Unidad

Unit 3 /1Learning
/ Escenario
environment
2 5
Lectura Fundamental
Essential reading

Currentdeperspective
Etapas un plan de of
comunicación
Europe and
estratégica
its main challenges in the short term

Index

1 The experience of the european economy with the crash

2 German leadership and its role in the rescue of Europe

3 How was the economy recovered? The experience of the european economy

4 Europe 2020

5 The perspective for the near future

Key words: european challenges, economic crisis, brexit, leadership styles, 2020 strategy, european future.
Introduction

Figure 1. Mountain Matterhorn, Switzerland.

Source: topntp26 (2018).

As is well known, the European Union, being a single market of 28 countries (before Brexit), is a
leading commercial power and a set of countries with different characteristics in terms of cultures,
local economies and socio-political contexts. That is why it is a great challenge to make joint
decisions, however, with the different treaties, supranational bodies have been created to help the
creation of a joint political heritage.

Economic policies continue to be a challenge, since they depend on the development of the
countries and on how this face the different crises. The paradigm is determined by how the joint
decisions of each country favors or impacts the economy, and vice versa, as well as the economic
impacts of the crises on the group of members of the European Union.

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Issues such as the Italian budgets, the uncertainty derived from the Brexit, the recovery of Spain and
Greece, the commercial tensions and the withdrawal of stimuli from the European Central Bank are
situations that represent great challenges for the stability of the European Union and the Eurozone.

The goal of this reading is to analyze these issues, knowing how the last crises in Europe have
developed and dealt with, based on the specific cases of countries like Spain, Greece, Portugal, Italy
and Ireland. It also shows the fundamental role that countries like Germany and France played in the
EU during the crises. Besides, it is important to understand the situation of England regarding the
Brexit process, a crucial issue for the future of the country and the EU.

1. The experience of the european economy with the crash

The crisis began in the financial system of the United States and it spread over the European financial
institutions. It had an outstanding impact due to the interdependence of financial markets and the
similarity of the European and American models: the overlap between financial institutions and real
estate development companies. From there it affected the economy with serious consequences for
production, employment and public finances, particularly in the countries of southern Europe.

In the fall of 2008, the outlook in the banking sector was unsustainable, due to great speculation, the
securities and titles people had bought had no longer enough value. In some European countries there
were mainly three different bubbles: the real estate, the government and finance. When they finally
exploded it was necessary to face the consequences of each one.

The European economy suffered an unprecedented blow. In 2009 there was a GDP contraction of
4.5%; the unemployment was one digit in that year with 9%, but after the crash it reached 10% on
average and in the following years it remained with two digits. A temporary pause on the economic
decline in 2010 proved to be short lived and the negative trends continued (European Commission,
2014).

In 2011, the economic activity weakened steadily since the crisis in the eurozone intensified, which
was subject to a contraction in the last quarter of 0.3% of GDP, both in the eurozone and the EU.
The consequences of the financial crisis of 2011 and the wave of austerity that lied ahead would push
the EU to a moderate recession in 2012 and a weak recovery in 2013 (0.5%), to the extent that the
European Central Bank injected liquidity to economies with greater imbalances to stabilize financial
markets in the short term.

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 1.1. What happened in the eurozone?

Some experts affirm that “The origin of this crisis is the economic incongruence of the creation of
a common currency for totally different economies in terms of productivity and competitiveness,
without a common fiscal policy, without a common banking regulation” (Castells, 2013).

The existence of a single currency somehow prevented structural adjustments through currency
devaluation, this led to take measures to avoid the bankruptcy of governments and national financial
systems, but there was an option, between rescuing said governments, countries and banks with
funds from other countries or eject them from the eurozone. The first option was taken. An essential
political decision that led to the loss of economic sovereignty on the part of the rescued countries
and the submission to the political decisions of the rescuers. It was a political option with important
economic and social consequences (Castells, 2013).

Figure 2. Eurozone.
Source: zurijeta (2018).

