The recent entry of Croatia into the euro zone has led many to believe that the currency is working well and that the euro crisis of 2011 is a distant memory. However, this may not be the case. The core issues of the euro zone arise when there are deflationary pressures and a large variation in economic conditions among the nations of the zone. Although these issues do not currently prevail, they are still potential threats to the stability of the euro zone.

Inflation rates have been high in the euro zone and are expected to remain high in December 2022. Although high inflation brings its own set of problems, it does not lead to high unemployment and loan defaults in the short term. However, in the long term, politicians may become more attached to higher rates of inflation, making it difficult for the European Central Bank to achieve price stability.

In 2011, the euro zone faced a deflationary pressure on the Greek banking system, which endangered its solvency. This issue, along with some nations having stronger economies than others, led to the euro crisis. Today, these issues are more evenly distributed and the euro has been relatively weak, limiting the downside risk faced by the euro-zone economies. However, these mechanisms do not eliminate the core problems with the euro zone.

One of the potential threat is that deflationary pressures can lead to a decrease in economic activity and an increase in debt defaults. This can be particularly problematic for countries with high levels of debt, as it becomes more difficult for them to service their debt and to stimulate economic growth. Another threat is that if some countries in the euro zone are experiencing strong economic growth while others are in recession, this can lead to imbalances in trade and capital flows, which can make it difficult for the euro zone as a whole to maintain stability.

The euro zone is a complex political and institutional construct, and it relies on cooperation and coordination among its member states. If there are political or institutional challenges that prevent this cooperation and coordination, this can threaten the stability of the euro zone.

External factors such as a global recession, an oil price shock, or a geopolitical crisis can negatively impact the euro zone and threaten its stability.

Additionally, the lack of fiscal and financial integration among its member states, which can lead to imbalances in the economy, making it difficult to manage and stabilize during a crisis.

The fragility of the banking sector in some countries of the Eurozone could be a source of risk for the stability of the zone, as it could lead to potential bank runs and contagion effect among the member states.

These are some examples of potential threats to the stability of the euro zone and it’s important to note that these challenges are interconnected and could interact with each other, making it difficult for the euro zone to maintain stability.