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1 Evolution of the EU 2 List of Countries 3 Economic Benefits 4 “One Currency For One Europe” 5 European Union-Treaties 6 Trade Patterns in the EU 7 European Union- Fallacies and Crisis
8 Greek Default 9 European Union Future
10 Conclusion-Greece should exit the EU
The idea of creating a unified Europe was not a new one. In the 9 Century, the Frankish
emperor Charlemagne dominated much of Europe. At the beginning of the 19 century, Napoleon Bonaparte attempted to control most of Europe. In the 1930’s, Adolph Hitler intended to conquer all of Europe. The key words here are dominated, control, and conquer. Throughout
history, wars were fought in Europe over land, religion, and resources—all with devastating results. At the end of World War II, it finally became apparent that violence and hatred could not unify Europe. In 1945, many European cities lay in ruins and people were homeless. Factories were destroyed, and bridges and railroads were bombed out. Without their homes and livelihoods, many Europeans were left in despair, not knowing how their lives could ever be normal again. It was going to take an entirely new way of thinking to rebuild Europe and help the Europeans rebuild their lives: people were going to have to work together peacefully. The ancient rivalries and prejudices had to be put aside and a new spirit of cooperation had to take their place. And
cooperate they did in ways that were nothing short of miraculous! The Marshall Plan and the Berlin Airlift were just two examples of how allied nations worked together to help, instead of punish, the vanquished nations of World War II. They marked the dawn of a new era of European history, and set the stage for a peaceful unification of Europe. Already in 1921, the governments of the Luxemburg and Belgium had the idea that if they could work together economically, and make trade agreements, they would be more able to compete with larger countries. During World War II, The Netherlands and Belgium also took steps toward economic cooperation. Finally, in 1948, The Benelux Customs Union was formed, which enabled the free movement of goods, workers, services, and capital between the countries. In 1958, the Benelux Treaty was signed, formally establishing the Benelux countries as a free trade unit. Economists and statesmen in other European nations were also suggesting the possibility that an integrated Europe could have both economic and political advantages. For example, Jean Monnet of France believed that a union of European nations could better compete against countries with
and eliminated tariffs and quotas on trade in iron ore. France. the other European countries wanted to monitor it closely to be sure they weren’t using their coal and steel industries to rebuild a powerful military. Luxemburg. coal. such as the United States. West Germany and Italy. the Netherlands. It laid the foundation for the future stability and prosperity that would become possible in a unified Europe. As West Germany was beginning its ―economic wonder‖. and a court of justice. Thus. and steel within the six-nation economic union. and recovering admirably from the devastation of World War II. the European Coal and Steel Community (ECSC) was formed in 1951 and became effective the next year. a council of ministers. French foreign minister Robert Schuman believed that the European producers of coal. such as France and West Germany. as Monnet had suggested. On the one hand. As a result. it would enable France and other European nations to keep a watchful eye on West Germany’s quickly reviving economy. In order to supervise the operations of the ECSC. coal and steel in Belgium. created the European Coal and Steel Community (ECSC). Likewise. On the other hand. It took effect in 1952. six European countries began the path toward a unified Europe Evolution Part 1 The Treaty of Paris. signed in 1951. this integration could give those countries more economic clout in the world markets. The ECSC integrated the production and trade of the iron.a larger pool of resources. the Treaty of Paris provided for an executive council. could integrate their coal and steel industries. in 1952. These groups of administrators had very limited power but they were the beginning of a cooperative organization involving a very important part of European industry. coke. a common assembly. 4 .
and Denmark. however. and created the European Economic Community (EEC. more unified European organization for several years. These treaties were called the Rome Treaties. Also. and the Common Market gradually expanded free trade to include all other areas of the member countries’ economies. there still was no general election of a European Parliament by the citizens of the member countries. or Common Market) and the Euratom. The EC now consisted of nine countries: France. but not agricultural products. For example. Political tension between several European leaders prevented the formation of a stronger. each of the nine EC countries still had its own currency. This would all change soon. Luxemburg. and was much less powerful than the Common Market.The founders of the ECSC must have succeeded in gaining the trust and confidence of its citizens. Austria. Norway. thereby increasing their prosperity. Switzerland. Belgium. after several changes in leadership and much negotiation. the United Kingdom. three more countries from the EFTA joined the European Community. This organization relaxed tariffs on industrial products. Sweden. though. Ireland. and Portugal created the European Free Trade Association (EFTA). Euratom was created to promote the peaceful use of atomic energy. much more remained to be accomplished before the EC would have the political strength and influence on world affairs that the European Union has today. This enlarged European Community was very successful in promoting economic cooperation among its members. as plans were already 5 . the Netherlands. the United Kingdom. Denmark. after the ratification of the Merger Treaty. In 1973. West Germany. the EEC also became known as the European Community (EC). Italy. In 1968. because in 1957 and 1958 two more treaties were signed which greatly increased the areas of cooperation between the six countries. Right after the Rome Treaties established the formation of the Common Market.
the European Community would become a powerful organization that not only promoted prosperity for its members. through many more treaties and steps toward unification. the first direct election of members of the European Parliament took place. and standardize their policies on such issues as health. Finally. and Portugal (1986) entered the European Community. This act would ultimately provide for the total integration of the economies of the EC nations. progress was being made to unify the European economies and direct representation was given to its citizens. In the 1980’s. raising the number of EC countries to twelve. These two organizations helped regulate the budgets and the currencies of the EC countries. and the environment. ordinary European citizens. The European Court of Auditors was established in Luxemburg in 1977. Spain (1986). and represent. and Madame Simone Veil was its President. Gradually. Gradually. employment. Greece (1981). in 1974. the head leaders of the EC countries began meeting three times per year as an organization officially called the ―European Council‖. and the European Monetary System was put into effect in 1979.underway to create an organization that would be elected by. Another important development of this decade was the creation of the Single European Act. Also in 1979. the most significant event of the 6 . Evolution Part 2 During the 1970’s the European Community continued to strengthen its authority over the economies of its member nations. Economists from the nine EC countries were also working together to regulate their currencies and protect their economic stability. Finally. but also the security and environmental welfare of its citizens.
created a whole new dimension to the European Community. and a tremendous effort would be made to help the former Soviet Block countries achieve higher social and environmental standards for their citizens. negotiations and legislation continued to create the framework for the new European Union (EU). The new currency is called the euro (€). The decade of the 1990’s also brought three more nations into the EU: Austria. By the end 5 4 7 . in 1999. the Maastricht European Council adopted the Treaty on European Union. which defined the EU as it is known today. The Maastricht Treaty also gave the EU more authority over such issues as security. because they continued to work toward greater international cooperation. This treaty. but also involved the standard of living of every citizen of the EC. Overall. the Schengen Agreement was signed. Finland and Sweden joined in 1995. Finally. Adding these new nations. also known as the Maastricht Treaty. and consumer protection. The main concerns of the member nations were not only economic. called for the EU nations to use a single currency by 1999. giving the EU even more power and responsibility regarding its citizens. and the beginning of the end of communism in the Warsaw Pact nations. In the 1990’s. which again increased the size of the European Community. In 1990. the people must have felt that the increased stability provided by a unified Europe was an important goal. East Germany became united with West Germany. Economic aid was given to the new Mediterranean members to help strengthen their economies. in 1993. and enacting the Single European Act. the environment. the Amsterdam Treaty was signed and put into force. making it possible for people to easily travel throughout the member countries without having to show passports at border crossings. Most significantly.1980’s was the fall of the Berlin Wall in 1989. and there are strict qualifications regarding economic stability that must be fulfilled by the EU nations that use it. education. health.
With the accession of twelve new countries. and Sweden fulfilled the requirements set by the treaty. The thirteen nations currently using the euro are: Belgium. This almost happened. but not quite. Austria. on the back sides of their coins. Finland. The Netherlands. 2007 and Malta and Cyprus will join on January 1. Portugal. 2008. So. and Slovenia. yet diverse. and in 1999 euros were used for electronic (computerized) transactions only.‖ Slovenia began using the Euro on January 1. yet . Evolution Part 3 According to the Maastricht Treaty. Italy. but did fulfill them one year later. eleven of the fifteen EU nations were using a single currency by the designated year. The United Kingdom. This indicates that the European Union is unified. Luxemburg. all twelve countries have special symbols. Ireland. in theory. with each country maintaining its own identity.th of the 20 century. such as a king or a famous building. 8 . Spain. but chose not to participate. It wasn’t until 2002 that the individual currencies of the participating twelve nations were replaced by actual euro coins and bank notes. the transition could not happen ―overnight‖. all European Union countries were to be using euros by 1999. each one must apply separately to join the ―Euro Zone. Germany. France. Denmark. The Euro is the common currency . Greece had not yet fulfilled the requirements in 1999. the EU had become a powerful political and economic body consisting of 15 European nations. Greece. However.
