Question

What were some limitations of the Single Currency in the Euro Zone?

Answer 1

Perished from independent monetary policy.
With the establishment of Euro, the ECB and not national central banks which set the euro area interest rate. The ECB also supervises the supply of money within the euro area. Therefore, nation states within the euro area lose the ability to use monetary policy to fine-tune their national economies respectively. Example: Greece struggled to use monetary policy to address its 2011 debt crisis. The commitment to the 1996 Stability Pact has put pressure on these nation states to follow discretionary fiscal policy, because budget deficits must be held within certain acceptable limits.

Risk of developing unevenly within the single currency region.
In theory, the harmonization of national regulations and the implementation of a single currency such as Euro create a single market from the various national economies which join this currency union. The creation of Euro, in the ECB's word, increases the mobility of capital and financial services within the Eurozone. Because of the external economies of scale, enterprises tend to concentrate in some areas. This means that certain peripheral areas within the Eurozone would lose out on jobs and growth.

Some economists argue that the euro area is not a single market, by any way. National economies maintain their distinct characteristics within the euro area and have their business cycles respectively. Thus the ECB's monetary policy can not address individual member states ' economic needs.

As seen in Ireland, Greece and Spain, easier access to loans with lower interest rates can lead to an increase in public debt. For example, when Greece was inducted into the Eurozone, it began to enjoy ECB monetary credibility and began to have access to loans with lower interest rates (as compared to its previously high interest rates due to higher risk premium) and access to a larger pool of loanable funds from other eurozone banks. This led to many of the country's public infrastructure projects, and some with little prospect of profit.