The Euro in Crisis: Decision Time at the European Central Bank Harvard Case Solution & Analysis

Case Overview

The case illustrates the dilemma that European Central Bank (ECB) faced when they were asked whether to bail Greece or not. Their ultimate objective was to regulate price stability within the Eurozone and to make sure that the euro was kept protected.  However, intervening in the internal fiscal matters of a country would discourage frugality and give out a message that if a country is unable to take care of its fiscal matters then they can seek help from ECB.

Financial ministers would no longer feel the pressure to negotiate financial policies within their countries no matter how much the financial matters deteriorate there would be an extra body to intervene and inject money which would smoothen the situation; this kind of behavior was not to be encouraged! Spain and Portugal were the other contenders for receiving a bailout and their bailout was not easily absorbed into the balance sheets as there were larger countries then Greece.

The case gives a clear understanding of how a common currency came into being and from the 1992 Maastricht Treaty which proposed a single currency for all the European states provided that they meet a certain criterion called the “euro”. Euro was launched as an accounting unit in 1998 and then as paper currency in 1999 with England and Denmark having negotiated a separation from being euro members.

The new currency was met with criticism and skepticism, but gradually it carved a place for itself and proved that it was to become a stable currency. The case also outlines the roles of France and Germany being the largest economic players who would play a major role in financing the bailout as the Greek economy sank further and further. As the Greek tragedy unfolded, the case describes ECB was left to decide whether to intervene or not.

Analysis

Having gained an understanding of the case and all the stakeholders within the scenario the first analysis is whether coining a common currency for the European States was a wise decision, especially in the context of globalization. Globalization has become a buzz word today as it has become increasingly relevant to all aspects in life today.

The economic scenario is no exception to being affected by the phenomena known as globalization. There have been many attempts to define globalization and one attempt was made by the (GCSP) Geneva Center for Security Policy in their study which understands that globalization has a vast impact and it brings the concept of economic integration to light and is one of the most influential role it plays(Al-Rodhan, 2006).

Through a comprehensive study of all existing definitions of globalization the authors have developed the following precise definition that describes Globalization as a process of encompassing the causes along with the course and consequences of both human and non-human activities of transnational and transcultural behaviors.

Euro has given many benefits to the world as it has opened gateways to form a global economy indeed, if not, then it created one after its introduction. The ripple effect upon less economically developed countries has been severe with opening up investment and trade portals for them as well as being a strong currency reserve money in which the euro-zone has at least become more tolerant of economic shocks or sudden changes as the currency is more resilient and stability prone.

Regulatory authorities and the numerous stakeholders foresee the inevitable disasters and to a certain extent can contain the damage away from the euro-zone.  Euro was introduced amid great criticism but within ten years of its introduction it has risen to the occasion and been the source of numerous strengths and opportunities. The single market made because of the currency works more efficiently compared to its individual counterparts (Yotopoulos, 2004).

Extra costs, various risks, transparency issues, and cross border transactions were eliminated after the introduction of the single currency. Within the euro zone businesses could be conducted, the lowest cost product can be found or the highest value service and investments are made in a wholesome and safe manner (Barry, 2003).

The euro hasn’t been able to paint a complete rosy picture, and there are some gray areas still hidden in it. Starting with its membership criteria coined in the Maastricht treaty is being violated by the current members and there has been a widespread outrage because there was no swift action taken against them at the onset of their failing........................

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This case traces the origins and evolution of the European Central Bank, with attention to its 2010 decision to buy Greek sovereign debt.
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by Gunnar Trumbull, Dante Roscini, Diana Choi Source: HBS Premier Case Collection 17 pages. Publication Date: December 11, 2010. Prod. #: 711049-PDF-ENG

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