and people who work in stores. as it continues to compete well on the world market The European Union is not at all like the United States or any other single country. and learning to recognize all the new coins and bank notes took time. that consumers do have confidence in the EU currency. Any citizen of the EU may be a candidate and all citizens may vote. It is a complex system that enables its member countries to work together to preserve peace and promote prosperity. converting prices from old currencies to the new one was a huge task. It also supervises the European Commission and can vote to dismiss them. the 2004 enlargement and accession of Bulgaria and Romania in 2007 has increased the number to 785. No longer does money need to be changed at every border. Also. The number will reduce to 736 after the 2009 elections. and the President of Parliament is chosen every 2 1/2 years. getting accustomed to new things can often be difficult. and many consumers felt that everything became more expensive as the prices were ―rounded up‖ to euros. The elections to choose Members of Parliament are held every five years. skeptics were concerned that the euro would be too weak to hold its value against the US dollar and other major currencies. and what they do: The European Parliament—This is the only body of the EU that is directly elected by the citizens of the member countries. not everyone was delighted when the old currencies were replaced with the new one. At first. In 2003 there were 626 members of the EU Parliament. It works with the Council of the European Union to pass laws and approve the budget. 9 . The Parliament meets in Strasbourg every month and additional meetings are also held in Brussels (see photos above). while maintaining their individual national interests. It also is unlike any other international organization.Since 2002. however. The following is a list of five EU ―institutions‖. and other places of business can now work with one currency. restaurants. For some people. However. the use of euros has made life much easier for tourists and merchants. Time has proven. if necessary.
and they can be dismissed or censured by Parliament. businesses and individuals. the Court of First Instance was created in 1989 to hear certain types of cases. There is one appointed commissioner from each member country. Council meetings are held in both Brussels and Luxemburg. Which ministers attend each meeting is determined by the subject matter of the discussions. and makes sure that treaties and other international agreements are upheld. Because so many cases are brought before the Court of Justice. as a whole. The Council’s other duties include finalizing international agreements and making decisions that involve international security. For example.The Council of the European Union—The ―Council‖ represents the individual countries. EU institutions. which makes sure that EU laws are correctly interpreted. at least one minister from each member country must be present. The Court consists of one appointed judge from each member country. There are also eight advocates-general to assist the judges. if agriculture is to be discussed. It functions independently from the EU member states. The Commission proposes new laws. and they serve for five years. The Court of Justice is located in Luxemburg. 10 . The Council must work with the Parliament to pass new laws and approve budgets. At each meeting. It presides over disputes which involve member countries. must be approved by Parliament. so each EU member nation takes its turn at presiding over Council meetings for a period of six months. Ministers of Agriculture will be present. They. and it meets in Brussels. and their president. It must monitor how EU money is spent. The Court of Justice—This is the ―supreme court‖. and the judges serve for renewable terms of six years. The European Commission—This is the executive side of the ―EU Institutions triangle‖ (see diagram below) and it represents Europe. and ensure that EU laws are followed.
respecting human 11 .Some other important EU bodies are the European Investment Bank (Luxemburg) which lends money for projects of European interest. Lithuania. Cyprus. and the Republic of Macedonia are candidate countries. As it continues to enlarge and grow in international prominence. Poland. and the President of the European Commission. It is supposed to meet four times a year. and its focus moved from economic interests to more human issues. and Slovenia were added to the European Union. it must be a stable democracy. Romania and Bulgaria joined. and the European Central Bank (Frankfurt) which oversees the stability of the euro. Malta. 2004. Finally. Hungary. and Turkey. Change will be necessary to adapt to the needs of the future. The European Council has the power to initiate new policies. Croatia. What began as the European Coal and Steel Community in 1951. its structure and procedures for doing business had to change. As the European Community grew. and sometimes is called upon to resolve issues that the Council of the European Union has failed to resolve. it will also continue to evolve. The European Union is the product of more than fifty years of continuous evolution. making it the largest trade unit in the world. In 2007. Latvia. The Czech Republic. What must a European country do to qualify for EU membership? First of all. On May 1. and must function independently of the individual member countries. and these meetings are presided over by the president or prime minister of the country that is currently presiding over the Council of the European Union (see page 13—a different head of state presides every six months). the European Council is made up of the heads of state of all EU member countries. These organizations look out for the interests of the European Union as a whole. Estonia. Slovakia. has gone through many steps of enlargement to become today’s European Union.
Everyone enjoys the opportunities and products of the largest and most diverse market in the world. As wonderful as that sounds. in order for the standard of living of the new countries to be raised to the standards of the older member nations. the rule of law. The economies and societies of the new member countries are much less stable that those of the western European countries. Once a country has fulfilled those obligations. represent a much more culturally diverse group than was ever added before in previous enlargements. Despite these concerns. In other words. Finally. They also worry that large companies may relocate their factories in the new EU countries because they can hire cheaper labor there or that cheaper consumer products from the new EU countries will be brought to western European markets and force them to lower their prices. it must have a functioning market economy that has low inflation. The ten countries that were added in 2004. Finally. most people feel that the enlargement is a good thing. and becomes a member state. a low budget deficit. and invest in any EU country. services. EU citizens may live in any EU country. as well as the two added in 2007. sell their goods in any EU country. and capital. because it will help the people in the new member countries improve their lives and promote peace and stability for the entire continent of Europe. it enjoys the benefits of the four freedoms on which the EU is based—free movement of goods. much economic support from the EU will be needed. and the protection of minorities. Second. 12 . and it certainly has challenges. and exchange rate stability (its currency doesn’t fluctuate much). Many people from the western European countries feel that they are shouldering an unfair burden in the interest of less advantaged countries. work in any EU country. not all EU citizens are in favor of enlargement. it must adopt the common rules.rights. labor. standards and policies that make up the body of EU law.
with the year of accession (joining) in brackets in each case. There were six founding members of what was then called the European Economic Community or EEC. is as follows: Italy (1957) Belgium (1957) France (1957) Germany (1957) Luxembourg (1957) Netherlands (1957) United Kingdom (1973) Ireland (1973) Denmark (1973) Greece (1981) Spain (1986) 13 .List of Countries in the European Union As of Today. The full list. There are 27 countries in the European Union.
Portugal (1986) Finland (1995) Sweden (1995) Austria (1995) Cyprus (2004) Czech Republic (2004) Estonia (2004) Hungary (2004) Latvia (2004) Lithuania (2004) Malta (2004) Poland (2004) Slovakia (2004) Slovenia (2004) Bulgaria (2007) Romania (2007) 14 .
with a population of 500 million people and a GDP of over €12 trillion.3 per cent. the European Coal and Steel Community. The single market. Britain joined the then EEC in 1973. is now the world’s largest trading area. Its trade with countries outside the EU has. which is intended to ensure that a company in one member state can trade with a company in any other member state without the interference of national borders.3 per cent (after adjusting for inflation). grown at an annual rate of only 1. since when its trade with the other member states has grown at an annual rate of 3. by contrast.Economic Benefits of The European Union. 15 . shops or trades in it. was explicitly a project of economic integration. and economic issues have remained at the heart of the EU ever since. The effect of EU membership can be seen in the trade statistics. Being part of the European single market has brought great benefits to the British economy and to anyone who works. The forerunner of the EU. The benefits of the single market A central feature of the European Union is its single market.
In 2006 alone this meant an overall increase in GDP of €240 billion .000 and 900. internet access. Between 300. Lower prices: the opening up of national markets and the resultant increase in competition has driven down prices of. reducing bureaucracy for citizens.compared to a situation without the single market. cars and medicines. It is worth a couple of paragraphs to explain how this has happened. Less red tape: rather than adding to red tape. 60 million customs forms have been scrapped as they are no longer applied to cross-border trade within the single market. for example. such as food.or €518 for every EU citizen . air travel and telephone calls (the latter having been reduced on average by 40 per cent over the period 2000-2006). It has also become easier to start or buy a business: the average cost for setting up a new company in the former EU-15 has fallen from €813 in 2002 to €554 in 2007. Wider choice of products and services: 73 per cent of EU citizens think the single market has contributed positively to the range of products on offer.15 per cent. A central objective of 16 . while the establishment of common standards has led to safer and environmentally friendlier products. Delivery costs have been reduced by 15 per cent.000 jobs have been created thanks to the single market. and the time needed to register a company administratively was reduced from 24 days in 2002 to about 12 days today. and compliance costs for businesses. who pass those savings on to consumers.A recent study published by the European Commission reported the following benefits as a result: Increased prosperity: over the last 15 years the single market has increased the EU's GDP by 2. single market rules often replace a large number of complex and different national laws with a single framework.
