As more and more countries within the European Union (EU) struggle economically, questions are increasingly being raised on the sustainability of the EU.
The credit crunch in the eurozone, winding down of failing institutions, the rising sovereign debt, growing unemployment, uncertainty, and falling growth have raised questions over the single unit currency.
Analysts and economists are worried over the growing Euroscepticism and with the public opinion on the downward slide in crisis-hit nations, doubts over the single currency are only growing.
The euro currency, launched on January 1, 1999, was used by EU 17 (Euro Area) countries and used by more than 331 million people. At the Maastricht summit in February 1992, it was agreed that to join the currency, member states had to qualify by meeting the terms of the treaty in terms of budget deficits, inflation, interest rates and other monetary requirements.
Under the Maastricht treaty, they pledged to limit their deficit spending and debt levels. However, in the early 2000s, some EU member states were failing to stay within the confines of the Maastricht criteria and turned to securitising future government revenues to reduce their debts and/or deficits, sidestepping best practice and ignoring international standards.
This has allowed the sovereigns to mask their deficit and debt levels through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions, and the use of complex currency and credit derivatives structures.
The failure of monetary policy in euro-zone and unsustainable load of debt has led to a broader economic collapse among southern European countries. This could envelop and threaten the greater states.
Little bit Greece-y
Greece, among many southern European countries, has received several bailouts from the EU and IMF in exchange for the adoption of EU-mandated austerity measures to cut public spending and a significant increase in taxes. This has sent the country into economic recession and has caused social unrest.
The Greek citizens have now voted against a bailout and further EU austerity measures. This decision has raised the possibility that Greece might leave the European Monetary Union (EMU) entirely.
The withdrawal of a nation from the EMU is unprecedented, and if it returned to using the Drachma, the speculated effects on Greece’s economy ranged from total economic collapse to a surprise recovery.
There were several reasons for the crisis.
Firstly, there were no penalties for countries that violated the debt-to-GDP ratios. These ratios were set by the EU’s founding Maastricht Criteria. Why not? France and Germany also were spending above the limit. They’d be hypocritical to sanction others until they got their own houses in order. There were no teeth in any sanctions except expulsion from the eurozone, a harsh penalty which would weaken the power of the euro itself. The EU wanted to strengthen the euro’s power. That put pressure on EU members, not in the eurozone.
Second off, eurozone countries benefited from the euro’s power. They enjoyed the low-interest rates and increased investment capital. Most of this flow of capital was from Germany and France to the southern nations. This increased liquidity raised wages and prices. That made their exports less competitive.
Countries using the euro couldn’t do what most countries do to cool inflation. They couldn’t raise interest rates or print less currency. During the recession, tax revenues fell. At the same time, public spending rose to pay for unemployment and other benefits.
Finally, austerity measures slowed economic growth by being too restrictive.
For example, the OECD said austerity measures would make Greece more competitive. It needed to improve its public finance management and reporting. It was healthy to increase cutbacks on public employee pensions and wages. It was a good economic practice to lower its trade barriers.
As a result, exports rose. The OECD said Greece needed to crack down on tax dodgers. It recommended the sale of state-owned businesses to raise funds.
In return for austerity measures, Greece’s debt has been cut in half. But these measures have also slowed the Greek economy. They have increased unemployment, cut back consumer spending, and reduced capital needed for lending.
The Financial Dimensions
The financial dimensions to the crisis have three components – a sovereign debt crisis and a banking crisis and divergence in competitiveness. The political dimension is that Germany does not seek the dominant position into which it has been thrust and did not accept the obligation and liability and was imposing wrong policies on the euro-zone.
The globalisation of finance, easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices, and international trade imbalances have worsened the situation
Tackling the financial crisis
In order to tackle the financial, currency and debt crises, the Southern countries have gone for budget tightening, austerity measures, and spending cuts, and sought bailouts from rich nations. In doing so, they had to surrender sovereign powers and bow to conditions to the rich nation, which has led to a vertiginous decline in the trust in the EU and Euro.