Abstract: Since 2009 Europe has been experiencing some major economic issues and European government banks were bailed out in order to not have to leave the Euro. Very little progress has occurred since the onset of the crisis until recently and still many countries are suffering from detrimental debt and very low quality of life. Discovering the foreground for this economic crisis is imperative to be able to calculate a solution and unfortunately, this has still yet to be done. The economy of Europe can’t be revived with the existing policies and institutional makeup in place.
The problem within the European Union falls within its institutional architecture and policies. The social, political, and economic integration goals of the EU have not been successful due to lags in the institutions leading to weak policies. This has lead to member states living as individual entities, creating unnecessary competition within the EU and causing large gaps between successful and unsuccessful countries. Through various viable online databases and current event newspapers and journals, it clear that the EU needs an extensive makeover.
These sources lend insight to the ideology that the policies in place are not effective and are a direct effect of asymmetric institutions. This paper will prove that in order to step out of this financial crisis and prevent events from repeating themselves, the EU needs to remodel its institutions and put forth new policy reforms. The crisis that invaded the European Union in 2009 is largely imparted due to member states circumventing economic policies to avoid large deficits. Unfortunately, this caused a domino effect amongst the member states, which ultimately lead to decreased confidence in the Euro and in turn, limited foreign investments affecting the liquidity of the market.
Over the past five years, the European Union has been struggling to make sufficient policy changes to aid their member states out of economic deficits. This year has been the first year that many countries have seen any economic improvement since the crisis first hit. Europe has continuously been in a state of persistent unemployment, inequality, limited growth, and a pervasive sense of powerlessness. The difference in economic growth models between the north and the south, the overbearing institutional asymmetry of the member states, the horrific austerity measures that were imposed by the European Central Bank at the onset of the crisis, and the growing sense of nationalism within the EU member states are all examples of extreme lapses in EU policies.
The above has inhibited the EU from moving forward out of this economic downfall and has left some economies in a more detrimental state. The European Union will continue to remain in economic limbo if they don’t implement plans for major policy reforms. For more than a decade, European governments have been stimulating economic growth within their national borders by inexpensively borrowing money and running large economic deficits. An economic deficit can be defined as the increase in the amount of expenditures of a nation over their revenues, resulting in a negative balance sheet. During the 2000’s, member states turned to securitizing future government revenues to reduce their debt and deficits in order to continue to fall within the confines of deficit spending and debt levels put forth by the 1992 Maastricht Treaty.
Creative accounting spurred in the sovereign states as many began to sell rights to receive future cash flows which in turn allowed governments to raise funds without violating debt and deficit targets – thus, enabling countries to sidestep EU policies. Debt levels were being masked through inconsistent accounting, off balance sheet transactions, and the use of complex currency and credit derivatives structures. In December 2009, Greece’s budget deficit was two times greater than previously reported and rumors of them defaulting on their loans spread threw Europe like rapid fire. Ten central and eastern banks asked for bailouts prompting an instant crisis of confidence in the international bond market, increasing the cost of borrowing for others and making the Euro unappealing to foreign investors.
In result, economies across the Eurozone plunged sending them into an economic crisis. Eurozone countries were forced to refinance their debt through third-party assistance like the European Central Bank (ECB) and the International Monetary Fund (IMF). Member states of the European Union (EU) and the IMF lent assistance by offering long-term loans to bail out Greek, Irish, and Portuguese governments while the ECB assured liquidity by adding funds to the banking system. Since 2010, the Council, European Parliament, European Commission and state governments have passed much legislation in regards to financial stability, policy coordination, and job growth.
The ECB advertised free unlimited support for all Eurozone countries involved in state bailouts and precautionary programs from the European Financial Stability Facility and European Stability Mechanism through yield lowering Outright Monetary Transactions. Recently centralized legislative packages like Two-Pack, Europe 20-20, the Youth Employment Initiative, and new banking supervisory authorities have been adopted to ensure financial stability, support growth and employment, and improve economic governance.
