As we know, the monetary policy is uniform, however, at the same time, the fiscal policy is decentralized. Some countries, with an increasing external surpluses and being more and more competition, implement the fiscal policy at fixed exchange rate that means, a lot expenditure on the labor cost.
On the contra, some countries, with a highly fiscal deficit and on housing bubbles, increase their economy by using the lower rate of interest, lower cost of refinance.
After 2008, the world financial crisis, those inverters and speculators widened inters rate disparities in EU and weakened the single currency notion.
The reason for this damage may be stem from the respect and insufficient observance of the rules agreed under EMU which are decided in the SGP or the Stability Growth Pact. There is lacking an effective instrument to address systematically macroeconomic imbalances.
Troubles inherit from the theory
Referring to the definition of the optimum currency area, Eurozone is not regarded as an optimum currency area. It is a kind of a geographic area, in the area the single currency can produce the greatest economic benefit. There is lack of flexibility in Eurozone in terms of capital mobility, labor and wage because there is no adherence to either of the two. A very large common budget is essential so as to face the probable asymmetric shocks by which some of the members are impacted. As one or many members raises their debt and spending disproportionately thus there is a need of a single monetary policy together with a common fiscal policy. This system has some capricious effects, in the circumstance of divergent growth and inflation (Mundell 1961).
Build-ups to the Eurozone’s sovereign debt crisis
In past, because Germany, France and Italy were growing slowly, which takes represent the two-thirds of Eurozone GDP, so the ECB was keeping its intervention rates and repurchase agreement at lower rate? On the other hand, Spain has a higher rate. This measure is an additional tool for managing money market interest rates, especially, trading in a foreign exchange rate, take Germany be an example, there has been intervention in the trend of exchange rate by the Bundesbank at times when deutsche bank was appreciating and when it was depreciating.