Eurocrisis

Published: 2021-07-22 18:45:06
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European integration pre-crisis2 Paris Treaty2 Rome Treaty3 Maastricht Treaty3 The European Integration through a Single Currency4 TRANSITIONAL STAGE 1999-2001 : Official launch of the EURO4 II. The Euro-crisis5 The EURO Crisis: Timeline of the Events5 2001-20085 20095 20105 20116 20127 The EURO Crisis: The result of a failed European Integration. 7 III. Redefinition of the European Integration9 Addressing the Crisis through remedies9 New rules for integrating new countries9
Conclusion10 Bibliography11 Newspaper articles (online/electronic article)11 Books12 Introduction The obvious answer is that yes, the euro-crisis has had an impact on the European integration process, making it more difficult for new countries to access to the EU. It is the European integration of the previous years that has in fact led to the current European crisis and as a result, the European integration would have to be redefined so as not to fall into the same traps of past years. More stringent rules of accession to the EU, such as stricter public deficit limits, more powers of sanctions from the EU commission to member states etc…). We will explore in a first part how the European integration was conceived and orchestrated pre-crisis, the rules of accession established by the different treaties, as well as the single currency process, then we will go through a brief outline of the crisis as well as the reasons of the whole crisis we are in, to finally address the problem and attempt a redefinition of the European integration process.
Despite an intricate and developed model of regional integration as well as the will from European leaders to lead a united front towards European integration, the EU integration model did present its flaws and showed its weaknesses leading to the current EURO crisis… let us now begin by looking at the European integration process pre-crisis. I. European integration pre-crisis Paris Treaty The promotion of European unity has been around for 60 years now.
The critical first steps towards European integration were taken into practice after World War 2 in 1950 when the first aim was to bring together Europe’s national coal and steel industries under the administration of a single joint treaty. This treaty the Treaty of Paris was founded in 1952 and included six member states, France, West Germany, Italy and three Benelux countries. They united together with three priorities; “postwar economic construction, the desire to prevent European nationalism leading once again to conflict, and the need for security in the face of threats posed by the cold war. (McCormick, J. 2011) Rome Treaty Europe has progressed significantly since the first step towards integration and the European union is one of the most developed models of regional integration. Over the past 60 years the establishment of treaties have enabled Europe to be a more integrated market (McCormick, J. 2011). Following the treaty of Paris the Treaty of Rome was established which created a free market with the removal of internal barriers and the agreed external tariff rate.
Monopoly power decreased leaving businesses to be more competitive, a common agriculture policy was agreed upon to ensure stable prices and a competitive market. Maastricht Treaty The Maastricht treaty was signed in 1992 having significant impacts on the contracts of the member states of the EU as it was designed “ to achieve ‘an even closer union among the peoples of Europe where decisions are taken as closely as possible to citizens. ’” Three pillars were created to be able to achieve these objectives.
The first pillar formalized the community’s commitment to what already happened in practice in the European community as well as covering the economic and monetary union (McCormick, J. 2011). The second established common foreign and security policy and the third pillar concerns police and criminal law matters. All member states met the Maastricht convergence criteria that allowed them entry into the eurozone apart from Greece (Watts, D. 2008). The conditions installed by Maastricht (McCormick, J. 2011) set the standards for future accessions of countries, so that the Eurozone would be sure not to take on any troubled economies.
The conditions were as followed; 1/ The inflation rate of the country must be “no more than the average of the rate in the three countries with the lowest inflation rate. ” 2/ the budget deficit must be “ no more than 3 per cent of GDP and its national debt no more than 60 per cent of GDP. ” 3/ the country’s long term interest rate was to be “no more than 2 per cent of the average of the rate in the three countries with the lowest rates. ” 4/ lastly the country’s currency must not have been “devalued against other member states’ for at least two years prior to monetary union. The European Integration through a Single Currency TRANSITIONAL STAGE 1999-2001 : Official launch of the EURO In 1999 the single currency the ‘euro’ was introduced and some countries abolished their separate currencies, these included Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxemburg, Netherlands, Portugal and Spain. Since then another five EU countries have adopted the currency, these being: Slovenia, Cyprus, Malta, Slovakia and Estonia. Fewer barriers within the market was a fundamental part of a more integrated Europe.