Though EU has seen economic growth in the past year, they still have a long way to go. The integration process acts as a major factor in the economic crisis due to different preferences in policy changes between members and non-members of the Eurozone. The Eurozone came into existence in 1998 when eleven member states of the European Union met euro convergence criteria. These member states successfully adopted the Euro as their national currency on January 1, 1999. All other EU states are obligated to join, excluding the United Kingdom and Denmark, upon meeting criteria requirements. The presence of two distinct Europes became recognized upon creation of the Eurozone.
This divide has caused divergence in integration preferences involving fiscal and monetary policies. The recent crisis that has controlled Europe for the past five years has caused shifts in popular consensus regarding European integration in the context of two common integration processes, neofunctionalism and liberal intergovernmentalism. Neofunctionalism integration is an incremental process, which is driven by the demands of interest groups for market integration and supranational institutions responding to these demands following the functional logic which characterizes highly interdependent economies and linkages between different policy areas (Haas 1968b; Rosamond 2005).
Liberal intergovernmentalism differs slightly from neofunctionalism in regards to European integration being compelled by EU member states – especially those, which maintain more independent economies allotting them stronger bargaining power. Though these two processes vary tremendously, they have one main commonality – they prioritize the elites and economic interest groups over the population.
Due to recent events within the EU, this has become a constraint in integration processes as public opinion is becoming more important than ever. The centralization of redistributive public policies has been met by resistance from member states’ leaders exemplifying the growing importance of public opinion as a restricting factor within domestic politics. Integration from an economic perspective has been difficult to fully achieve due to the existence of two Europes. The lack of consensus surrounding integration processes has lead to lapses in domestic policies inhibiting the work of European Union institutions.
The Eurozone is a large part of these issues, stemming from the many problems involved with the currency and member state’s domestic policies, affecting non-members of the Eurozone by creating a gap in the needed financial assistance between the two groups and thus, affecting policy changes. The Economic Monetary Union was ultimately a political construction formed in 1992 through the Maastricht Treaty with convergence criteria concerning the inflation rate, public finances, interest rates and exchange rate stability. Many thought the EU represented a geographical region that maximizes economic efficiency by sharing the same currency across the entire area, stemming from the Optimum Currency Area theory.
The European Central Bank maintains authority over policy decisions within the EMU and it is independent of political control. Once the Eurozone was created, the New Exchange Rate Mechanism II was established to provide stability above the euro and other national currencies that have yet to join the Eurozone. These structural changes brought about the Eurozone in place today, working within the confines of one currency for all member states. The euro is now used in 18 countries and follows different economic growth models in many of these countries. The lack of structural alignment within the member state’s national institutions has caused a major gap between the deficit and surplus countries.
The EU runs within the realm of a conservative system, meaning it lacks the ability to adapt to a change in policies and structural framework. Changes occur very rarely within the institutions because the ability for member states to coordinate towards a collective action is limited due to their varying viewpoints and lack of a majority party rule. The conservative nature of the institutions acts as an obstacle for all actors attempting to rework economic policy and the institutional architecture. This has especially affected the left-wing parties that aim to improve or alter the economic make up of the European Union because they require stronger institutional and societal resources.
The social democrats feel the affects of the conservative system even more so as they are the majority participants in the European Council, Council of Ministers, and European Parliament, they act to appoint ministers, and some lead national states. Their ideas and decisions, though they are the majority, are faced with many other parties criticizing and forcing collaboration and compromise. The minorities in return benefit more from the conservatism because the structure forces collaboration of all ideas within the policy-making process and not just the ideas of the majority. Recently the left-wing has moved forward to advocate policies in reducing unemployment, particularly within the youth sector; it favors redistributing income and wealth to battle inequality; it suggests control over the financial system from an institutional level; and lastly, it supports increasing productive capacity and rebalancing the European economy through heavy investments.
