'One of the aims of EMU was that only the global balance of payments Essay

'One of the aims of EMU was that only the global balance of payments of the European Union with the rest of the world be of im - Essay Example In the recent economic epoch it is analyzed that the economic structure of different nations in the euro zone is actually separate. The monetary inflexibility of the policies in the EMU is becoming difficult when followed under the current economic operations of different nations. There is a widespread financial crisis in the European states (Kenen, 2000). The rigid policies of EMU prevent the monetary authorities in different countries to undergo the process of deficit financing that would help the nations to pay out its creditors. The EMU aims at evaluating the currencies of its European states and thus improving their Balance of Trade. It facilitates the nations to collect higher tax revenues and achieve a successful growth in their GDP (Visser, 2004). The essay tries to show how the EMU aims at improving the Balance of Payment (BOP) situation of Euro zone states with the rest of the world. The essay will try to analyze the optimal policy that can be adopted by the European Union to improve its balance of payments disequilibria with the rest of the world. Balance of Payment and its Significance The Balance of Payment helps to take an account of the monetary transactions carried out by a nation with the rest of the world (McCombie and Thirlwall, 1994). ... The current account looks into the trading affairs mainly of tangible goods and services; on the other hand the capital account looks into the inflow and outflow of financial assets in an economy. A nation can have either a fixed or a floating exchange rate. If a country has a fixed exchange rate then the central bank of the nation accepts foreign fund inflow exactly at par with the level of fund that the nation has out-flowed. By doing so the state makes the exchange rate of the economy rigid. The BoP surplus or deficit can only be analyzed in that situation by the reserves of foreign exchange with the central bank. On one other hand if the exchange rate of a country is more flexible than the central bank does not intervene in the matters of goods and service trading. In such situation, the country’s currency evaluates if its exports are more than its imports and the currency devaluates if the imports are more than the exports. The essay will throw a light on the BoP situatio ns of the almost all the states as a whole who are included in the Euro Zone. BoP Situations of Euro Zone The countries in the European Union are undergoing severe financial crisis since the latter half of 2009. The nations are not only facing a sovereign debt crisis but also a crisis in their banking affairs. The Euro Zone nations are lagging behind other nations both in terms of competitiveness and growth. In some of the countries the crisis was so severe that to refinance their state debts they had taken assistance from the third parties. The commercial banks in the Euro zone are undercapitalized (Baimbridge and Whyman, 2008). The configuration of the nations of the Euro zone countries as a monetary