Evaluate the Approaches to Improve the Low Effectiveness of the Euro Emergency Mechanism

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Extended Essay

Evaluate the Approaches to Improve the Low Effectiveness of the Euro Emergency Mechanism

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Written by
JINGJING LI (AccFin 5)

Directed by
Jean Sherratt

August 2012

University of Glasgow Language Centre EFL Unit

CONTENTS

ABSTACT

INTRODUTION......................................................................................................1

2. CAUSES OF THE LOW EFFECTIVENESS........................................................1

3. SOLUTION ONE: THE EMF.................................................................................1 3.1. WHAT ARE THE EMF AND EFSF?..............................................................1 3.2. ADVANTAGES OF THE EMF.......................................................................2

4. ANOTHER APPROACH: EUROBONDS............................................................3

CONCLUSION........................................................................................................4

REFERENCE...............................................................................................................5

ABSTRACT

Currently, the whole euro zone countries still are traped in Euro Crisis. this situation tells us that it is necessary and urgent to improve euro emergency mechanism to cope with this crisis. Some approaches are introduced and, among them ,the EMF and Eurobonds attract most attentions. Both the EMF and Eurobonds are proposed idea which need to be discussed. Knowing their advantages and drawbacks is quite important before making decisions. The purpose of this essay is to analyze the main reason of low effectiveness of the euro mechanism and critically evaluate these two solutions and discuss the prospects for the future.

Evaluate the Approaches to Improve the Low Effectiveness of the Euro Emergency Mechanism

1. INRRODUCTION
In December 2009, three global credit rating companies (Standard and Pooks, Moody's, Fitch ratings) cut Greek sovereign rating and this debt triggered Euro Crisis quickly. After that, the euro countries started to find a solution together but they failed. During this process, the EU was unable to put forward to effective solutions, leading to the crisis intensifying. It reveals the serious drawback of euro emergency mechanism. This essay analyses the reason for low effectiveness of euro mechanism and focuses on two practical solutions (the European Monetary Fund, Eurobonds) aiming to improve its shortcomings.

2. CAUSES OF THE LOW EFFECTIVENESS
Generally, complex decision-making regulations and lack of super sovereignty mechanism are the reasons why the euro mechanism does not operate well. Based on the Euro monetary system, when an economic crisis happen, European countries cannot make the monetary policy by themselves to cope with it. Instead, European Central Bank (ECB) makes monetary policy for the whole euro zone.So, the EU countries need to face crisis and work out problems together. However, the European Union has a long transmission chain of the decision-making and execution, leading to low efficiency of macroeconomic regulation and control. So it often misses the best time to solve the problem. That means, EU needs some super sovereignty mechanism to simplify the decision-making process.

3. SOLUTION ONE: THE EMF
3.1. WHAT ARE THE EMF AND EFSF?
The improvement of the euro emergency mechanism may occur by some means, containing establishing a European Monetary Fund (EMF) (Gros & Mayer, 2011). The EMF is a suggested international institution to provide financial support to euro zone members during the crisis. According to Schulmeister (2012), it will help European Union to restore finances from public along with the European central bank and European Commission. Basically, the EMF is put forward to replace the function of the European Financial...
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