Europe, Russia, North America, Middle America

Europe

What did the recent “euro crisis” reveal to us about the challenges and future prospects of the European Union? In your opinion, has the European Union been good or bad for the realm?

The recent Euro crisis created many challenges for the European Union, both financial and cultural. The stronger economies of nations such as Germany and France are heavily relied upon to support weaker economies in countries like Greece and Spain. Not only has this created an economic fracture in the EU, but has caused a cultural divide as well – nations share the same currency, but not always the same work ethics, economic vision, or budget discipline.

Monetary policy inflexibility is one of the many challenges facing the EU. A single currency in the Euro prevents states from acting independently to solve economic problems within its borders. A nation such as Greece, in deep financial trouble with lenders, is unable to create Euros in order to pay creditors or eliminate risk of default. Typically, a country may elect to devalue its currency in an effort to make exports cheaper, which then leads to a balance of trade, increased GDP, and high nominal tax revenues. Greece is bound by the laws of the EU, completely tied to the Euro and unable to control its monetary policy.

Structural problems of the Eurozone system have also created problems. Countries share a common currency without a fiscal union – they are required to follow a similar fiscal path, but there is no common treasury to enforce it. It is also a difficult structure for quick response to crises, as financial decisions require unanimous support of member nations. The vague fiscal path policy combined with members requiring a consensus to act creates problems, as countries vary quite differently in their economic and cultural ideals. What is good for Germany and France may not always be in the best interests of Greece and Spain. It is overly idealistic to think that each member nation could strive toward the same financial goals at the same time, and this has led to much tension in the form of the Euro crisis.

Trade imbalances have revealed issues for the future prospects of the EU. Before the crisis, Germany had a better public debt and fiscal deficit relative to GDP than the most affected Eurozone members. Weaker nations such as Ireland, Italy, and Spain had a worse balance of payments position – when their bubble burst, many “miracle economies” that rose quickly leading up to the crisis saw their assets disappear almost overnight, but their debts remain. The Euro has also locked countries into an exchange rate, betting that all economies rise together in productivity. This has not happened, and therefore lent a hand in creating the crisis.

As an economic model, the EU has been a massive success for most of its member nations. Trade agreements and a common currency have certainly benefitted the