or a complex and cumbersome customs procedure. That way. Some non-tariff barriers can still be retained where there is an overriding reason of some other kind. is the abolition of tariff and non-tariff barriers. such as public health. for those people that prefer them. The traditional beers are still available. and in fact what turns 27 national markets into the European single market. while a non-tariff barrier is any other kind of law or rule that. barley. while also serving as non-tariff barriers. Industry lobby groups often try to protect their own interests by arguing in favour of retaining particular non-tariff barriers from which they benefit. this was protectionism. For example. This can take the form of a quota. makes cross-border trade harder. national rules also perform a valuable function. The answer in these cases is to replace the myriad sets of national rules with a single set of European rules instead. The result of reducing and eliminating these non-tariff barriers has been to increase trade between the different European countries. levied on goods or services that cross a border. or a domestic law that has the effect of discriminating against imports. for example protecting health and safety or consumer rights. but the overall trend in Europe has been to reduce and eliminate them. A tariff is a tax on trade. in practice. of course. the German law that required beer to be made solely of three specified ingredients – water. In effect. the EU can get the benefits that the national rules provided – consumers 17 . It is often the case that.the EU. A major task for the European Commission and the European Court is to distinguish between the good reasons for retaining non-tariff barriers and the bad. including ones from abroad. creating jobs and increasing prosperity. A ruling of the European Court of Justice forced a change in the law so that consumers in Germany can have a wider choice of beers. and hops – had the effect of excluding from the German market foreign beers made with other ingredients.
idle bureaucrats and corrupt politicians. Partly this is because companies that wish to export into the EU market have to conform to EU rules for their export production. 25 years ago.remain protected. However. the rules that the EU adopts for its own single market tend to be copied by other countries around the world. but it is clearly incorrect to treat the EU as though it were the eurosceptic caricature of greedy farmers. that proportion was 70%. in the same year. CAP spending fell to only 37% of the total. perhaps.6 billion. or €46. for example – but without the obstructions to trade that non-tariff barriers might provide. the latest figures on the budget show this to be a declining aspect of EU activity and expenditure. Furthermore. including a 9% increase 18 . because the EU is the world’s largest economic block and the world’s largest trader. One might say that it is still too high. often choose to copy EU standards because they are already the most widely used and so are likely to pose the fewest difficulties in being adopted. in any case. therefore. EU spending on measures linked directly to jobs. gives a country influence over the setting of commercial rules that it would. Every recent reform of the EU budget has reduced the proportion of the EU’s expenditure that is spent on agriculture. and in 2008. be likely to follow even if not in the EU. and partly this is because other countries. In fact. The role of the EU budget Discussion of the EU budget often centres on the EU’s expenditure on the Common Agricultural Policy. growth and competitiveness rose to a record 40% of the budget. when drawing up rules of their own. To be a member of the EU.
then you can be confident that the EU is representing your interests properly. Furthermore. Not only are fluctuation risks 19 . The Euro-‘ONE CURRENCY FOR ONE EUROPE” The euro was created because a single currency offers many advantages and benefits over the previous situation where each Member State had its own currency. The EU budget increasingly reflects the priorities of an organisation determined to boost its competitiveness and productivity in the modern economy. It is a pity if a lack of information about Europe means that they do not know this. and more prosperity than a single market of only 60 million. If you think that competitiveness and growth should the priorities in the future. the EU’s commercial agenda is increasingly matched by its budgetary priorities. This means that more than ever the EU is echoing the economic priorities that most people in Britain wish to see. and away from the agenda of agricultural protection. rather than the agriculturedominated priorities of the past. Even eurosceptic free market economists agree that a single market of 500 million consumers is likely to offer lower prices. Note that this is more than is spent on agriculture. to the benefit of companies.in spending on research. employees and consumers alike. It is moving towards the agenda of competitiveness and growth. more choice. The European single market has simplified rules and cut red tape. for Europe is where their prosperity lies.
over time it became clear that closer economic and monetary cooperation was needed for the internal market to develop and flourish further. economic stability is good for a Member State’s economy as it allows the government to plan for the future. the Member States concentrated on building a 'common market' for trade. but the euro also means closer co-operation among Member States for a stable currency and economy to the benefit of us all. However. the Member States approved the Treaty on European Union (the Maastricht Treaty). When the EU was founded in 1957. 20 . For example. in turn. and for the whole European economy to perform better. But economic stability also benefits businesses because it reduces uncertainty and encourages companies to invest. benefits citizens who see more employment and better-quality jobs. They include: More choice and stable prices for consumers and citizens Greater security and more opportunities for businesses and markets Improved economic stability and growth More integrated financial markets A stronger presence for the EU in the global economy A tangible sign of a European identity Many of these benefits are interconnected. deciding that Europe would have a strong and stable currency for the 21st century.and exchange costs eliminated and the single market strengthened. bringing more jobs and greater prosperity for Europeans. The benefits of the euro are diverse and are felt on different scales. In 1991. from individuals and businesses to whole economies. This.
there is now one large integrated market using the same currency. Within the euro area. and gives the euro area a more powerful voice in the global economy. A single currency makes the euro area an attractive region for third countries to do business. Meanwhile. thus promoting trade and investment. Before the euro. risks and a lack of transparency in cross-border transactions. through businesses purchasing the best value service. Prudent economic management makes the euro an attractive reserve currency for third countries. being able to compare prices easily encourages cross-border trade and investment of all types. the need to exchange currencies meant extra costs. from individual consumers searching for the lowest cost product. With the single currency. Benefits worldwide The scale of the single currency and the euro area also brings new opportunities in the global economy. 21 .How do these benefits of the euro arise? The single currency brings new strengths and opportunities arising from the integration and scale of the euro-area economy. making the single market more efficient. doing business in the euro area is more cost-effective and less risky. to large institutional investors who can invest more efficiently throughout the euro area without the risks of fluctuating exchange rates.
as the key mechanism for enhancing the benefits of the single market. Second. such as worldwide oil price rises or turbulence on global currency markets. The size and strength of the euro area make it better able to absorb such external shocks without job losses and lower growth. The 1992 Maastricht Treatyobliges most EU member states to adopt the euro upon meeting certain monetary and budgetary convergence criteria. a central element of Economic and Monetary Union (EMU).e. The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) and the Eurosystem (composed of the central banksof the eurozone countries). sudden economic changes that may arise outside the euro area and disrupt national economies. This is achieved first through the sound management of the euro-area economy under the rules of the Treaty and the Stability and Growth Pact (SGP). i. and the operation of the eurozone payment systems. The Eurosystem participates in the printing. Realising the benefits The euro does not bring economic stability and growth on its own.Scale and careful management also bring economic stability to the euro area.while Sweden (which joined the EU in 22 . minting and distribution of notes and coinsin all member states. The United Kingdom and Denmark negotiated exemptions. although not all states have done so. the ECB has sole authority to set monetary policy. social and political structures of today’s European Union. making it more resilient to so-called external economic 'shocks'. trade policy and political cooperation. As an independent central bank. the euro is an integral part of the economic.
Slovenia. Belgium.3%. the euro is also the sole currency of Montenegro and Kosovoand several European micro states (Andorra. Luxembourg. Germany. together with future members of the EU. Monaco. Saint Pierre and Miquelon and Akrotiri and Dhekelia). The euro inherited and built on the status of the Deutsche Markas the second most important reserve currency.1995. Malta. Outside the EU. Italy. The share of the euro as a reserve currency has increased from 18% in 1999 to 27% in 2008. and has circumvented the obligation to adopt the euro by not meeting the monetary and budgetary requirements. with a share of 22% of all currency 23 . The euro remains underweight as a reserve currency in advanced economies while overweight in emerging and developing economies: according to the International Monetary Fund]the total of euro held as a reserve in the world at the end of 2008 was equal to $1. France. the euro has been the second most widely held international reserve currencyafter the US dollar. All nations that have joined the EU since 1993 have pledged to adopt the euro in due course The euro is the sole currency of 17 EU member states: Austria. These countries comprise the "eurozone". Ireland. after the Maastricht Treaty was signed) turned down the euro in a 2003 referendum. Cyprus. the Netherlands. the enlargement of the eurozoneis set to continue. San Marino and the Vatican City) as well as in three overseas territories of EU states that are not themselves part of the EU (Mayotte. Together this direct usage of the euro outside the EU affects over 3 million people. Estonia. Finland.1 trillion or €850 billion. some 326 million people in total. With all but two of the remaining EU members obliged to join. Since its introduction. Slovakia. Over this period the share of the US dollar fell from 71% to 64% and the Yen fell from 6.4% to 3. Portugal. and Spain. Greece.
reserves in advanced economies, but a total of 31% of all currency reserves in emerging and developing economies.
The possibility of the euro becoming the first international reserve currency is now widely debated among economists.]Former Federal Reserve Chairman Alan Greenspangave his opinion in September 2007 that it is "absolutely conceivable that the euro will replace the US dollar as reserve currency, or will be traded as an equally important reserve currency." In contrast to Greenspan's 2007 assessment the euro's increase in the share of the worldwide currency reserve basket has slowed considerably since 2007 and since the beginning of the worldwide credit crunch related recession and European sovereign-debt crisis
Outside the eurozone, a total of 23 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro including 14 countries in mainland Africa (CFA franc and Moroccan dirham), two African island countries (Comorian franc and Cape Verdean escudo), three French Pacific territories (CFP franc) and another Balkan country, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark). On 28 July 2009, São Tomé and Príncipe signed an agreement with Portugal which will eventually tie its currency to the euro
With the exception of Bosnia (which pegged its currency against the Deutsche Mark) and Cape Verde (formerly pegged to the Portuguese escudo) all of these non-EU countries had a currency peg to the French Franc before pegging their currencies to the euro. Pegging a country's currency to a major currency is regarded as a safety measure, especially for currencies of areas with weak
economies, as the euro is seen as a stable currency, prevents runaway inflation and encourages foreign investment due to its stability.