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Greece, Portugal, Ireland, Spain and Italy had a high sovereign debt, and their titles had a great
speculation. The earned money with the so-called “credit defaults swap” were surely falling credit.
Many families went into debt because the banks gave credit to anyone. The problem was that only
the rich people got benefited from the money of an economy gone in bankruptcy.

The impact of this crisis was different for every country. For example, Greece was one of
the countries that received the most bailouts, because it had the highest public debt with
approximately 115% and a deficit of 13.6% of GDP in 2010. At the other side there were countries
like Luxembourg and Finland that maintained debt limits of less than 3% (Aldemar et al., 2016).

Two factors aggravated the crisis: the level of exposure to the mortgage market and the level of
politicization of body governing. In the case of Spain both happened, which became the symbol of
bad management.

1.2. The crisis after the euro and the impact of the economic crash: the case of
Spain

In the 2000s, Spain was doing very well economically. Unemployment was low; companies that had
just been privatized debuted in the stock exchange and internationalized; the IBEX 35 was profitable;
Spanish companies such as the telephone companies, Repsol, BBVA, Inditex, Santander and Endesa
were recognized for their stability; the public debt had decreased from 65% of GDP in 1996 to 55%
in 2000; the GDP grew more than 5% in 2000 one of the highest in Europe. Spanish capitalism was
a great example of success. (EDJNet, 2019).

Nevertheless, in 2003 Spain entered an economical decrease to the point of failing the payment of
its obligations for different bubbles: real state, finance and a fiscal.

But how was the financial bubble generated? When the European Central Bank lowered interest
rates in 2001, private banks in the euro countries, including Spain, generated several loans to Spanish
companies and families; they began to borrow excessively, thus their debt increased from 300,000
million euros in 2001 to more than 800,000 million in 2007. Simultaneously, the debt of companies
multiplied by more than three, going from 400,000 million euros to 1.2 billion; the problem was that
all this credit was to finance construction, which generated more than 200% of inflation (European
Central Bank, 2017).

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The real state bubble had its own chain of events. Savings were backed in the real estate sector, in
supremely expensive housing; it had grown at a rate of 5% per year. Throughout the 2000s to 2010
the most profitable market was real estate, as expected. In Spain, land became more expensive and
the bubble was unsustainable, because it had been promoted by the state with many plans for urban
expansion. In addition, market was more important and corruption rates took place in Spain.

Finally, there was also the fiscal Bubble. Fiscally a lot of money came in, public spending increased
broadly, many infrastructure investments were made, although some were not necessary. Electricity
costs increased due to the problems in the coal and electricity sector. In some autonomous
communities of Spain, taxes were not collected but they were spent.

In early 2006, when the European Central Bank started to raise interest rates, it was too late,
because this caused the discouragement of investment, and all the deficits began to appear in
the light, which was accompanied by the fall of Leeman Brothers in 2008.

“A successful central bank should be like a referee whose success is judged by

how little his or her decisions intrude into the game itself”. Mervyn King.

In that year elections were held in Spain, and José Luis Rodríguez Zapatero was elected, who,
instead of taking austerity measures, continued to increase spending with the argument that
this would increase investment again and stimulate demand, thus seeking to apply Keynesian
principles. However, by continuing to spend on works that were not necessary, the situation
worsened. In 2010 he was forced to cut 5% of salaries and to freeze pensions. The number of
public employees and hires however continued to rise, but the number of registered pensioners
decreased which made the measures unsustainable.

In 2011, President Mariano Rajoy announced that he would cut spending and go to austerity. On
the other hand, taxes began to rise especially on income, affecting the small companies, that had
the ability to create wealth but were having to give more money to the government, who continued
to increase spending. This caused unemployment to increase at 23% and more.

There was a lot of interventionism, but it was necessary; they had to puncture the bubbles and clean
up. In summary, the government should reduce expenses by decreasing the deficit, and the economy
should be revitalized allowing entrepreneurs to create more industry.

