Course Name:

Professors Name:

University Name:

City, State:

Date:

The European exchange rate system

 With the need to reduce the exchange rate variability in Europe to

achieve the monetary stability that would ensure growth in the

member states, the European economic group introduced the system.

Also, the goal was to improve the currencies of nations within the euro

zone.

Causes of crises in the early 1990s

Competitiveness problem: the markets had to identify countries with

the competitiveness problems in the traded goods, rising labor costs

and attacked their currencies. That is to say; the energy cost almost

went up to the extent of reaching the prices of the goods that were

traded.

German unification: the unification of the Dutch society saw a reduced

quantity supply developed a real exchange rate thus the rising prices

of their commodities. The East Germany for example entirely cut an

amount of their products and increased the costs. They unified in

dealing with that and every market that wanted to trade with them

experienced the rise of commodities.

Inevitable policy shifts: the first policies defended the existing parties

thus the members realized that even with the currencies were

persistent and maintained, markets will still make a change in future.

The theory of the optimum currency areas

 The optimum currency areas method is the theories that deal with the

examination of the countries' economies for partnership in a monetary

union and whether they have desirable characteristics to be members.

Again, it acts as the body that determines the future common currency

that member countries might want to acquire. However, the theory

deals with the fundamentals of the trade-off between microeconomic

efficiency and stability.

The member states did not apply the use of the optimum currency

areas, and that is why the euro crises developed. For example, in Spain

and Ireland, low-interest rates fed the housing bubbles and worsened

the subsequent crash. Again, in Greece higher borrowing was primarily

public thus resulting in government debt as well as much lending was

done by the bank.

The euro crises

The euro crises happened during the time when most of the European

countries were faced with reduced financial institutes, and most

Governments had a lot of debt resulting in economic and fiscal

instability of those particular countries. Their businesses went down,

and they could barely fit the market with the grown tax and commodity

price fluctuations.

Causes of the crises

There was the lack of an active mechanism that could prevent the

growth of macroeconomic and fiscal imbalance. For example, the

 Lehman Brothers' bankruptcy and the bank markets that completely

froze.
Also, there was completely no joint eurozone institution that could

absorb shocks. For instance during the US submarine mortgage

problems and credit crunch.

Reforms

System-wide funding: a temporary European financial stability fund

was created with the mandate to offer assistance to euro area member

states. Later the European Council agreed that there was the need for

the formation of a permanent crises resolution mechanism that took

effect in 2012 and replaced the small fund programs.

System-wide banking rules: an independent European Union Authority

which is the European Banking Authority was formed. It had wide

responsibility for supervising, coordinating and advising financing

institutions in banking and e-money rules. Additionally, with the

banking unions created, euro zone banks were to operate under a

standard set rule.

The common agricultural policy

That is the agricultural policy of the European Union. It put in place a

system of agriculture that subsidies and other programs to reduce cost

and ensure rural development as its aims. However, it has been a

difficult area to reform since it is a problem that started in the 1960s

and has developed to date. Although the agricultural policy was formed
 to: (1) reduce price fluctuations (2) raise farm incomes (3) increase

food security (4) protect rural communities.

CAP Reforms

Attempts to supply control: that was to experiment ad hoc monitor and

discourage production. Although it failed since technological

development and high prices overwhelmed supply control.

MacSharry reforms: that was acquired in 1992, and it targeted both

internal and external pressures to compensate farmers with direct

payments and set aside schemes for large farms. However, this policy

did not cut all CAP cost, but it set the right direction.

The 2003 CAP reform: that was a reform of both internal and external

forces. It ensured direct payments that were reduced to a low single

farm payment. Also, it cut direct payments to large-scale farmers so as

to increase rural development. That was a reform that led to a massive

shift from price support to direct payment, reduced dumping, and

storage.

The 2013 reform: this reform was part of the 2014-2020 negotiations

on financial crises and austerity agenda. It had to reflect on national

lists such as the UK rebate' and the degree of funding for the CAP. It

thus ensured a basic payment based on eligibility of the land and

distribution of funds within sectors and geographical regions. And, to

accept differences in quality of land that every member state can

identify.