Within the EU several currencies have a peg to the euro, in most instances as a precondition to joining the eurozone. The Bulgarian levwas formerly pegged to the Deutsche Mark, other EU member states have a direct peg due to ERM II: the Danish krone, the Lithuanian litasand the Latvian lats.
In total, over 150 million people in Africa use a currency pegged to the euro, 25 million people outside the eurozone in Europe and another 500,000 people on Pacific islands
Economic Advantages of Euro
In economics, an optimum currency area (or region) (OCA, or OCR) is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. There are two models, both proposed by Robert Mundell: the stationary expectations modeland the international risk sharing model. Mundell himself advocates the international risk sharing model and thus concludes in favour of the euroHowever, even before the creation of the single currency, there were concerns over diverging economies. Before the Late-2000s recessionthe chances of a state leaving the euro, or the chances that the whole zone would collapse, were considered extremely slim. However the Greek government-debt crisis led to former British foreign secretary Jack Strawclaiming the Eurozone could not last in its current form.Part of the problem seems to be the rules that were created when the Euro was set up. John Lanchester, writing for The New Yorker explains it thus:
The guiding principle of the currency, which opened for business in 1999, were supposed to be a set of rules to limit a country's annual deficit to three per cent of gross domestic product, and the total accumulated debt to sixty per cent of G.D.P. It was a nice idea, but by 2004 the two biggest economies in the euro zone, Germany and France, had broken the rules for three years in a row
Transaction costs and risks
The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks in the eurozone must charge the same for intramember cross-border transactions as purely domestic transactions for electronic payments (e.g., credit cards, debit cards and cash machine withdrawals).
The absence of distinct currencies also removes exchange raterisks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones. Companies that hedgeagainst
Financial markets on the continent are expected to be far more liquidand flexible than they were in the past. as the European Central Bank is modelled on the Bundesbank. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the eurozone. Differences in prices can trigger arbitrage. Some evidence of this has been observed in specific eurozone market Macroeconomic stability Low levels of inflation are the hallmark of stable and modern economies. Member countries that join the 27 .]it is independent of the pressures of national governments and has a mandate to keep inflation low. Some countries have successfully contained them by establishing largely independent central banks. particularly the Mediterranean nations.e. causing inflation in some regions and deflation in others during the transition. prices on commonly traded goods are likely to converge. Because a high level of inflation acts as a tax (seigniorage) and theoretically discourages investment. Price parity Another effect of the common European currency is that differences in prices – in particular in price levels – should decrease because of the 'law of one price'. many countries have been unable or unwilling to deal with serious inflationary pressures. In spite of the downside.this risk will no longer need to shoulder this additional cost. Therefore. One such bank was the Bundesbankin Germany. speculative trade in a commodityacross borders purely to exploit the price differential. it is generally viewed as undesirable. This is particularly important for countries whose currencies had traditionally fluctuated a great deal. i.
Investment Physical investment seems to have increased by 5% in the eurozone due to the introduction. Many national and corporate bondsdenominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in national currencies.[ Regarding foreign direct investment. While increased liquidity may lower the nominal interest rateon the bond. a study found that the intra-eurozone FDI stocks have increased by about 20% during the first four years of the EMU.[ Concerning the effect on corporate investment. Trade A 2009 consensus from the studies of the introduction of the euro is that it has increased trade within the eurozone by 5% to 10%although one study suggested an increase of only 3%while another estimated 9 to 14%]However. there is evidence that the introduction of the euro has resulted in an 28 . a meta-analysis of all available studies suggests that the prevalence of positive estimates is caused by publication biasand that the underlying effect may be negligible. A credible commitment to low levels of inflation and a stable debt reduces the risk that the value of the debt will be eroded by higher levels of inflation or default in the future.euro hope to enjoy the macroeconomic stability associated with low levels of inflation. denominating the bond in a currency with low levels of inflation arguably plays a much larger role. The ECB (unlike the Federal Reservein the United States of America) does not have a second objective to sustain growth and employment. allowing debt to be issued at a lower nominal interest rate.
It has been found that the introduction of the euro created "significant reductions in market risk exposures for nonfinancial firms both in and outside of Europe"]These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-Euro firms with a high fraction of foreign sales or assets in Europe".increase in investment rates and that it has made it easier for firms to access financing in Europe. A study of this paradox found that this was due to an asymmetric effect of the introduction of the euro on prices: while it had no effect on most goods. 29 . The study found that consumers based their beliefs on inflation of those cheap goods which are frequently purchased. but this impression was not confirmed by general indices of inflation and other studies. it had an effect on cheap goods which have seen their price round up after the introduction of the euro. there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices.]It has also been suggested that the jump in small prices may be because prior to the introduction. A study found that the introduction of the euro accounts for 22% of the investment rate after 1998 in countries that previously had a weak currency[ Inflation The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the short term. retailers made fewer upward adjustments and waited for the introduction of the euro to do so[ Exchange rate risk One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates. The euro has most specifically stimulated investment in companies that come from countries that previously had weak currencies.
especially with respect to the securities markets [. equity. Effect on interest rates Long-term interest rates of Euro countries.. governments in these 30 . the real and policy barriers to integration in the retail and corporate banking sectors remain significant. As a consequence the market value of firms from countries which previously had a weak currency has very significantly increasedThe countries whose interest rates fell most as a result of the euro are Greece.]Following the Late-2000s financial crisis. with eurozone countries lending and borrowing more between each other than with other countries.Financial integration The introduction of the euro seems to have had a strong effect on European financial integration. the euro has significantly decreased the cost of trade in bonds.. and Italy.]The effect of such low interest rates made it easier for banks within the countries in which interest rates fell and the countries themselves to borrow significant amounts (above the 3% of GDP budget deficit imposed on the eurozone initially) and increase their public deficit and levels of privately held consumer debt. Spain. On a global level. 1993-2012 The introduction of the euro has decreased the interest rates of most members countries. in particular those with a weak currency. According to a study on this question. Specifically. there is evidence that the introduction of the euro has led to an integration in terms of investment in bond portfolios. Portugal. it has "significantly reshaped the European financial system. and banking assets within the eurozone. even if the wholesale end of banking has been largely integrated.] However. Ireland.
with an increase of 6. Several studies failed to find any evidence of convergence following the introduction of the euro after a phase of convergence in the early 1990s.countries found it necessary to bail out or nationalise their privately held banks in order to prevent systemic failure of the banking system. Other studies have found evidence of price convergence. 31 . via increasing government bond interest rates.5% European Union –Treaties. in particular for cars[ A possible reason for the divergence between the different studies is that the processes of convergence may not have been linear. slowing down substantially between 2000 and 2003. producing the ongoing European sovereign-debt crisis. and resurfacing after 2003 as suggested by a recent study (2009) Tourism A study suggests that the introduction of the euro has had a positive effect on the amount of tourist travel within the EMU. Price convergence The evidence on the convergence of prices in the eurozone with the introduction of the euro is mixed.]This further increased the already high levels of public debt to a level the markets began to consider unsustainable.
A treaty is a binding agreement between EU member countries. The main treaties are: The Treaty of Lisbon (signed 13 December 2007) entered into force on the 1 December 2009. Treaty texts and commentaries signposted below show how the amendments take shape and include consolidated versions of Rome and Maastricht treaties. The Treaty of Rome has been renamed the Treaty on the Functioning of the European Union. This means that every action taken by the EU is founded on treaties that have been approved voluntarily and democratically by all EU member countries. Amendments include changes to 32 . how decisions are made and the relationship between the EU and its member countries. rules for EU institutions. EU institutions can adopt legislation. Also known as the Reform Treaty. to prepare for new member countries and to introduce new areas of cooperation – such as the single currency. if a policy area is not cited in a treaty.The European Union is based on the rule of law. Under the treaties. it amends the Treaty on European Union (Maastricht 1992) and the Treaty Establishing the European Community (Rome 1957). For example. the Commission cannot propose a law in that area. It sets out EU objectives. Treaties are amended to make the EU more efficient and transparent. which the member countries then implement.
more efficient and better able to address global problems. Reflection on the reform process. Although the treaty was adopted by the Heads of State and Government at the Brussels European Council on 17 and 18 June 2004 and signed in Rome on 29 October 2004. enhancement of the rights of individuals and organisations. it was never ratified. such as climate change. Following the treaty of Nice a Convention on the Future of Europe (aka European Convention) was established to draw up a draft constitutional treaty for Europe between March 2002 and July 2003. and the attribution of legal personality on the Union. prompted the establishment of a new Inter Governmental Conference in 2007. 33 . Treaty of Lisbon Signed: 13 December 2007 Entered into force: 1 December 2009 Purpose: to make the EU more democratic. efficiency and democratic legitimacy in an enlarged European Union. with one voice. The Draft Treaty establishing a Constitution for Europe was the subject of an intergovernmental conference intended to revise the structure and decision making process to support the enlargement of the Union. Following protracted ratification. the Reform Treaty continues to face challenges however. Evolving from the failed constitutional treaty the Lisbon Treaty proposed greater coherence.the institutional structure and to the way legislation is negotiated.