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 1.3. How was the crisis faced in Greece?

Greece had become heavily indebted. Although Greece is too small to cause a crisis in the EU, the
crisis in this country grew to an extreme way after the financial crash created a lot of confusion that
led Europe to take drastic measures to help.

Fiscal bankruptcy of countries like Greece forced them to take loans to survive. This situation
repeated to some extent in countries like Ireland, Spain, and Portugal. Greece began to receive
money from Germany and Europe, helping banks and investors, but not people, under the guarantee
that the Greek state could continue paying interest and past dues. Nevertheless, with austerity
policies, the retirements and salaries continue to fall.

All these measurements could not solve the problems. Indeed, how could Greece and the other
countries return their debts if people earned very little or were constantly unemployed?

By 2012, Greece had received more than 240,000 million to cover 76% of the debt. However, after
several years of practicing the policy of austerity, the European Central Bank began to practice the
footsteps of the Federal Reserve of the United States, a sort of quantitative flexibilization to inject
liquidity into the economy to try to reactivate it.

But this is how the business of speculation remains active. Some experts suggested that what was
needed in countries like Greece was a type of Marshall Plan to reactivate the economy and have more
money to invested in real things, such as infrastructure or renewable energies, not in repayments of
credit.

2. German leadership and its role in the rescue of Europe

Germany was also affected in some way by the crisis, although to a lesser extent than the countries
mentioned. Many workers were forced to accept any work available, for which salaries stagnated.
Because of the low salaries, products were cheaper and exports increased.

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Figure 3. Market at Papenburg, Germany
Source: Wikimedia Commons Contributors (2018).

Germany’s high exports favored its economy, but the other countries were at a disadvantage, since
they could not compete: their sells were low and they had to buy a lot, so they had to go into debt.
For other countries to have another opportunity in the world market, it was necessary for salaries
in Germany to grow again. For this, a minimum salary of 8.50 euros per hour had to be introduced,
labor loans, temporary work and short jobs should be limited, that is, salaries should be strongly
binding.

Germany’s role was key, Merkel’s government saw a historic opportunity to reconfigure Europe in
the interests of Germany while saving the euro and preserving the interests of German banks by
protecting them from a widespread bankruptcy of their own.

So, a series of mechanisms and financial institutions controlled politically by Germany were
implemented: the European technocracy and, to a lesser extent, the IMF, which offered to rescue
countries and banks, and in the end the euro, in exchange for:

• A structural reform of the European institutions, moving towards an economic federalism, a

prelude to a political federalism, under German leadership.

• Austerity policies in the short term to cut public spending, public employment and social
benefits, to concentrate the available resources in the stabilization of the financial system
(Castells, 2013).

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Cutting public spending left European governments with no possibility of carrying out national
strategies to overcome the crisis, so that only with Germany’s contribution and approval would
Europe emerge from the crisis. Europe transformed to a German Europe.

3. How was the economy recovered? The experience of the european

economy
At the beginning of 2016, the eurozone recovered the level of GDP prior to the shock derived from
the crisis and slightly surpassed in volume the figures reached before the Great Recession. However,
the recovery was slight and uneven in each European country, so during the process economic
rescues were needed for some countries in the eurozone. They spent more than 8 years for their
recovery. According to economists like the Nobel Joseph Stiglitz, “It is practically a decade that will
remain as the testimony of the economic disaster of the eurozone” (Stiglitz, 2018, p.3)

A huge symptom of recovery can be seen in 2017, when the GDP was worth 17,277.70 billion USD,
representing approximately 28% of the world economy. The average of the GDP was 7,421.83 billion
USD from 1960 until 2017, reaching an all-time high of 19,137.01 billion USD in 2008 and a record
low of 359,03 billion USD in 1960 (European Union, 2018).