Member countries were struggling to keep their currencies stable relative to the European currency unit and trading costs were high due to the expense of exchange rates which was causing the single market to not function properly. The integration could not happen for the member states without some sacrifice, namely resulted in some loss of autonomy. This issue with adopting a single currency carries financial instability, by which member countries no longer would have control over their domestic economic polices, including the control over interest rates, loss of sovereignty, and an absence of strong an institutional framework (ECB, 2012).
The final stage in 2002 saw the introduction of coins and bills for circulation, and participating Eurozone countries original currencies disappeared. Now that we have defined the European integration process through its founding treaties and the single currency, let us now look into the Euro-Crisis through a Timeline of the different main events, as well as identify the reasons of the EURO-Crisis. II. The Euro-crisis The EURO Crisis: Timeline of the Events 2001-2008 In 2001 Greece joined the Euro region with the highest yield for 10 year bonds, they were the country with the highest risk of lending to. Bloomberg, 2012). Germany and France in 2003 announce they expect to exceed the EU’s 3 percent deficit limit for the third year, and Germany push for relaxed deficit rules (Bloomberg, 2012). In 2008 Malta and Cyprus joined the Eurozone (BBC news, 2012). Following this Lehman Brothers declared bankruptcy which caused worldwide market panic (Bloomberg, 2012), EU leaders agreed on a 200 billion-Euro stimulus plan that would help boost the European economy following the global financial crisis (BBC news, 2012). 2009
Slovakia joined the Eurozone in 2009 and four other countries joined the exchange rate mechanism in order to bring their monetary policies and currencies to the same level as the euro in preparation for Eurozone membership. These countries included Estonia, Denmark, Latvia and Lithuania (BBC news, 2012). Later on France, Spain, Ireland and Greece were pressured to cut their budget deficits as debts start to grow. As the global economies slowed Greece’s deficit became higher than previously thought and the countries finances weakened which caused Greece’s debt rating to be cut from A to A-.
Greece forecasted an increase in budget deficit to 12. 5 percent of GDP by 2009 (Bloomberg, 2012) way above Eurozone membership requirement of 3 per cent of GDP and national debt was 113% of GDP, nearly double Eurozone limit of 60% (BBC news, 2012). Following this Greece’s debt was further down graded to BBB+ from A1 (Bloomberg, 2012). 2010 With concerns over other heavily indebted European countries arise including; Portugal, Ireland, Greece and Spain. Spain and Portugal launch austerity measure, with Spain’s budget deficit at 11. 2 percent of GDP. Both countries governments cut public spending and raised taxes (Steiner, S. 012). The EU leaders held a summit on Greece, on the 2 May the “Euro-region (and IMF) agree on a 110 billion-euro rescue package for Greece” and Greece agrees to austerity cuts of 30 billion-euros over the next three years in exchange for aid (Bloomberg, 2012). In 2010 Greece’s budget deficit increased with a deficit more than four times the requirement of EU rules (BBC News, 2012). Greece adopted a plan to bring the European union’s largest budget deficit within the EU limit by 2012 (Bloomberg, 2012), and the ECB announce that Greece “won’t win any special treatment from the central bank. (Jean-Claude, T, 2010). The European central bank omitted Greece having to leave the EU, with the EU commissioner Joaquin Almunia saying, “ Greece will not default. In the euro area, default does not exist. ” (Bloomberg, 2012). The European financial stability facility (EFSF), was set up as a provider of loans, leading money to countries that were struggling. They issued bonds guaranteed by the euro-area countries and helped failing banks and financial institutions through loans to governments (Steiner, S. 2012). Ireland was the next country to request a bailout package from the EU and
IMF of a total of 85 billion-euro which enables it to handle its worst budget in the country’s history (BBC News, 2012). The value of the Euro continues to fall as other countries debt increased and brings about further worries to the EU. 2011 The year 2011 begins with Eastona joining the Euro, increasing the number of countries with the single currency to 17 (BBC News, 2012), Portugal requested EU bailout funds and received 78 billion-euros from Eurozone and IMF (BBC News, 2012). In order to fight inflation the European central bank raised interest rates from 1% to 1. percent as inflation was 2. 6 per cent, which was above the ECB target inflation rate of below 2 per cent. EU publishes new debt deficit forecasts predicting Ireland, Portugal and Greece will all have debts more than their GDP (Bloomberg, 2012). The Eurozone is forced to continue expanding Greece’s bailout package in order to “prevent contagion among other European economies. ” As worries of the crisis spreading around Europe increased, EU members made plans to set up a permanent rescue fund, funded by the Euro-area countries to establish a secure European stability mechanism. 2012
European central bank was forced to buy Spanish and Italian bonds in order to bring down their borrowing costs amid concerns that the debt crisis will spread to the larger economies of Italy and Spain (BBC News, 2012). Hungary failed to meet budgetary targets and EU finance payments were suspended, however they were reinstated as the governments made plans to push their budget deficit down to EU target. Spain requested 100 billion-euros (Bloomberg, 2012) to bail out banks in order to help the financial sector and avoid austerity measures that other countries that were bailed out were forced to implicate.