2000 The Treaty of Nice was agreed at the Nice European Councilin December 2000. change of voting procedures in the Council. British Prime Minster. Treaty of Nice 'The present generation should lay the final brick in the edifice of Europe. The Lisbon treaty clarifies which powers: belong to the EU belong to EU member countries Are shared.Main changes: more power for the European Parliament. a permanent president of the European Council. and to prepare for the coming enlargementof the EU to include ten new members. It represented a further attempt by the governments of the member states to find a workable means of moving forward the process of European integration.Tony Blair. Negotiations were divided by the reemergence of old arguments over the benefits of intergovernmental as opposed to 34 . citizens' initiative. a new EU diplomatic service. This is our task and we ought to get down to it. a new High Representative for Foreign Affairs.' .
However. Nevertheless. the final document made significant changes to how the EU would be run in the future.supranationalmodels for the running of the EU. it pushed forward the model of a supranationalEuropean Union at the expense of intergovernmental cooperation. Treaty of Amsterdam The Treaty of Amsterdam (1997) was the third major amendment to the arrangements made under the Treaty of Rome(1957). absorbed the Schengen Conventionand increased the role of the EU in home affairs. Main changes: methods for changing the composition of the Commission and redefining the voting system in the Council. 35 . It was largely an exercise in tying up the loose ends left over from the Maastricht Treaty(1992). in the ways in which it changed the operation of the Council of the European Union. Signed: 26 February 2001 Entered into force: 1 February 2003 Purpose: to reform the institutions so that the EU could function efficiently after reaching 25 member countries.
 it created the European Unionand led to the creation of the single European currency. Upon its entry into force on 1 November 1993 during the Delors Commission. More transparent decision-making (increased use of the co-decision voting procedure). common foreign and internal affairs policy). Main changes: amendment. the Treaty on European Union or TEU) was signed on 7 February 1992 by the members of the European Community in Maastricht. renumbering and consolidation of EU and EEC treaties.Maastricht Treaty The Maastricht Treaty (formally. Signed: 2 October 1997 Entered into force: 1 May 1999 Purpose: To reform the EU institutions in preparation for the arrival of future member countries. the same city hosted the European Councilwhich drafted the treaty. Treaty on European Union . Nice and Lisbon Signed: 7 February 1992 Entered into force: 1 November 1993 Purpose: to prepare for European Monetary Union and introduce elements of a political union (citizenship. the euro. Netherlands. 36 . The Maastricht Treaty has been amended by the treaties of Amsterdam. On 9–10 December 1991.
laying the groundwork for the rapid changes of the 1990s and 2000s Signed: 17 February 1986 (Luxembourg) / 28 February 1986 (The Hague) Entered into force: 1 July 1987 Purpose: to reform the institutions in preparation for Portugal and Spain's membership and speed up decision-making in preparation for the single market.Main changes: establishment of the European Union and introduction of the co-decision procedure. creation of the cooperation and assent procedures. In these ways it took the process of European integration to a new level. it had not achieved its aim of establishing a genuine common market. Single European Act The Single European Act (SEA) was the first major attempt made by member states to amend the arrangements made in the Treaty of Rome(1957). New forms of cooperation between EU governments – for example on defence and justice and home affairs. Main changes: extension of qualified majority voting in the Council (making it harder for a single country to veto proposed legislation). Although the European Community had been in operation for nearly thirty years. giving Parliament more say in decision-making. It also created deeper integration by making it easier to pass laws. The SEA's main pupose was to set a deadline for the creation of a full single market by 1992. strengthening the EU Parliamentand laying the basis for a European foreign policy. giving Parliament more influence 37 .
The term European Communities or EC also came into use from this time onward. Euratom. Signed: 8 April 1965 Entered into force: 1 July 1967 Purpose: to streamline the European institutions. Repealed by the Treaty of Amsterdam. first gathered together the organizational structures of the then three European Communities (European Coal and Steel Community. ECSC).Merger Treaty . and it also had them share a single budget. This formal name was Treaty establishing a Single Council and a Single Commission of the European Communities. It created the European Commission and the Council of the European Communities to be the governing bodies for all three institutions. 38 . Main changes: creation of a single Commission and a single Council to serve the then three European Communities (EEC. This treaty is regarded by some as the real beginning of the modern European Union. signed in Brussels on 8 April 1965 and in force since 1 July 1967.Brussels Treaty The Merger Treaty. European Economic Community and Euratom).
was to contribute. In the light of the establishment of the common market. as stated in Article 2. growth of employment and a rising standard of living. banish the spectre of war and open the way to European integrationThe aim of the Treaty. This choice was not only economic but also political. to economic expansion. Thus.Treaty establishing the European Coal and Steel Community The first Community organisation was created in the aftermath of the Second World War when reconstructing the economy of the European continent and ensuring a lasting peace appeared necessary. the Treaty introduced the free movement of products without customs duties or taxes. Thus the idea of pooling Franco-German coal and steel production came about and the European Coal and Steel Community (ECSC) was formed. All of this had to be accompanied by growth in international trade and modernisation of production. the institutions had to ensure an orderly supply to the common market by ensuring equal access to the sources of production. subsidies. The underlying political objective was to strengthen Franco-German solidarity. It prohibited discriminatory measures or practices. aids granted by States or special charges imposed by States and restrictive practices Signed: 18 April 1951 Entered into force: 23 July 1952 Expired: 23 July 2002 39 . the establishment of the lowest prices and improved working conditions. through the common market for coal and steel. as these two raw materials were the basis of the industry and power of the two countries.
Lithuania. Romania) Trade Patterns in the European Union Trade isn’t just big business. Malta. Ireland. The ECSC treaty expired in 2002. Finland. and hundreds of thousands of Irish citizens work in jobs related to the trade of goods and services. but as an island nation with a population of just over four million it’s difficult for us to compete with bigger countries on international trade markets. Portugal) 1995 (Austria. 2007 (Bulgaria. When new countries joined the EU. Estonia. It allows us to buy everything from our morning coffee to the homes we live in. Hungary. Cyprus. it’s everybody’s business. Poland. the founding treaties were amended: 1973 (Denmark. Sweden) 2004 (Czech Republic. Latvia. United Kingdom) 1981 (Greece) 1986 (Spain. That makes Ireland’s trade policy crucial to creating employment and improving living standards. 40 . This eased distrust and tensions after WWII. Slovakia.Purpose: to create interdependence in coal and steel so that one country could no longer mobilise its armed forces without others knowing. Slovenia).
and good for consumers by lowering the price of goods and services and providing more choice in the marketplace. was the first large emissions tradingscheme in the world. it’s also designed to help developing nations benefit from fair access to both European markets and the global economy The European Union Emissions Trading System (EU ETS). and we all negotiate as one on the international scene through the European Commission. power stations. also known as the European Union Emissions Trading Scheme. as part of the European Union Ireland can trade on a level playing field and get a fair deal on our imports and exports. Much of our trade policy is made in agreement with the other 26 Member States. the EU ETS covers more than 11.000 factories. fair trade – something that will be a cornerstone of Ireland’s economic growth on the road to financial recovery. Being part of the European Union also makes it easier for Ireland to trade effectively on world markets. The Internal Market has removed import duties and other barriers to free trade between EU member states.It was launched in 2005 to combat climate change and is a major pillar of EU climate policy. one of the EU’s most important achievements. It’s helped create a more competitive market place that’s been good for business by reducing costs. The EU's trade policynot only ensures member states get the best possible deal when trading with countries outside Europe.However. The EU has developed around the central philosophy of free. As of June 2012. and other installations 41 . At the heart of that philosophy is the Internal Market.
and inclusion of other greenhouse gases. 42 . The third trading period will run from January 2013 to December 2020. Norway. if an installation has performed well at reducing its carbon emissions. Installations currently receive trading credits from their national allowance plans (NAPs). a factory can purchase trading credits from other installations or countries. administered by the governments of participating countries. it can sell its leftover credits for money. This allows the system to be more self-contained without necessitating too much government intervention. called a "trading period". because every year they must return leftover emission allowances to the government. In January 2008. emission creditsare doled out for a period of several years. The second trading period began in January 2008 and spans a period of five years. The first ETS trading period lasted three years. including centralized allocation by an EU authority (as opposed to national allocation plans). from January 2005 to December 2007. and LiechtensteinThe installations regulated by the EU ETS are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions. Conversely. If carbon emissions exceeds what is permitted by its credits. the European Commissionproposed a number of changes to the scheme. a turn to auctioning a greater share (more than 60%) of permits rather than allocating freely. until December 2012.These changes are still in a draft stage. Installations must monitor and report their CO2emissions. In order to neutralize irregularities in CO2emission levels due to extreme weather events (harsh winters or very hot summers).with a net heat excess of 20 MW in 30 countries—all 27 EU member states plus Iceland. such as nitrous oxide and perfluorocarbons.
