Neither German nor Greece Should Leave the EU - Literature review Example

Critical discussion of whether German or Greece should leave the EU Neither German nor Greece should leave theEU Introduction The history of the EU stems from the ratification of Maastricht Treaty of November 1993 and aims at fostering greater economic growth and cooperation among the European member states Europa.eu, n.p). Currently, the EU has a membership of 28 states that include Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom (Europa.eu, n.p.). The EU has undergone turbulent times due to differing economic strengths of the member states and difficulties that some members face in meeting their obligations under the treaty. The current concerns on the poor economic performance of some member states and high debt default risks have raised concerns about the future of EU thus leading to the suggestion that some countries should be forced to leave the Union (Myers 2013). The problem of financially troubled European countries raises a question whether weaker or stronger countries should leave the EU (Sivy 2012). The aim of this research is to provide a critical analysis of the economies of Germany and Greece in order to decide whether it is Germany or Greece that should leave the European Union. German and the European Union Germany is one of the earliest members of the EU, and is remained committed to fulfilling its obligations of ensuring higher economic growth and meeting the budget deficit cap under the EU treaty (Scheuer & Schmitt 2009). Germany is the largest European economy that accounts for nearly 25 percent of EU export trade due to the strong manufacturing sector and dynamic economic model (Scheuer & Schmitt 2009). The current economic growth forecasts indicate that Germany will outpace all the other 28 nations by 2 percent in 2014 due to moderate economic recovery, low inflation and adequate investments in the country (Tradingeconomics 2014). The real GDP growth rate is currently 0.4 percent and is forecasted to increase to 1.8 percent in 2014. The inflation rate remained at a low of 1.6 percent in 2013 and is forecasted to ease to 1.1 percent in 2014 while the unemployment rates are expected to decline from 8.6 percent in 2013 to 8 percent in 2014. The unemployment rate in Germany has declined considerably and labour market conditions have improved due to sustained economic growth and positive investments in the country (Tradingeconomics 2014. Germany annual GDP growth rate increased 2.50 percent in 1st quarter of 2014 over the same period in 2013 and annual GDP growth rate has average 1.30 percent since 1992. Although the GDP growth rate was negative 6.80 in 2nd quarter of 2009 due to the adverse impact of the global financial crisis, Germany economy is on recovery trajectory (Tradingeconomics 2014). Germany GDP annual growth rate (source, tradingeconomics.com: http://www.tradingeconomics.com/germany/gdp-growth-annual). Germany’s government debt to GDP was 78.40 of the GDP in 2013, and has averaged 66.69 percent since 1995. The country had a current account surplus of 13200 million euros as at May 2014 and the surplus has averaged 2681.83 million euros since 1956. The current account to GDP was 7.50 percent of the GDP in 2013, and has averaged 2.34 percent since 1980. The country decreased its external debt to 628140 million euros in May 2014 from 639916 million in April 2013 and managed to record a trade surplus of 17800 million euros in the same period. (Tradingeconomics 2014). (SourceL www.Tradingeconomics.com: http://www.tradingeconomics.com/germany/government-debt-to-gdp). Germany current account (Source: www.tradingeconomics.com: http://www.tradingeconomics.com/germany/current-account). German current account to GDP graph (Source: www.tradingeconomics.com: http://www.tradingeconomics.com/germany/current-account-to-gdp). Germany Balance of trade graph (Source: www.tradingeconomics.com: http://www.tradingeconomics.com/germany/balance-of-trade). Greece and the European Union Greece economy dipped due to the recent recession, but economic forecasts indicate that the country is likely to return to growth in 2014 due to the structural reforms are undertaken in the product and labour markets. The member state GDP fell by 3.9 percent in 2013 compared to a negative growth of 7 percent in 2012 due to growth in shipping and tourism revenues and recovering investments that have ignited consumption in the economy (Bloomkberg 2014). Greece’s unemployment remained at a peak of 27.3 percent in 2013, but wage reforms are likely to contribute to competitiveness due to employment support programmes that have been initiated in the labour markets (Tradingeconomics 2014). Although bank recapitalization accounted for about 11 percent of the GDP, the government is undertaking measures to reform the social security payments and streamline revenue collection. The government debt-to-GDP remains at a high of 175 percent, but it is expected to decline due to strong fiscal balances that are expected in the next few years (Tradingecdonomic 2014. Greece recorded a negative GDP growth of 0.90 in first quarter of 2014 and an average inflation rate of 9.09 percent. The country recorded a government debt-to- GDP of 175 percent of the country’s 2013 GDP due to high external borrowing. The external debt currently stood at 416,971 million euros in the 1st quarter of 2014 from a low of 142, 217 million euros