Following Spain, Cyprus was the fifth Eurozone country to ask for bail out, it was predicted that 10 billion-euros was needed to bail Cyprus out (Yahoo Finance, 2012). Having gone through the timeline of events that marked the eurozone crisis, we can clearly see that the European integration is in fact at the origin of what has lead us to the Euro Crisis. It is Indeed those very measures of the integration that have led to the crisis (the will to include an increasing number of member states, the integration of these member states in haste, with sometimes being somewhat complacent budgetary situation of these countries).
The EURO Crisis: The result of a failed European Integration. An interview in Bloomberg (2011) with the former ECB chief states that, “there should have been better monitoring, better scrutiny and more sanctioning,” then the crisis could have been avoided. An integration done in haste, there was a rush to encourage many countries to join the Eurozone and too early. The single currency was seen as the key to increased European integration. However we can now see that countries should have held back and waited until Europe was more integrated before joining the eurozone.
There was a failure to impose budgetary discipline to member states. Greece has been in budget deficit for several decades (Fair observer, 2011) Greece’s economy was never fit enough to join the Euro in the first place and the idea was only presented to them at the time of economic boom in capital markets, where there was a rush for a more integrated market. The European commission says that Greece’s budget has not been within the 3 percent limit since the year of its accession (Bloomberg, 2011). Although these limits were set member countries failed to meet their own budget targets.
There was a lack of sanction in the EU, Greece did not receive any penalties except for being told to tighten up their bookkeeping (Bloomberg, 2011). The EU did not issue penalties to countries that did not meet the debt to GDP set out in Maastricht criteria, as a result of these issues not being faced initially, the ratio continued to increase and no improvements were made. It did not help when Germany and France helped to relax the criteria when they failed to meet the deficit targets for three years before 2005 (Bloomberg, 2012). There were flaws in the treaty that actually made up the integration of Europe.
For example, it is interesting to see that the Maastricht treaty assumed that only the public sector could cause such enormous debts assuming financial markets could always be corrected. We can obviously observe that this may have been the most instrumental mistake as the treaty missed out the possibility that an event of a public debt of a eurozone country where the “currency union would have no bail out, no exit and no default. ” (Business standard, 2011). The risk of each country when joining the Eurozone was not assessed properly, pricing of sovereign domestic debt of the countries in the Eurozone was set to the same risk-free level.
Later to be found out that there were large differences in the macro-economic fundamentals (Bloomberg, 2011). Let us now propose how the European integration should be redefined in order to successfully continue a better integration of its current members (sanitization of the PIGS, talk about the remedies of the crisis), and pursue the integration by bringing in new members. This will be achieved through the examination of recent news articles and interviews of the main actors (Marion Monti, Draghi, Merkel ,etc….. ) and recent research pieces. III.
Redefinition of the European Integration Addressing the Crisis through remedies One of the remedies of addressing the crisis is through the ‘Troika’, which is made up of the European Central bank (ECB), the European commission (EC), and the International Monetary Fund (IMF). Together they are in charge of monitoring the Euro debt crisis, as well as recommending policies that will help solve the crisis. There has been criticism that the Troika are not protecting the EURO or Greece but are protecting foreign banks and governments who are supporting these banks.
Dominique Strauss Kahn suggests that countries with high credit ratings should, “put back into the pot part of their interest rate spread” in order to help countries such as Spain and Italy (Business Insider, 2012). Dominique Strauss Kahn great idea is to federate risk through the issuing of Euro bonds in the name of all the eurozone countries allowing a spread in the interest rates of weaker economies, therefore reducing the burden for these countries however increasing debt on other. However stronger economies such as Germany are against the idea as they do no want to weigh down their economy.