and in general for failing to meet its goal[ 43 .Compared to the 2005.10 in September 2007. Lack of scarcity under the first phase of the scheme continued through 2006 resulting in a trading price of €1. and a large number of futures and optionsThe price of allowances increased more or less steadily to a peak level in April 2006 of about €30 per tonne CO2[ but fell in May 2006 to under €10/ton on news that some countries were likely to give their industries such generous emission caps that there was no need for them to reduce emissions. These changes took place starting January 2012 The ETS.2 per tonne in March 2007. However. nominally commenced operation on 1 January 2005. including: over-allocation. price volatility. In its first year. when the EU ETS was first implemented. windfall profits. The EU ETS has recently been extended to the airline industry as well. although national registries were unable to settle transactions for the first few months. the proposed caps for 2020 (the final year of the third trading period) foresee a 21% reduction of greenhouse gases. 362 million tonnes of CO2were traded on the market for a sum of €7. declining to €0. the prior existence of the UK Emissions Trading Schememeant that market participants were already in place and ready. The EU ETS has been criticized for several failings. in which all 15 Member States that were then members of the European Unionparticipated.2 billion.
‖ in October 2011. but it is also one of the hardest to understand. Ireland. Below is a Q&A to help familiarize you with the basics of this critical issue. Although these five were seen as being the countries in immediate danger of a possible default. The European debt crisis is the shorthand term for Europe’s struggle to pay the debts it has built up in recent decades. Portugal. Italy. In addition. Defenders of the scheme say that this spike did not correlate with the price of permits. 44 . however.Proponent argue. In fact. failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it was intended to be. and in fact the largest price increase occurred at a time (Mar–Dec 2007) when the cost of permits was negligible European Union: The Debt Crisis. and Spain – have. if not ever. the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. the EU ETS has been criticized as having caused a disruptive spike in energy prices. that Phase I of the EU ETS (2005–2007) was a "learning phase" designed primarily to establish baselines and create the infrastructure for a carbon market. This is one of most important problems facing the world economy. Five of the region’s countries – Greece. to varying degrees. the head of the Bank of England referred to it as ―the most serious financial crisis at least since the 1930s. not to achieve significant reductions.
How did the crisis begin? The global economy has experienced slow growth since the U. The result was that the new Prime Minister George Papandreou. which spent heartily for years and failed to undertake fiscal reforms. in late 2009. The markets also began driving up bond yields in the other heavily indebted countries in the region. Investors responded by demanding higher yields on Greece’s bonds. and what are the implications? The reason for rising bond yields is simple: if investors see higher risk associated with investing in a country’s bonds. which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. and the country could no longer hide the problem. so do tax revenues – making high budget deficits unsustainable. anticipating problems similar to what occurred in Greece. which leads to further fiscal strain. In truth. was forced to announce that previous governments had failed to reveal the size of the nation’s deficits. Greece. This begins a vicious cycle: the demand for higher yields equates to higher borrowing costs for the country in crisis. Greece’s debts were so large that they actually exceed the size of the nation’s entire economy. financial crisis of 2008-2009. When growth slows. was one of the first to feel the pinch of weaker growth. which raised the cost of the country’s debt burden and necessitated a series of bailouts by the European Union and European Central Bank(ECB).S. Why do bonds yields go up in response to this type of crisis. they will require a higher return to compensate them for that risk. prompting investors to demand even higher 45 .
On March 9. this time worth about $157 billion. but also other countries with similarly weak finances – an effect typically referred to as ―contagion. The name for this program was the Long Term Refinancing Operation. Greece and its creditors agreed to a debt restructuring that set the stage for another round of bailout funds. 2012. Ireland and Portugal also received bailouts. The Eurozone member states also created the European Financial Stability Facility (EFSF) to provide emergency lending to countries in financial difficulty. or LTRO. to purchase government bonds if necessary in order to keep yields from spiraling to a level that countries such as Italy and Spain could no longer afford. The ECB announced a plan. A general loss of investor confidence typically causes the selling to affect not just the country in question. the ECB made €489 ($639 billion) in credit available to the region’s troubled banks at ultra-low rates. respectively. Numerous financial instituions had debt coming due in 2012. but it has moved slowly since it requires the consent of all 17 nations in the union. The European Central Bank also has become involved.‖ What did European governments do about the crisis? The European Union has taken action. The primary course of action thus far has been a series of bailouts for Europe’s troubled economies. and so on. In spring. 46 . in August 2011. In December 2011. then followed with a second round in February 2012. Greece required a second bailout in mid-2011. when the European Union and International Monetary Fund disbursed 110 billion euros (the equivalent of $163 billion) to Greece. in November 2010 and May 2011.yields. 2010.
Slower loan growth. the solution isn’t that simple for one critical reason: European banks remain one of the largest holders of region’s government debt. The perilous state of the countries’ fiscal health was therefore a key issue for the markets at various points in 2010.‖ or postponing a true solution to a later date. could weigh on economic growth and make the crisis worse. Due to the growing interconnectedness 47 . For banks.causing them to hold on to their reserves rather than extend loans. this could mean a sharp reduction in the amount of assets on their balance sheet – and possible insolvency. the ECB sought to boost the banks' balance sheets to help forestall this potential issue. although they reduced their positions throughout the second half of 2011. As a result. 2011. Why is default such a major problem? Couldn’t a country just walk away from its debts and start fresh? Unfortunately. in turn. In addition. and 2012. the value of its bonds will plunge. a larger issue loomed: while smaller countries such as Greece are small enough to be rescued by the European Central Bank. Italy and Spain are too big to be saved. they were widely criticized as merely ―kicking the can down the road. Banks are required to keep a certain amount of assets on their balance sheets relative to the amount of debt they hold. If a country defaults on its debt. Although the actions by European policy makers usually helped stabilize the financial markets in the short term.
Treasuries fell to historically low levels in a reflection of investors’ "flight to safety. With the market turmoil of 2008 and 2009 in fairly recent memory. a bank failure doesn’t happen in a vacuum. Instead.of the global financial system. most financially sound countries. How has the European debt crisis affected the financial markets? The possibility of a contagion has made the European debt crisis a key focal point for the world financial markets in the 2010-2012 period. there is less latitude for government backstopping of this crisis compared to the one that hit the United States.‖ The best example of this is the U. yields on U. when a series of collapses by smaller financial institutions ultimately led to the failure of Lehman Brothers and the government bailouts or forced takeovers of many others. investors’ reaction to any bad news out of Europe was swift: sell anything risky.S. and buy the government bonds of the largest. European bank stocks – and the European markets as a whole – performed much worse than their global counterparts during the times when the crisis was on center stage." 48 . as rising yields means that prices are falling. there is the possibility that a series of bank failures will spiral into a more destructive ―contagion‖ or ―domino effect. The bond markets of the affected nations also performed poorly. Typically. financial crisis. Since European governments are already struggling with their finances.S. At the same time.
leading to elevated tensions within the European Union. On one hand. But on the other. it would be an event of unprecedented magnitude for the global economy and financial markets. However. the crisis has led to tensions between the fiscally sound countries. Germany pushed for Greece and other affected countries to reform the budgets as a condition of providing aid.What are the political issues involved? The political implications of the crisis are enormous. an important obstacle has been Germany’s unwillingness to agree to a region-wide solution – such as the issuance of bonds by all 17 countries in the Eurozone – since it would have to foot a disproportionate percentage of the bill. The tension has created the possibility that one or more European countries would eventually abandon the euro (the region’s common currency). On the national level. In the affected nations. and the higher-debt countries such as Greece. After a great deal of debate. Greece ultimately agreed to cut spending and raise taxes. Is fiscal austerity the answer? 49 . This concern contributed to periodic weakness in the euro relative to other major global currencies during the crisis period. leaving the euro would allow a country to pursue its own independent policy rather than being subject to the common policy for the 17 nations using the currency. such as Germany. the push toward austerity – or cutting expenses to reduce the gap between revenues and outlays – has led to public protests in Greece and Spain and in the removal of the party in power in both Italy and Portugal.
