European Union – the Road to Lisbon

The predecessor of the European Union was the European Coal and Steel Community (ECSC). It was a collaboration of 6 nations (West Germany, France, Italy, Belgium, Netherlands and Luxembourg), formed in 1951. Its aim was to unify Western Europe after World War II, to ensure peace and stability in Europe and to prevent division amongst allies by increasing the economic interdependencies of these countries. In the next decades the number of countries in this collaboration grew as well as the intensity of the economic collaboration.

Did the EU make a mistake creating a common currency? There are both positive (lower costs of cross border transactions by eliminating exchange rate risks and more efficient financial markets) and negative elements (both economically and politically) that come with a common currency. However, the Euro was pushed as a response to the ERM crisis in 1990 after Germany’s reunification, and the designers of the euro area made some political compromises at the expense of economically sound rules and regulations.

Would Greece have been better off with a floating currency? Probably. The Greek currency would have devalued over time, importing would have become more expensive but increased exports could have stimulated the Greece economy to a level higher than it is today. Has the Euro hurt or helped Germany? The Euro both helped and hurt Germany. As Germany is a net exporting company, and a lot of its exports go to other European countries, the Euro made export even easier.

On the other hand, Germany is contributing a lot to help solve the problems in Greece. How should Brussels respond to the Greek debt crisis? There are several ways Europe and the ECB can react to the Greek debt crisis. First of all, a mechanism for greater coordination of fiscal policy across the EU member states should be considered, in order to avoid such a crisis in the future.

There are several ways of doing so, for instance: -Member states exceeding Stability and Growth Pact targets should temporarily lose their voting rights within the European institutions. -Agricultural and regional support funds might be curtailed for countries that stray beyond EU guidelines -The ECB could impose variable collateral requirements on each member state that depended on their fiscal deficit. Another possibility is to create Eurobonds, which could be used by all member states for financing purposes. This way Greece could attract financing at a more affordable rate than it can now.