New rules for integrating new countries EU leaders continue to struggle to make budget agreements for the future years. The European Council President Herman Van Rompuy asked for the European Union to have “more intrusive control of national budgetary policies” if they do not stick to the strict fiscal rules they should be denied their right to vote in EU institutions (Mason, D. 2011). German Chancellor Angela Merkel and French former President Nicolas Sarkozy called for “strict rules preventing countries running a budget deficit above 3 percent of gross domestic product or public debts above 60 per cent. In opposition to Merkel, Sarkozy “lists the pooling of eurozone debt as Eurobonds as one potential solution,” with the condition that they are an incentive for discipline (Mason, D. 2011). Conclusion Yes, the euro-crisis is currently having the effect of blocking/stifling the integration process, we need to get out of the crisis before anymore integration can be done, we need to 1/ address the crisis and “purify” the current situation, and 2/redefine the rules of accession in order to continue the integration.
Possibly kick out a few countries i. e a more restricted club, the need to have stricter rules of accession to the EU. And have more sanctions available and the disposal to the EU commission. Bibliography Newspaper articles (online/electronic article) BARRE, N. (2012) What if DSK had the one great idea to save the Euro? World Crunch. [ONLINE] 18th September 2012. Available from: <http://worldcrunch. com/business-finance/what-if-dsk-had-the-one-great-idea-to-save-the-euro-/euro-zone-dsk-strauss-kahn-euro-bonds-spread/c2s9614/#.
ULP1XbT6n_c> [Accessed: November 25th 2012 ] BBC NEWS. (2012) Timeline: The unfolding euro zone crisis. [ONLINE] June 13th 2012. Accessed from: <http://www. bbc. co. uk/news/business-13856580> [Accessed: November 26th 2012 ] Bloomberg. (2011). Greece ‘Cheated’ to Join Euro; Sanctions Since Were Too Soft, Issing Says. [ONLINE] May 26th 2011. Accessed from: <http://www. bloomberg. com/news/2011-05-26/greece-cheated-to-join-euro-sanctions-since-were-too-soft-issing-says. html> [Accessed: November 25th 2012 ] Bloomberg. 2012). Greek crisis timeline from Maastricht treaty to ECB bond buying. [ONLINE] September 5th 2012. [ONLINE] <http://www. bloomberg. com/news/2012-09-05/greek-crisis-timeline-from-maastricht-treaty-to-ecb-bond-buying. html> [Accessed: November 25th 2012 ] Business standard. (2011). Alok Sheel: Euro zone’s impossible trinity. [ONLINE] November 24th 2011. Accessed from: <http://www. business-standard. com/india/news/alok-sheel-euro-zone%5Cs-impossible-trinity/456434/> [Accessed: November 25th 2012 ] ECB, (2012).
European financial integration in times of crisis Speech by Peter Praet, Member of the Executive Board of the ECB, at the ICMA Annual General Meeting and Conference 2012. May 25th 2012. Accessed from: <https://www. ecb. int/press/key/date/2012/html/sp120525. en. html> [Accessed: November 20th 2012] MASON, D. (2011). Van Rompuy calls for tough eurozone sanctions. Public service Europe. [ONLINE] 6th December 2011. Accessed from: <http://www. publicserviceeurope. com/article/1214/van-rompuy-calls-for-tough-eurozone-sanctions> [Accessed: November 18th 2012 ]
SOROS, G. (2012) The Tragedy of the European Union and how to resolve it. The New York review of books. [ONLINE] October 25th 2012. Accessed from: <http://www. nybooks. com/articles/archives/2012/sep/27/tragedy-european-union-and-how-resolve-it/? pagination=false> [Accessed: November 26th 2012 ]. STEINER, S. (2012) Timeline: Evolution of the European debt crisis. Yahoo Finance. [ONLINE] October 29th 2012. Accessed from: <http://finance. yahoo. com/news/timeline-evolution-european-debt-crisis-070133430. html> [Accessed: November 18th 2012 ].
Watt, N. & Traynor, I. (2012) EU summit breaks up without agreement over budget, The Guardian. [ONLINE] Friday 23rd November 2012. Available from: <http://www. guardian. co. uk/world/2012/nov/23/eu-summit-breaks-up-budget> [Accessed: November 25th 2012 ] Books MCCORMICK, J. (2011). Understanding the European Union: A concise introduction (5th ed. ). New York: Palgrave Macmillan. SUDER, G. G. S. (2011). Doing business in Europe (2nd ed. ). Los Angeles, [Calif. ]: SAGE. WATTS, D. (2008). The European Union. Edinburgh: Edinburgh University Press.

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