Not necessarily. Taxpayers in countries such as Germany and France balk at using their money to fund what is seen as the overspending of Greece and the other troubled European countries. the U. In addition. or another smaller European country.S. This type of fundamental. this makes it more difficult for the high-debt nations to dig themselves out. which means lower tax revenues for countries to pay their bills. high-level disagreement has made a solution more difficult to achieve From a broader perspective. In turn. In addition. is a problem for all of us. Europe’s richer countries have little choice but to pressure the smaller nations to tighten their belts since they are facing pressure from their own citizens. Germany’s push for austerity (higher taxes and lower spending) measures in the region’s smaller nations is problematic in that reduced government spending can lead to slower growth. The prospect of lower government spending has led to massive public protests and made it more difficult for policymakers to take all of the steps necessary to resolve the crisis.S. The European debt crisis not only affects our financial markets. but also the U. taxpayers will eventually have to foot the bill.S. debt is growing steadily larger – meaning that the events in Greece and the 50 . U. so if the IMF has to commit too much cash to bailout initiatives. government budget. the entire region slipped toward a recession in late 2011 due in part to these measures and the overall loss of confidence among businesses and investors. Forty percent of the International Monetary Fund’s (IMF) capital comes from the United States. does this matter to the United States Yes – The world financial system is fully connected now – meaning a problem for Greece. Nevertheless.
or allow Greece (and possibly Spain and/or Italy) to exit. Spain. Europe remains in turmoil. Greece's exit from the euro appears inevitable. Instability continues to affect the rest of Europe as well: French President Nicolas Sarkozy lost power due in part to his support for austerity measures. since the elections would likely lead to a rejection of the country's latest bailout package. for its part. As a result. Citigroup economists see a 75% chance that Greece could leave the euro after its elections later in the year.is still a significant possibility. and will likely remain so for several years Greek Debt Scenario 51 .rest of Europe are a potential warning sign for U. policymakers.who already lack unity face a difficult choice: keep the currency union together.S. and the region had fallen into a recession. particularly with the "fiscal cliff" looming at the end of this year. the chance of a further economic shock to the region . over 50 percent of investors surveyed by Bloomberg News predict an exit of a euro member at some point in 2012. In addition. faces 25% unemployment with no clear path to growth.and the world economy as a whole . a path that would likely lead to financial market chaos. with all of the challenges that would entail. according to Bloomberg. What is the outlook for the crisis? As of May 2012. European policymakers .
with bond yields rising so high. This led to a crisis of confidence. with the lower interest payments in subsequent years combined with the agreed fiscal consolidation of the public budget and significant financial funding from a privatisation program. conditional not only the implementation of another austerity package. fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels. A debt relief equal to a lowering of the debt-to-GDP ratio from a forecasted 198% in 2012 down to roughly 160% in 2012. which constituted a 58% share of the total Greek public debt. This proposed restructure of all Greek public debt held by private creditors. would according to the bailout plan reduce the overall public debt burden with roughly €110 billion. In late 2009. In October 2011. the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece. Eurozone leaders agreed to offer a second €130 billion bailout loan for Greece.5% face value loss..The Greek government-debt crisis is one of a number of current European sovereign-debt crises. most importantly Germany. 52 . expected to give a further debt decline to a more sustainable level at 120. indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone. that private capital markets practically were no longer available for Greece as a funding source. conditional on the implementation of austerity measures. The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets.5% of GDP by 2020. On 2 May 2010. but also that all private creditors holding Greek government bonds should sign a deal accepting a 53.
A second election in midJune. due to a delayed reform schedule and a worsened economic recession. If Greece can comply with all economic targets outlined in the bailout plan. The potential exit became known as "Grexit" and started to affect international market behaviour.The second bailout deal was finally ratified by all parties in February 2012. to start using the private capital markets for debt refinance and as a source to cover its future financial needs. The latest bailout plan is to cover all Greek financial needs from 2012-14. led to strong speculation Greece would have to leave the Eurozone. to be granted an extended deadline from 2015 to 2017 before being required to be self-financed. the country is set for a possible return in 2015. had also been met. and are expected to publish a report with their findings in September 2012. and became active one month later. ended with the formation of a new government supporting a continued adherence to the main principles outlined by the signed bailout plan.. with minor budget deficits fully covered by extraordinary income from the privatisation program for a subsequent 5-year period.e. or 2) launch a new debt restructure to decrease the debt repayment (i. In mid-May 2012 the crisis and impossibility to form a new coalition government after elections. this will either require creditors to: 1) fund Greece with a new extra third bailout loan. If Greece is granted the two extra years to restore their fiscal balance. The new government however immediately asked its creditors. by imposing additional haircuts on governmental bonds. 53 . The creditors are currently examining this request in the light of an updated and recalculated sustainability analysis of the Greek economy. or by offering Greece to pay some lower/delayed interest rates). after the last condition regarding a successful debt restructure of all Greek government bonds.
4% to 4.The scheduled €31bn bailout disbursement for August 2012. at a debased rate[ (essentially.e. was withheld by the creditors. An essential part of that. awaiting reassurance by the "surveilance report" that Greece was still following the agreed path to restore and reform the economy. in order to reduce the 2013 fiscal deficit. such as its historical drachma. there was a possibility that Greece would prefer to default on some of its debt. Economists who favor this approach to 54 . estimating a 25% to 90% chance of a default or restructuring A default would most likely have taken the form of a restructuring where Greece would pay creditors. perhaps 50 or 25 percent It has been claimed that this could destabilise the Euro Interbank Offered Rate. will be for the Greek parliament to present and approve a new €11. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. only a portion of what they were owed. as planned from 8. Eurozone governments and IMF. Analysts gave a wide range of default probabilities.9bn austerity package in September 2012. which is backed by government securities.7% Greek Default Without a bailout agreement. which include the up to €110 billion 2010 Greece bailout participants i. coining money). Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an ―orderly default‖ on Greece’s public debt which would allow the country to withdraw simultaneously from the Eurozone and reintroduce a national currency.
Separate or superstate: those seem to be the alternatives now. led 55 . temporarily creating new money and injecting it into the system by purchasing outstanding debt European Union-Future WHAT will become of the European Union? One road leads to the full break-up of the euro. For two crisis-plagued years Europe's leaders have run away from this choice. a corresponding surrender of sovereignty.solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighbouring European countries even more At the moment.3 trillion since the global financial crisis began. for example the U. Federal Reserve expanding its balance sheet over $1. as has happened with other economic zones. with all its economic and political repercussions. But northern European creditors. The other involves an unprecedented transfer of wealth across Europe's borders and.S. perhaps. in return. it cannot unilaterally stimulate its economy with monetary policy. for Greece. They say that they want to keep the euro intact—except. because Greece is a member of the eurozone.
Only if Europeans share a sense of common purpose will a grand deal to save the single currency be seen as legitimate. Unfortunately. and southern European debtors increasingly resent foreigners telling them how to run their lives. It is a 56 . Only if it is legitimate can it last. the euro zone must draw on its joint resources by collectively standing behind its big banks and by issuing Eurobonds to share the burden of its debt. a rescue demands more. Last summer this newspaper argued that to break the euro zone's downward spiral required banks to be recapitalised. will not pay out enough to assure the euro's survival. In recent months we have concluded that. Ultimately. It is unashamedly technocratic and limited. though the ECB bought temporary relief by supplying banks with cheap. the European Central Bank (ECB) to stand behind solvent countries with unlimited support. it is a test of Germany. Most of all. We set out the scheme's nuts and bolts below. and the curbing of the Teutonic obsession with austerity.by Germany. successive European rescue plans fell short and. But German brinkmanship is corroding the belief that the euro has a future. If it is to banish the spectre of a full break-up. the crisis has festered and deepened. whether or not Greece stays in the euro. which raises the cost of a rescue and hastens the very collapse she says she wants to avoid. This has become a test of over 60 years of European integration. Europe's choice will be made in Berlin. Chancellor Angela Merkel maintains that the threat of the euro's failure is needed to keep wayward governments on the path of reform. designed not to create the full superstate that critics (and we) fear. long-term cash in December and February. But it is plainly a move towards federalism—something that troubles many Europeans.
gamble. but time is running short. Even if this break-up were somehow executed flawlessly. All good. Each government would decree that all domestic contracts—deposits and loans. banks and firms across the continent would topple because their domestic and foreign assets and liabilities would no longer match. Advocates of a break-up imagine an amicable split. To prevent runs. A break-up. they were vulnerable to a property bust or that Portugal and Italy were trapped by slow growth and declining competitiveness. for a while at least. To stop capital flight. France and Germany rode a coach and horses through the rules designed to prevent government borrowing getting out of hand. Greece should never have been let in. Rumours of bank runs around Europe's periphery have put savers and investors on alert The euro zone needs a plan. would shut over a weekend or limit withdrawals. though Ireland and Spain kept to the euro's fiscal rules. except that the people who believe that countries would be better off without the euro gloss over the huge cost of getting there (see article). governments would impose controls. Is the euro really worth saving? Even the single currency's diehard backers now acknowledge that it was put together badly and run worse. The high priests of euro-orthodoxy failed to grasp that. A cheaper currency would help match wages with workers' productivity. A cascade of defaults and lawsuits would follow. would allow individual countries to restore control over monetary policy. banks. many argue. especially in weak economies. Governments that run deficits would be forced to cut spending brutally or print cash 57 . prices and pay—should switch into a new currency.
