Sunday, December 11, 2011

EU crisis

What was a Eurozone economic crisis has become a full-fledged EU political crisis, with Britain isolated from the rest of Europe. How did this happen? It's too complex for me to understand or explain, but here goes anyway.

The EU was established by agreement of 12 European nations through the Maastricht Treaty of 1992, which established the EU as a political and economic union (hence there are 12 stars on the EU flag). There were two reasons for this, first the wish to avoid any future wars in Europe that had torn the continent apart and resulted in the deaths of millions of people, so it was important that Germany, France and the UK be an integral part of the EU. The other reason was economic, it made no sense for a truck travelling from say Britain to Italy or Romania to go through so many borders and monetary zones. Removing borders and converting to a single currency, the euro, solved these problems. But, some countries were reluctant to have their currency and their financial decisions under the control of others, so they opted out of part of the subsequent agreements that established the Eurozone. One of these was Britain, so the pound continues to exist as a separate currency, while the Deutschmark, the Franc, the Lira and the Drachma ceased to exist. The EU gradually expanded to 27 members as other Eastern European countries joined, but the Eurozone remained only a part of the EU, namely only 17 countries out of 27. In order to have countries join the Eurozone the economic requirements were made quite liberal and even ignored, so that while national debt was supposed to be less than 10% of GDP, in some cases, such as Greece, this was overlooked.

Since the EU has no cross-national economic organization (except the European Central Bank), it was unable to deal with the crisis that arose when countries such as Ireland, Portugal and then Greece, began to default on their debt payments and could have gone bankrupt. Since they were using the euro, the Eurozone had to bail them out by making ever increasing loans to them. Greece for example received a total loan of ca. 200 billion euros. Part of the mechanism adopted to avoid either a country leaving the Eurozone or defaulting on its debt resulted in the establishment of an EU Emergency Fund, that has now been funded with 500 billion euros, as well as 200 billion euros loaned to the IMF to help further countries from defaulting, such as possibly Spain and Italy.

I would liken this situation to that which existed in the US during the "depression" and the stock market crash of 1929. As a result of the terrible havoc that caused, the US Government expanded the role of the Federal Reserve, that can take independent steps to prevent such huge downward fluctuations in the market, extending over the whole of the USA. This is what the EU needs, but because it is still made up of independent countries, this cannot be done easily. It would require actually establishing a Federal Union of Europe, or a United States of Europe, that most members are not prepared to accept because it would require them to give up too much autonomy.

So the EU members, some of who are of course also Eurozone members, decided that they need to modify the basic agreement of the EU in order to ensure that such potential defaults do not occur again. In order to do this they recommended certain changes to the EU treaty itself, that would include the expansion of the role of the European Central Bank, and tough new budget rules, etc. At the meeting in Brussels in the past few days, this was discussed. But, PM Cameron representing Britain, refused to agree to these changes. He argued that the UK has the largest financial center in Europe and he needs to protect it and the pound, so he excercised his veto over the proposed EU changes. This has angered Pres. Sarkozy of France and Chancellor Merkel of Germany, who are the principal leaders of the EU and the Eurozone.

So now there are many possible courses. The UK could leave the EU altogether. Some argue that there never should have been a separate EU and Eurozone, the two should be synonymous. Also, that the EU cannot exist without a strong financial organization, as if it were a federation, and countries that are not prepared to accept this must not be included. There are also those in Germany who argue that it is not fair that Germany be forced to subsidize the weaker economies of the southern tier of Europe such as Greece, Portugal, Spain and Italy (as if New York, California and Ohio refused to subsidize Mississippi). So will it become the status quo ante with the EU collapsing or will the euro regain its value and shine once again? The results of this political and financial crisis could have enormous consequences.


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