in the 1st quarter of 2003. Greece recorded a trade deficit of 1721.10 million euros in May 2014 and a current account deficit was 1166.50 million euros in April 2014 (Tradingeconomics 2014). Greece Balance of trade graph (source: tradingeconomics.com: http://www.tradingeconomics.com/greece/balance-of-trade). Greece government debt to GDP (source tradingeconomics. Com) The current economic shocks and debt crisis facing Greece and other EU member states has evidenced the vulnerability of the economies to economic shocks and contagion and thus measures must be implemented to ensure the economies are vulnerable from external shocks in order to ensure sustainable development (Barrel 2012). Greece must implement austerity measures that aim at controlling the high government spending through reduction of the high public wage and restructuring programs that aim at cutting down the spending on pensions (Barrel 2012). Another economic rescue measure that must be implemented in Greece is elimination of the high rate of corruption and improvement in the domestic revenue collection in order to ensure economic sustainability and cut down on external borrowing thus ultimately reducing the budget deficit (Duthel 2012). German and Greece analysis Germany’s GDP growth rate was positive (+2, 3%) while that of Greece was negative (-0, 9%). Based on this information, German has considerable revenues to pay off its sovereign debts, finance its budget and facilitate more investments that will ultimately lead to a decline in the unemployment rate unlike Greece, which is experiencing recession, and skyrocketing unemployment rate (Bloomberg n.d.). Below is a comparative graph with historical GDP distribution of Germany and Greece over the 20 years’ period from 1993 to 2013. Graph 1: GDP of Germany and Greece (Source: World Bank (Data.worldbank.org, 2013) Economies of both countries were relatively weak in 1993. The economies of the two countries experienced negative growth in 2008/2009 due to the adverse impacts of the global financial crisis. Although Germany has managed to attain growth by 2010/2011, Greece failed to turn around the economic growth until 2012/2013. Greece GDP annual growth rate (Retrieved from http://www.tradingeconomics.com/greece/gdp-growth-annual). German GDP annual growth rate (source: Trading economics: http://www.tradingeconomics.com/germany/gdp-growth-annual). German GDP is expected grew at 2.5 percent in first quarter of 2014. In the first quarter of 2011,the growth rate peaked at 5.20 percent after initial low of negative 6.80 percent during the 2nd quarter of 2009 due to the impact of the overall global economic recession. Unemployment The unemployment rate of Germany was at a low of (6,7%) compared to the unemployment rate of Greece which is at a high of (27,8%) as of May 31, 2014. These numbers indicate that Germany is experiencing higher economic growth than Greece and thus the per capita incomes are high in Germany than Greece. The following graph indicates the Unemployment rate in Germany. Source: Bloomberg.com: http://www.bloomberg.com/quote/GRUEPR:IND/chart). The high unemployment rate in Greece will encourage political instability in the country thus slowing down the rate of economic recovery and net investments in the country (Bloomberg.com, 2014). The graph below indicates the quarterly Unemployment rate in Greece. Graph 2: Greece unemployment rate quarterly (Source: Bloomberg.com 2014). The recent financial crisis has made many EU member countries accumulate high sovereign debts and deficits in their budget due to high external borrowing (Soros 2013). The high debt crisis in some countries like Greece has threatened the stability of the entire euro zone and the possible fallout (Bitros 2013). Analysis of the decision According to the above statistics, Germany should not leave the EU since this will limit the future prospects of the entire euro zone. Thus, the country has improved its exports activity due to common currency and trade in the eurozone (Scheuer & Schmitt 2009).The current 2.50percent of the GDP experienced in Germany reflects the positive net external trade that is driven by both private and public consumption, and investments diversification in the economy. The private consumption is driven by low interest rates of 1.8 percent rates, favourable consumer prices and robust labour markets that have increased the disposable consumption income (Lynn2010). The unemployment rate will decline since the demand for labour after the economic recovery will outpace the growth in the labour force and net migration in the country. Germany has a balanced budget after a surplus of 0.1 percent in 2012 and the current revenue growth will lead to further surplus in 2014. Accordingly, German has put in place fiscal measures such as higher pensions that will to counter the possible rise in public sector (tradingeconomics 2014). Germany is a key player in the monetary bloc since it contributes immensely to EU economic growth through enhanced trade and leaving the EU will lead to competitive disadvantage of the entire monetary union (Duthel 2012). The EU is a major contributor of global economic output and trade which is estimated at 25 percent of the global trading activities and thus possible collapse of the EU will affect other key trading partners such as the US and China and ultimately slow down global economic growth (Duthel 2012). Economic indicators of Germany