Lack of enforcement made room for crisis

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Lack of enforcement made room for crisis


Scholars and financial gurus were cautious about adopting the euro in the past, but few predicted that the worst fears would be realized.

However, the currency that is used by 17 of the 27 European Union members had flaws from the beginning.

It was created by the terms of the 1992 Maastricht Treaty. To join in the currency, member countries are required to meet stringent criteria, but the problem is that there are no penalties forcing them to abide by the rules.

These include one stating that they should have a budget deficit of less than 3 percent of their GDP, but even Germany, the biggest economy in Europe, failed to meet this criterion.

The so-called PIGS countries - Portugal, Ireland, Greece and Spain - are guilty of much broader violations.

The treaty also called for a debt ratio of less than 60 percent of GDP, low inflation and interest rates close to the EU average. But these rules were largely ignored after the countries were allowed to join the euro zone.

The euro was introduced as an accounting currency on Jan. 1, 1999, but coins and bank notes did not enter circulation until January of 2002.

The currency is also partly responsible for the financial crisis in the euro zone as these countries could not control their own key interest and exchange rates.

In theory, as a country’s account deficit increases, the value of its currency should fall, which would eventually reduce the country’s imports. Greece also experienced high inflation after it joined the euro zone.

By Limb Jae-un []

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