Now, in its 18th year of existence, the European single currency – the most daring act of integration since the launch of the European integration project – is facing its biggest challenge yet. Greece, Portugal and Ireland are still experiencing economic hardships, even after receiving substantial bailout packages in order to avoid defaulting on their debt. Italy and Spain – the third and fourth largest economies in the Eurozone – are close behind, combining high public debts, large budget deficits, and low growth. Germany and France, considered the most robust economies of the Eurozone, are feeling the strain of supporting their weaker partners, in an attempt to save the euro. The economic importance of this crisis is that the future of Economic and Monetary Union (EMU), the Eurozone, and the European economic integration is at stake.
After a decade of economic preparations and convergence in light of optimal currency area criteria, these Eurozone countries had an extraordinary opportunity to pave the way for rapid economic development and modernization, with sustainable growth rates, and new, open and high quality economic and political institutions after joining this common currency area. Although the economic environment was truly favorable, the ability to exploit these advantages properly for countries, specifically the PIIG countries, was largely based on two major conditions: maintain fiscal disciple and sound finances, while increasing the productivity and the competitiveness of their respective economies. The PIIG countries, especially Greece, did neither. It would have been sufficient if they had used the borrowed funds to spur production capacity, including the export sector, but sadly, this was not the case. After an examination of economic data regarding productivity, unit labor costs, and hourly wage rates, I find that the Eurozone is not currently operating as an optimal currency area, or, at least some member countries, especially Greece, might be better off having their own currencies.