When the European Union was first incepted, the vision was that creating a common currency would reinvigorate the economic competitiveness that was once present in Europe. However, in practice, it has led to a disaster.
The problem is that theory rarely reflects reality. In theory, the European Union (EU) should have helped lagging countries such as Greece by giving them a stronger currency and a more accessible investment pool. Unfortunately, the European Union did both of these things.
Although this sounds like a conflicting statement, there are two important issues that should be addressed. First, before the EU, Greece’s currency had historically been depreciating. Deprecation is when a currency loses purchasing power. Deflation can be economically disastrous because it makes purchasing products from other countries relatively expensive, and it makes it hard to pay back debit because your money is worth less than when you took out the loan, and the increase risk increases interest rates making paying off debit even more difficult. The positive thing about depreciation is that countries exports will be relatively inexpensive.
After being allowed to join the EU, Greece had access a stronger currency and lower interest rates to help finance their expenditures. However, it was much more difficult to finance their expenditures relative to their neighbors in the north because they hadn’t historically been as economically stable. As a result, many of the countries in EU, including Germany, became their creditors.
Second, despite the EU’s goal of creating a stronger, more unified central economy, it continued to allow individual countries to manage their own finances. This meant that while the risk was spread across multiple countries it also spread the risk, without enforcing regulations to prevent individual countries from being fiscally irresponsible. This meant the EU allowed fiscally irresponsible countries such as Greece to readily gain access to funds from the fiscally responsible countries such as German, while not providing significant measures to control the risk and/or compensate Germany fairly for the risk.
Generally, political power is dependent on three factors: the size or production capacity of the economy (GDP), trading network, and macroeconomic stability. In Europe, it is safe to assume that Germany’s Chancellor, Angela Merkel, wields most of power and political influence. Currently, Germany has the 4th largest GDP in the world and the highest in Europe. Germany is also the world’s second largest exporter. Furthermore, according to the Global Competitiveness Report for 2009-2010, Germany was ranked 30th in macroeconomic stability and 1st in infrastructure. Since 2005, Merkel’s leadership and influence has led her to become not only one of the most powerful individuals in Europe, but quite possibly the most powerful woman in the world as well. However, this charge does not come easy. If something is to be done in Europe, she will need to be the one leading the way. This is why she has been under fire for the recent events with Greece’s collapse unfolding. In short, she is dealing with two conflicting sides. One side, primarily the Germans, are frustrated with countries like Greece and don’t believe they deserve a bailout. On the other side, other foreign leaders and economists are stressing that if a bailout does not occur, there will be a ‘domino effect’ collapsing many other countries in Europe. Coincidentally, Europe is faced with a similar dilemma that occurred nearly two years ago in the United States. What is the lesson learned? Her decision must be rational, but a hasty one as well. Unfortunately, she has already been accused of waffling rather than making a concrete decision in recent news.
The Future of the European Union: 3 Possible Scenarios
I see three possible scenarios for the future of the European Union (EU):
- The EU dissolves as a result from uprisings and frustrations from fiscally sound countries,
- The EU is readjusted and fiscally complacent countries are removed (i.e. Spain, Greece, Portugal, etc.),
- The EU collectively decides to form a central agency with limited direct control over each countries central banks to ensure future stability.
The first possibility is a possibility but least likely, because it will ultimately depend on the gumption of Europe’s leaders, including Germany’s Prime Minister, Angela Merkel. The second scenario seems most likely because the European Union’s policies already include requirements and statutes that limit those who can join. However, the challenge again will be whether there is leadership to enforce such policies. The third seems to be the most progressive, least autonomous, and therefore the least likely. As Steve Forbes said in Forbes Magazine, “It’s astonishing that a continent having such deep cultural traditions and a well-educated population should be pygmies when it comes to innovation.” Although this solution draws upon many of the principles of our financial system in the United States, it’s still highly unlikely that leaders will be wiling to set aside their country’s autonomy for increased regulations. Consequently, their predicament is fairly paradoxical.