The data announced in January 2019 by Eurostat broke a new barrier: in November, the
unemployment rate in the euro countries stood at 7.9%, the best figure in more than a decade; the
GDP recovered showing one of the highest and continuous growth, accumulating 22 quarters in a
series of growth in which GDP advanced by 10%. In this way, at least 13 million people were seeking
employment in the eurozone countries, according to the European statistical agency. They are
90,000 less than a month ago and 1.13 million less than a year ago (Sánchez, 2019).

More recently, albeit weak, the EU has shown signs of recovery, registering expansions of its real
GDP of 2.4%-2.6% annually during 2017-2018, but still below its potential 3%. It remains to be
seen if this recovery can be consolidated amid the high political and financial uncertainty, especially
in Spain and Italy, where the European Central Bank has reversed its intentions to increase interest
rates in 2018 (Clavijo, 2018).

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 3.1. What was done to lower the debt inflation in the eurozone?

A gradual recovery has been happening since 2014, with the real GDP by 1.5% and 2.0% in 2015
at the EU. And in order to adjust inflation, the European Central Bank began in 2015 to buy debt
gradually. This worked and allowed to reduce inflation; it sought to reach average levels of 1.7% in
the next two years. And starting 2018, when the economy was already in a better state, the Bank
began the gradual dismantling of the aid that had been generated, reducing the monthly number of
purchases. However, the investment was maintained, and budgets were taken care of with the idea of
keeping liquidity in good condition. (González Páramo, 2011)

4. Europe 2020
Something that has been important for the recovery was the strategy Europe 2020; which was
proposed to face:

• Background

• Low growth

• Low productivity levels

• Deteriorating economy

• Social environment

The strategy searched a growth model that went beyond increasing GDP, “to achieve a sustainable
future”, then the EU needed to “tackle its structural weaknesses” and “already look beyond the short-
term”(European Commission, 2014).

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 Inclusive growth

Stability of intitucions
guaranteeing democracy.
Sustainable growth

functioning market economy.

Dedicated delivered system

Ability to take on the

obligations of membership. Europe Sustainable Future

Figure 4. Europe 2020 Strategy.

Source: Own elaboration.

The EU average expresses diverse growth trajectories and very different experiences during the crisis
across its members, with some countries getting particularly hit hard and others recovering over
time. At the launch of the Europe 2020 strategy in 2010, the depth and length of the crisis were still
largely unknown (European Commission, 2014).

5. The perspective for the near future

During the month of January of every year, in Davos-Klosters, Switzerland, world leaders meet to
discuss about the current challenges and future perspective of the world economy and development.

A major challenge is the international climate agreement reached in Paris in 2016 that offers new
models of public-private cooperation. It’s worth mentioning that global warming has increased the
temperature in recent years to more than the pre-industrial level.

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The experts of Davos have a term of 10 years to solve global issues like weapons of mass destruction,
but even this comes second to the greatest issue: the consequences of climate change: the lack of
water and the involuntary migration, that are escalating quickly and having a great impact due to
the rise or fall in energy prices (Beltrán, 2018). This is a difficult task, with many factors to take into
account: the cost of oil, the ratio of raw materials, the growth of the world economy, etc.

These and others, like the refugee crisis in Europe, are the issues that are part of the agenda that
is normally discussed in Davos, in order to foresee the impact that these phenomena have on the
economy.

During these meetings, Germany, France and Italy improve the functioning of capitalism to increase
the reactivation of the economy, advocate free trade and not protectionism. England, explained to
attendees in Davos on the principles that make world trade work for all, as well as the measures that
country is taking as it leaves the European Union, driven world trade, the new bilateral agreements
with countries around the world (Beltrán, 2018).

As a result of these meetings, the International Monetary Fund rises to its global growth forecasts for
2018 and 2019 to 3.9% in GDP, hoping that the global economy will continue to recover thanks to
the flourishing trade and investment (European Union, 2018).

