials. An economic system

which creates recession and unemployment

cannot help in any way improve European

unity. The most important causes that lead

to this presumption are the deflationary

impact of the Euro that is threatening to

create splits within Europe, the decline in

competitiveness that affected more

countries than it helped and asymmetric

shocks which may be found in most

currency areas.

2. The deflationary impact

Deflationary bias means that there is a

tendency for the economic policy to

promote lower growth and lower inflation.

It means that there are pressures which

keep demand subdued leading to lower

inflation, higher unemployment and lower

growth.

The ECB has a very tight agenda to keep

inflation less than the target of 2%. For

example, in 2011, cost factors led to an

increase in the headline rate. The ECB

responded by increasing interest rates. The

Bank of England responded by keeping

interest rates at 0.5% (even though

inflation was much higher in the UK than

EU). The Bank of England argued it was

important to consider wider economic

issues of growth and unemployment [4].

The ECB is much less willing to accept

even a temporary deviation from the

inflation target over fears temporary

inflation would increase inflation

expectations. Thus, the ECB is willing to

risk lower growth than risk higher

inflation.