These radical left-wing policies, though they may be successful, are being met with intense controversy due to the structural make up of the European Union institutions. Until the conservative system has been reformed, these policies will be impossible to work into the institutions. Unfortunately, this gauges Europe’s inability to pull out from this crisis because of its incompetence to put forth the necessary policy reforms to do so. The institutions were built on the mindset of an integrated decision- making process by involving all political parties and forcing a compromise based decision; but this hinders the ability for reforms to be put into action and has acted as a setback to rebuilding the European economy. The asymmetric institutions are very recognized in the divergence of economic growth methods between northern and southern Europe.
Northern countries compared southern countries face a very large account surplus gap. Northern countries, like Germany, follow an export led growth model in which they hold down labor costs by allowing very slow and steady wage increases. Industrial relations institutions encourage firms and unions to coordinate on modest wage increases.
Due to Germany’s training systems, employer associations, and trade unions, they maintained many skilled workers in their industries. This enabled them to be able to create a comparative advantage in producing high-value added goods and retain the capacity for continuous innovation. They act as a competitive country that can compete globally on quality and price. Unlike Germany, countries in the south including Spain, Italy, Greece and Portugal, follow a different economic growth model, which relies on a demand led growth framework. In a demand led economy, governments focus on increasing spending to encourage domestic consumption.
This type of spending can cause massive inflationary effects, which can hurt the competitive nature of their products. In response they use periodic depreciations of exchange rates as a way of offsetting these effects. Depreciation decreases the price of exports and increases the price of imports that compete with domestic products – encouraging the purchase of their products at home and abroad. With the adoption of the Euro, countries that pursued demand led growth could no longer depreciate their national currencies once they converted their national currency. This disconnect within member state’s economic models between the north and the south caused southern Europe to buy more from northern Europe than they were selling there and in turn, financing their purchases with loans from northern Europe.
As Germany continued to control their labor costs and keep them steadily modest, southern Europe was continuing to see wage increases leading their wages to grow much faster than wages in the north. The lack of overlap in the member state’s economic and political policies built into the EMU from inception is not only the root of the economic crisis but also completely derails the Optimum Currency Area theory. Without centralized policies compelling a uniform economic growth model of all Eurozone member states, the Eurozone is going to continue to see issues like this that lead to major gaps between the high surplus and high deficit countries. The European Union is built on a system that involves extensive discussion and compromise in regards to political decisions. Partisan logics play a very small role within the European Union institutions. The EU lacks one specific governing party and is the product of many different political opinions and political agendas.
Particularly in the Council and the European Parliament, the lack of coherent party leadership is heavily apparent during the decision-making processes. There is serious institutional divergence between the ruling parties of national governments and the absence of one cohesive party at the EU level. The culture of the institutions is based on the idea that no one party completely overrules an institution. As a result of this dynamic, the EU’s capacity to problem solve is reduced because it is forcing a compromise of ideas that often doesn’t produce the best answer. In the context of the recent economic crisis, the institutional asymmetry is not only a major cause for the crisis but it is hindering the ability of the EU to resuscitate its wounded economy.
In response to the economic crisis that plowed through Europe these past five years, the EU has refused to focus on its structural make up and instead, the European Central Bank has pushed forth austerity policies, which are used by governments to reduce budget deficits during adverse economic conditions. Unlike the United States who responded to their economic crisis by using a method known as quantitative easing, which involves the purchase of government securities or other securities from the market in order to lower interest rates and increase the money supply, the ECB decreased the money supply within the Eurozone by decreasing spending and increasing frugality in the financial sector.
These austerity measures that were adopted by the ECB and forced into play in the European governments have caused major negative consequences and from some points of view, have worsened the European economy. Some of the negative side effects include worsened poverty – increasing the homeless population, mass unemployment, social exclusion, greater inequality and collective despair.