feckless Mediterraneans. foreigners of all kinds. anti-globalisation populists. a flight to quality. That is why this newspaper thinks willingly abandoning the euro is reckless. intransigent Germans. like France's Marine Le Pen. Capital controls are illegal in the EU and the break-up of the euro is outside the law. because growth makes debt more manageable and banks healthier. but official funds for investment are limited. they might try to deter economic migrants by restricting freedom of movement. 58 . Devaluation in weak economies and currency appreciation in strong ones would devastate rich-country producers. There would be so many people to blame: Eurocrats. More likely. The ECB could and should cut rates and begin quantitative easing. But any realistic stimulus would be too modest to stem the crisis. More ambitious ways of boosting growth. so the whole union would be cast into legal limbo. A rescue is preferable to a break-up But not just any rescue. Too much of the debate over how to save the euro puts the emphasis merely on a plan for growth.And that is the optimistic scenario. As national politics turned ugly. such as the completion of a single European market for services. people or capital. Some rich countries might take advantage of that to protect their producers by suspending the single market. without the movement of goods. Collapse would be a gift to anti-EU. and a collapse in output. European co-operation would break down. are sadly not even on the table. financiers. runs on banks. a break-up would take place amid plunging global share prices. little of the EU would remain. The heirs of Schuman and Monnet would struggle to restore the Europe of 27 when it had been the cause of such mayhem—even if a euro-rump of strong countries emerged. Practically speaking. Mrs Merkel should have been more accommodating on this. That would help.
but its fragmented structure. Fear that the state could not cope makes a banking collapse more likely. Voters will be scared into grudging acquiescence precisely because a euro collapse is so terrifying. To survive. the euro zone's troubles run too deep. The ECB's support for the banks cannot prevent the weak economies of Spain. Banks and their governments are propping each other up like Friday-night drunks. Wolfgang Schäuble. they want to harmonise taxes and centralise political power with. sovereigns will face doubt about their capacity to service their debt and banks will see loans go bad. Europe has to become more federal: the debate is how much more. A lot. compared with over 100% in America.In any case. the single currency was always a leg on the journey towards a fully integrated Europe. The logic is straightforward. further inhibiting growth. just for individual governments. For as long as bond yields are high and growth is poor. Similarly. according to some gung-ho federalists. the banks are not too big for the continent as a whole. Fear that the state might have to deal with a banking collapse makes government bonds riskier. Taken as a whole. The euro zone's problem is not the debt's size. an elected European Commission and new powers for the European Parliament. In time. say. For people like Germany's finance minister. the new institutions will gain legitimacy because they will work and Europeans will begin to feel prosperous again (see article). Italy and Ireland from enfeebling their banks and governments. Portugal. the stock of euro-zone public debt is 87% of GDP. 59 . That is why we have reluctantly concluded that the nations in the euro zone must share their burdens. In exchange for paying up. Yet that same uncertainty pushes up sovereign yields and stops bank lending.
The wartime generation that saw the EU as a bulwark against strife is fading. If Berlin pays the bills and tells the rest of Europe how to behave. governments struggle to take collective decisions. the EU's aborted constitution. As the euro crisis has shown. it fills in two holes in the single currency's original design. has problems. And like the other version of the superstate. feels like misery. it would strengthen the camp in Britain arguing for an exit—a problem not just for Britons but for all economically liberal Europeans That is why our rescue seeks to limit both the burden-sharing and the concession of sovereignty. The Lisbon treaty and its precursor. 60 . But that. But in both cases the answer is not to transfer everything to the EU level. The small countries of the euro zone fear that the big ones would hold too much sway. deposit insurance and regulation. Another version of the superstate is to accept that politics remains stubbornly national—and to increase the power of governments to police their neighbours. For most Europeans. too. The second is fiscal: euro-zone governments will be able to manage—and reduce—their fiscal burdens only with a limited mutualisation of debt. And there is no evidence that voters feel close to the EU. The parliament is hopelessly remote.Yet to see the euro crisis as a chance to federalise the EU would be to misread people's appetite for integration. Rather than building a federal system. the outcome of the EU's most ambitious project. it risks fostering destructive nationalist resentment against Germany. The first is financial: the euro zone needs a region-wide system of bank supervision. ten governments reneged on promises to put constitutional reform to the vote. recapitalisation. were together rejected in three out of six referendums. the euro.
61 . The new mutualised-bond market. The solution is a narrower Eurobond that mutualises a limited amount of debt for a limited amount of time. but increasingly European. Rather than issuing new national government bonds. a part of the economy where monetary union has already swept away national boundaries. nor need Eurobonds cover all government debts. The best option is to build on an idea put forward by Germany's Council of Economic Experts. The fiscal integration can also be limited. A first step would be to use Europe's rescue funds to recapitalise weak banks. to mutualise the current debts of all euro-zone economies above 60% of their GDP. European integration has moved farthest in finance.Begin with the banks. Since the euro's creation. with collective resources for the recapitalisation of endangered institutions and regional rules for the resolution of truly failed banks. Politicians will no longer be able to force their banks to support national firms or buy their government bonds. while their French peers funded Greece's borrowing. All that is required is for overindebted countries to have access to money and for banks to have a ―safe‖ euro-wide class of assets that is not tied to the fortunes of one country. Banks will no longer be Spanish or German. particularly in Spain. At a minimum there must be a euro-zone-wide system of deposit insurance and oversight. Banks sprawl across national borders. from Germany (debt: 81% of GDP) to Italy (120%) would issue only these joint bonds until their national debts fell to the 60% threshold. But a common system of deposit insurance needs to be rapidly set up. These are big changes. Brussels need not take charge of tax and spending. German banks fuelled Spain's property boom. everybody. But it is limited to finance. The answer is to move the supervision and support of banks (or at least big ones) away from national regulators to European ones. Make no mistake: this is integration.
Spaniards. Austrians and the Dutch feel enough solidarity with Italians. but it is more manageable than trying to redesign Brussels from the top down. So it is a long agenda. 62 . But it is not a move to wholesale fiscal federalism. would be paid off over the next 25 years. One question remains: will Germans. Countries would have to find convincing ways to commit future governments to pay their share of the interest on the Eurobonds. which curbs excessive borrowing and deficits. and January's fiscal compact. Under our scheme. These joint bonds would not require intrusive federal fiscal oversight. to make that case. Limited in scope and time. they do not fall foul of Germany's constitutional constraints. including Britain. Portuguese and Irish to pay up? We believe that to do so is in their own interests. they can be built from last autumn's beefed-up ―six pack‖. So far Mrs Merkel has opposed all forms of mutualisation (and did so again this week—see Charlemagne). subsidising riskier borrowers. and Mrs Merkel in particular. are not members of the euro. The single banking regulator might require a treaty change.worth some €2. Indeed. The time has come for Europe's leaders. The treaty setting up Europe's bail-out fund would also have to be changed to allow money to be supplied directly to banks. Even this more limited version of federalism is tricky.3 trillion. which enshrines budget discipline in law and is now being ratified across the euro zone. which would be difficult when ten EU countries. Germany would pay more on a slug of its debt. and it is less costly than a break-up. Saving the euro is desirable and it is doable. Greece's debts so outweigh its economy that it would need a further rescue before entering any mutualisation scheme—though the sum involved is small on a continental scale. Each country would pledge a specified tax (such as a VAT surcharge) to provide the cash.
63 . Austerity measures have been wildly unpopular in Greece. If Greece reneges and international bailout funds are withdrawn. and not slipping back into a recession as expected. The European union faces a serious existence threat. with those most responsible for agreeing to the pact's terms ousted in the nation's recent elections and Greek political leaders failing to cobble together a coalition government to replace them. European officials. led by Germany. However. agreed to bail out Athens in return for budget-tightening and other austerity measures. The failure to form a coalition government has led Greece to call another set of elections for June. Most Greeks say they do not want to abandon the euro. and that European officials may be willing to renegotiate the terms of the original deal to keep it there. Syriza is now polling first. The Debt deal negotiated to rescue Greece from default faces the threat of collapse. Greece will begin to run out of money as early as late June and may have to return to its old currency. Others are hopeful. where there has been little economic growth and high unemployment in the last couple of years. some argue that a return to the drachma may allow Greece to become more competitive in the long run as it would allow Greece more control over its monetary and trade policy. A Greek departure from the eurozone would roil the global economy and cause chaos in Greece. but the leader of the anti-austerity Syriza Party declared the bailout deal "null and void" after the May 6 elections in which his party placed second. that new numbers showing the European economy to be flat. however.Conclusion: Greece shouls Exit the European Union. the drachma. will convince Greeks to stay in the eurozone. and exit the eurozone. leading many financial analysts and traders to worry that a Greek exit from the eurozone is inevitable.
“Either place yourself at the mercy of capital. or adopt a new weapon – this is the alternative imperialism puts before the vast masses of the proletariat. Imperialism bring the working class to revolution 64 . eke out a wretched existence and sink lower and lower.
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