The president of the European Commission, Jean-Claude Juncker, stablishes the importance of the
Davos meetings by stating that currently “most of the challenges are global and can only be tackled
together”. In his opinion, acting in this way “magnifies the ability of countries to retain sovereignty
over relevant issues, a sovereignty that would otherwise be lost in this global world”

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References
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Debt Crisis. The New York Times. Retrieved from https://www.nytimes.com/interactive/2016/
business/international/greece-debt-crisis-euro.html

Beltran, W. (January 29 2018). Davos la Pequeña Ciudad Suiza y las Conclusiones del Foro Económico
Mundial. Nota Económica. Retrieved from http://wibelher.wixsite.com/nota-economica-wbh/
single-post/2018/01/29/Davos-la-Peque%C3%B1a-Ciudad-Suiza-y-las-Conclusiones-del-Foro-
Econ%C3%B3mico-Mundial

Castells, M. (2013). La crisis económica europea: una crisis política. Retrieved from http://www.
europeg.com/files/Crisis%20de%20Europa.pdf

Clavijo, S (June 28 2018). ¿Qué ha pasado en cinco años del TLC Colombia-Unión Europea? La
República. Retrieved from https://www.larepublica.co/analisis/sergio-clavijo-500041/que-ha-
pasado-en-cinco-anos-del-tlc-colombia-union-europea-2743681

EDJNet. (2019). Public Debt: Europe is not that Scary. European Data Journalism Network. Retrieved
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scary

European Central Bank. (October 9 2017). Between Low Interest Rates and Bond Purchases - Has
European Monetary Policy Reached a Dead End? European Central Bank. Retrieved from https://www.
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European Commission. (2014). Taking Stock of the Europe 2020 Strategy for Smart,
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ALL/?uri=CELEX%3A52014DC0130R%2801%29

European Union. (2018). The Economy. Retrieved from https://europa.eu/european-union/about-eu/

figures/economy_en

González-Páramo, J. M. (2011). The ECB’s Monetary Policy During the Crisis. European Central Bank
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Mac Donald, F. (October 10 2012). Impacto Macroeconómico del Desempleo en los Países Europeos.
Econlink. Retrieved from https://www.econlink.com.ar/europa/desempleo-paises

Sánchez, A. (2019). Desempleo en la zona euro bajó del 8 % tras diez años. El Tiempo. Retrieved from
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POLITÉCNICO GRANCOLOMBIANO 13
Stiglitz, J. (2017). The Euro: How a Common Currency Threatens the Future of Europe. New York: W. W.
Norton & Company.

Stiglitz, J. (June 13 2018). The Euro Could Be Nearing a Crisis – Can it Be Saved? The Guardian.
Retrieved from https://www.theguardian.com/business/2018/jun/13/euro-growth-eurozone-joseph-
stiglitz

Torrecuadrada, S. & Gacía, P. (2017). ¿Qué es el Brexit? Origen y posibles consecuencias. Anuario
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Figure references
Topntp26. (2018). Mountain Matterhorn, Switzerland [Photography]. Retrieved from https://www.
freepik.es/fotos-premium/matterhorn-stellisee-lake-zermatt_3450295.htm

Wikimedia Commons Contributors (2018). Market at Papenburg, Germany [Photography].

Retrieved from https://commons.wikimedia.org/w/index.php?title=File:Papenburg_-_
Mittelaltermarkt_2017_31_ies.jpg&oldid=309422377

Zurijeta. (2018). Eurozone [Photography]. Retrieved from https://www.freepik.com/premium-photo/

euro-symbol-frankfurt_2050892.htm

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 TECHNICAL INFORMATION

Module: Cultura y Economía Regional de Europa

Unit 3: Current situation of the region and special cases
of study
Learning environment 5: Current perspective of Europe
and its main challenges in the short term

Author: Andrea Carolina Ramírez Ruiz

Pedagogical Advisor: Alexandra Bolaños

Graphic Designer: Andrés Felipe Figueroa
Assistant: Laura Delgado

This material belongs to Politécnico Grancolombiano

Its partial or total reproduction is prohibited

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