Fiscal mismanagement meets the euro

The European Union (EU) faces deep and persistent fiscal problems. This has led to a financial crisis that compromises the future of the Eurozone. This paper studies the effects of institutions on the official currency of the Eurozone. In order to depict and explain the role of Europe in the world economy, this study examines Eurozone trade with the world. It assesses the institutional structure of the Eurozone as it relates to the financial crisis and argues that the crisis is the result of fiscal mismanagement and the absence of an effective fiscal regulatory institution. The paper offers potential solutions to the financial crisis of the European Union and scrutinizes the advantages and disadvantages of a common currency, emphasizing the important role of political, legal and economic institutions. The best solution to the crisis will include the establishment of such an institution.

 Originally formed under economic and political pressures, the European Union traces its origins to the European Coal and Steel Community, the European Economic Community, and the European Atomic Energy Community, which were formed in the years 1951, 1956, and 1958, respectively. These institutions grew from the political need to prevent conflicts and the economic necessity for reconstruction following the devastation of the two World Wars. The advent of the Eurozone in the year 1999 completely changed the environment for the European financial institutions. The Eurozone, which includes 17 of the EU’s 27 members, is now bound together under one common currency with its monetary policy administered by the European Central Bank (ECB).