point out that the country is on recovery path and will experience high growth in the next few years due to prudent economic policies that will lead to dynamic growth and restructuring of the economy. Mainly, the suggestion that Germany should leave the EU emanates from its position position towards Eurobonds. In case the European economic leader will oppose to authorization of Eurobonds, it will prevent the heavily indebted economies such as Greece from avoiding a threat of default (Velde 2012). However, German should not leave the Euro zone and should focus on bailing out countries like Greece since further delays increase the debt default risks (Soros 2013). Although Germany is currently advocating for budget cuts and other austerity measures in the indebted countries, it must focus on ensuring the countries facing debt crisis such as Greece and Spain receive favorable emergency loans and unconditional grants that will bail out their staggering economies (Lynn 2010). Economists favour Greece staying in the EU since exiting the EU will lead to more debt crisis and decline in economic growth. In case Greece leaves the EU, it will have to accept higher bond yields in order to deal with its debt crisis due to its high government deficit of 1721 million euros by May 2014. The high interests rates will eventually slow down the rate of economic growth and increase the prevailing unemployment rate due to decline in investments (Barrel 2012). Leaving the EU, Greece’s banking system will definitely collapse due to the high debt rates, inflation will jump high, and ultimately a contagion will ruin the entire euro zone. According to Lynn (2010), the European Union has a responsibility of controlling its future and must extend financial bailouts and emergency rescue plans to Greece in order to enable the country attain economic growth. Greece must remain in the EU since leaving the euro will lead to decline in the Eurozone stock prizes by almost 50 percent and widen the bond yields thus limiting the capacity of other member states servicing their own sovereign debt (Tradingeconomics 2014). Currently, the government debt-to-GDP and trade deficit of Greece has forced many European lenders and investors to withdraw their funds from Greece financial systems since Greece banks have reported a decline of 13 percent of the deposits from foreign investors (Lynn 2010). Accordingly, Greece has a high unemployment rate and living standards of the citizens has declined tremendously since the onset of the current economic recession and financial crisis thus further exit from the euro will lead to additional decline in the per capita income and inflation due to devaluation of the Greek currency (Duthel 2012). In case if Greece will leave the European Union, it will encounter significant negative consequences on the country’s creditors as they will lose huge amount of money (Soros 2013). Even though the economy of Greece will face slow depression if it stays in eurozone, the exit might result in collapse of its domestic banking system (Parsons 2012). Conclusion Based on the research results discussed above, neither German nor Greece should leave the EU since all countries in the EU stand to benefit from higher economic growth if measures are put in place to bail countries with high sovereign debts like Greece. Germany is the largest economy in Europe and must remain within the bloc in order to enjoy more intra-EU trade volumes. Although Greece is current facing economic recession and high unemployment, the country must focus on implementing reforms in the labour and products markets and remain within the EU. Greece will encounter severe consequences in event of leaving the EU since it will go back to weaker currency and will face high interest rates that may eventually lead to collapse of the country’s banking system. By returning to its own currency, (drachma), Greece will experience high foreign exchange losses while trading within the EU thus limiting the economic growth and prosperity of the country due to the weaker currency. In this case, leaving the EU may limit future external borrowing. Therefore, it is critical for Germany and Greece to remain in the EU. References: Barrel, R. (2012). Eurozone crisis: what if … Greece leaves the single currency. [online] the Guardian. 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Duthel, H. (2012). European debt crisis 2011. London: McGraw-Hill. Europa.eu,. EUROPA - On The Road To EU Membership. Web. 13 Jul. 2014. Available at: http://europa.eu/about-eu/countries/on-the-road-to-eu-membership/index_en.htm Lynn, M. (2010). Bust: Greece, the Euro and the sovereign debt crisis. Chichester: Wiley. Myers, M 2013, Leading by Default: Perspectives and Challenges for Germany in Its Reluctant EU Leadership Role, German Studies Review, 1, p. 125, Project MUSE, EBSCOhost, viewed 14 July 2014. Parsons, N. (2012). Eurozone crisis: what if … Greece leaves the single currency. [online] the Guardian. Available at: http://www.theguardian.com/world/2012/may/14/greece-euro- single-currency-expert-view [Accessed 14 Jul. 2014]. Rapacki, R 2012, Poland and Greece - two contrasting EU enlargement experiences. ZEI Discussion Paper C213, 2012, Archive of European Integration, EBSCOhost, viewed 14 July 2014. Tradingeconomics.com. 2014. ‘European Union trade indicators’, Retrieved 14 July 2014, from http://www.tradingeconomics.com/euro-area/unemployment-rate. Read More