Challenges of the European Union

The European Union (EU) is one of the world’s strongest economic blocks, representing around 30% of global GDP and 20% of global trade. But since 2007, the EU is going through a series of problems, having severe impacts in whole block, but more severely in the southern countries as Greece, Italy, Portugal and Spain. The major challenges are:

1) The EU was unable to fully implement a common currency. the UK, Denmark, Sweden, Latvia, Poland, the Czech republic, Romania, and Bulgaria did adopt the euro. This limits the flexibility in fiscal policy, makes trade more complex and bureaucratic.

2) Unemployment: Greece is experiencing an unemployment rate of 27% and Spain of 26%. In Spain, youth (under 25 years old) unemployment rates have reached 65%.

3) GDP fall: after 2008-2010 deep recession, Europe has still not been able to recover. There is a competitiveness problem: countries who face higher labor costs cannot regain competitiveness in the usual way through depreciation. Prices become uncompetitive, leading to lower domestic demand, and high current account deficits. As an example, since 2011, current account deficits have fallen in countries like Ireland and Spain. Countries are seeking to regain competitiveness through internal devaluation (lower demand, pushing down prices - like happened in Brazil), but this is much more damaging to the economy than the traditional approach of depreciating exchange rates.

4) Bond Yelds: there is a tendency for bond yields to rise quickly after concerns were expressed over Greece. Market fears soon spread to other Eurozone countries, increasing borrowing costs and putting countries under pressure to pursue austerity measures to reduce budget deficits. However, these austerity measures have been implemented when the economy is already weak, causing a big negative multiplier effect and causing the economic downturn.

5) Inflexible Labor Markets: rigidities in the labor market discourage investment