Austerity measures are not popular policy reforms due to the fact that public social spending is typically the primary target resulting in a decrease in quality and quantity of government provided services and benefits. In many countries they have seen wage bill cuts or caps – especially for education, health, and other public sector workers – the rationalism of social protection schemes, the elimination of subsidies on fuel, agriculture and food products, stricter accessibility conditions for a number of social benefits, and other cuts to education and the health care system. These austerity measures are directly effecting the public and the benefits they receive that play into their daily lives. The ECB was very skeptical of the United State’s use of quantitative easing and didn’t believe it would help to solve the EU’s economic problems.
Quantitative easing uses taxpayers’ money to fuel the economy and the ECB wanted to avoid fixing these issues on the general publics dime – but at this point, it’s become a trade off and a question of, what is a bigger priority? Is it better to cut the public’s government benefits because money is being moved around and used elsewhere or is it better to increase government spending by financing it through the taxpayers?
One way or another, taxpayers are losing and their money is being used. But now the effects of austerity have exceeded denying the public certain benefits, it has caused these policies to undermine human rights. Basic necessities like the right to food have been affected when governments have limited subsidies without the adequate safeguards to guarantee minimum necessary levels. The reductions that have hit education budgets have also hindered peoples right to education.
Basic human rights that have been promised by the European Union’s institutions are being neglected due to the implementation of these unprecedented austerity measures. If the EU would like to see the welfare of their economy increase, austerity measures need to be completely withdrawn from their economic revival plan and new policies need to be put into play that encourage the collaborative rebuilding of member state economies through uniform economic growth methods and increased money supply in the market. In August 2012, Outright Monetary Transactions were established including the European Stability Mechanism and the European Financial Stability Facility.
These transactions allow the ECB to buy government issued bonds that mature in 1-3 years provided the bond issuing countries abide by certain domestic measures. In turn, aiming to bring down long-term bond yields to levels that lower borrowing costs for struggling countries and thus, provide investors with confidence in the euro in hopes to spur bond market sales in the normal market. These are the type of policies that need to be further put into action and used more widely throughout Europe. Austerity needs to be demolished and more policies of this sort need to be enacted. The European Union has been working towards total integration since the establishment of the Council of Europe in 1949, which was the first document to bind Europe by law.
The integration process has evolved since then through different integration theories and institutional structures. But there has always been one main goal, which was to create a cooperative Europe politically, economically, and socially. The unfortunate truth that has become more evident in light of the recent economic crisis has shown the world that the European Union isn’t an integrated entity. It is a shell of a system that allows the idea of an integrated Europe to exist but in fact, it is a collective group of individual countries whose nationalist priorities supersede the priorities of the entire union. This fact became extremely obvious during the crisis and nationalism has continued to grow since. Without centralized policies that integrate the economies of the member states, they have the freedom to act however the please to better themselves and often that comes at the price of the welfare of other economies.
The European Union needs to reform policies and either lean towards more of a federalist perspective on integration involving more of a supranational power, or the European Union would be better off splitting up. The crisis within the European Union was instigated due to poor financial decisions made by member states because of their growing deficits. These deficits were the result of insufficient institutional practices and policies that were put into play through the European Union. Institutional asymmetry is seen as the root of the crisis because it enabled countries to run their economies based on individual preferences without taking into consideration the effect this would have on their single market. Gaps in economic growth models spurred this downfall and the institutional asymmetry continued to work against the EU as it has acted as a major obstacle for policy reforms.
The European Union was created to join together countries and make for a more efficient geographical space – but the nationalist identities that still subconsciously and consciously exist within each nation impede the union’s ability to be completely integrated. Policy reforms are necessary within the institutional framework of the EU if there is going to be hope for a more successful future. Sources “Eurozone Crisis and European Integration: Functional Spillover, Political Spillback?. ” Taylor & Francis. N. p. , 17 Apr. 2013. Web. 15 May 2014. <http://www. tandfonline. com/doi/full/10. 1080/07036337. 2013. 774785#tabModule>.
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