Strategic Considerations within the European Union Framework - Essay Example

Strategic Considerations within the European Union Framework Member s of European Union have been pilling pressure to the union following debts and recession crisis. Arguably, EU failed to offer protection to the interest of its members and their citizens thus leading lost of public support (Ronald & Saskia, 2011:21). Although it is not probable to argue that the turmoil has influenced the Europeans view to matters, other than its social influences, it may have influenced the engagement of European citizens to European projects. Strategic plans initiated by EU member states to counter the impact of the financial crisis, and the create employment is an indication of the impact of the economic crisis to the citizens of the Euro zone. A survey by “Transatlantic trend” argues financial turmoil affected 60% of the people interviewed compared to 55% of people affected by the crisis in 2009. Europeans show a lot of concern to development as revealed by the Euro-barometer, which provides a basis of gauging the crisis (Heinz, 2011:71). Many believe that issues of immigration, insecurity, and environment are fundamental as issues relating to socio-economic issues. In the spring of 2007, major concern for most Europeans is the economic situation and inflation in 2008. Interviews conducted in spring of 2009 indicated economic turmoil as the major headache of most Europeans. Arguing from the report, 42% of people interviewed quoted economic recession as a threat (Thierry, 2011:132). Unemployment was another factor alongside economic turmoil. It is arguable that economic slump has an effect on rate of employment since recession dislodges most people out of employment. Further, social crisis report produced in autumn 2009 indicates that 51% of citizens interviewed indicated unemployment as the major factor, which was ahead of insecurity by 19%, inflation by 19%, and healthcare by 14% respectively (Thierry, 2011:132). The above figures do not show the magnitude of the effects in a national scale in terms of social crisis. Apparently, many European nations argue that the economic nightmare has maimed their buying power. For instance, a study conducted by Smith & Grant (2003) and published in their book to evaluate the effects of the economic slump shows the following trend the Dutch claim 40% of its effects, Bulgarians feel 84%, Spanish 71%, and Romanians 89%. Euro-barometer flash survey indicates the significance of the effects of the economic crisis to the households in Europe. In addition, a look at the June 2010 survey results shows a big difference between northern and southern Europe (UK, Sweden, German, Denmark, Luxembourg, Netherlands, and France), in which at least 15% of citizens claim to have had challenges in paying their bills; including food, over the twelve months. The above observation varies with report from Southern Europe (Portugal, Spain, and Italy), in which economic crisis trend takes 17-20%, and in the Eastern Europe in which the economic turmoil takes 30% and (43% for Romania). It is arguable that the trend of economic nightmare in Europe takes the shape of social crisis (Thierry 2011:134). This argument leads to the questions as to whether a political crisis is looming, which will lead to increased conception with regard to the ability of the European Union to counter the crisis. In the recent past, observers still believe that euro is still a victor to the economic crisis. The observers argue that the joining of the European Union by the Icelandic countries is approve that euro could champion the crisis. Other observations are the determination by Baltic countries to introduce policies that would act to maintain a stable rate of exchange using euro as a single currency. According to Ronald & Saskia (2011:43), it is apparent that Europe alongside other continents in the world suffered economic recession towards the end of 2008 and beginning of 2009. However, it managed to avoid devaluation witnessed during 1930 economic turmoil. Largely, its approach was to create policies, which attenuate the situation from jumping from bad to worst. Presently, euro zone is healing from the effects of the economic turmoil, although Irish finance system wounded the healing process in autumn 2010. In contrast to the healing process is the Greek economic misery observed in spring 2010. The graph below illustrates that Greece will face economic misery if UK is a 2 decade “Misery” high. Figure: 1 Retreived on Feb. 19, 2012 from http://www.zerohedge.com/sites/default/files/images/user5/imageroot/images/Greece%20Misery%206.14.jpg The major adversary of the euro is the dollar threat. An alliance between the British and the American administration mooch and hatch plans, which threatens the existence of euro. This foil intends to beat the dollar rival in the region. It is arguable that the members of the alliance impatiently wait for the collapse of the euro region. Observably attack on the euro attracts many questions because each euro attack would lead to resignation of Europe leaders. (Ronald & Saskia, 2011:42). Surprisingly, those defending the euro lack conviction especially when some voices echoed the doom and fall of the euro. These voices argue that euro project design lack a sustainable framework. This argument eludes the predicted doom to the euro. However, leaders, like Angela Markel, insisted that the euro area should be aware that not only would the collapse of the area bring down the monetary edifice, but it would probably also, lead to an overall set back to European integration. This is also threatening acquis, as intangible in appearance as competition policy (Reinert, 2004:61). Strategic Interactions in Relation to the Debt Crisis; It is vital for the European Union to counter the onslaught against the euro. To do this, the region must take stock, learn from its mistakes, and develop strategic intervention plan that would solve the crisis. Many economic experts would agree that euro zone must avoid three mistakes, whilst the durability of the euro and beyond that of European integration, which supposes two fundamental thorough reforms. Mistakes refer to certain aspects of economic theory such as the idea of an optimum currency area; the regular reference to poorly adapted economic tools such as devaluation; and concentration by member countries on economic policy. The solutions lie in giving total power of a central bank to the ECB and a policy to harmonise European growth by improving competition (Thierry, 2011:141). Interaction of European countries with other regions (trading blocks) has led to condemnation of euro as the most elusive currency in the region. This criticism does not hold much water since the idea of optimum currency applies as a theory in economics. Economic theories help in understanding reality or a method, which stimulates economic improvement, but not as Procrustean bed. The financial crisis reveals the shortcoming of euro in terms of its set up – as notably seen in the difficulties in managing the accumulation of public and private debts – in Greece, in the first instance, and in Ireland and Spain, in the second. It was therefore crucial to look for solutions for emerging problems. Although the euro area is not an optimum currency area, it would have been absurd not to take a consolidated action (Ronald & Saskia, 2011:104). Another of the widespread and admitted absurdities is in the idea that most of the euro zone problems lie in the inability of member countries to devaluate. If there is a strict countable link between the external deficit and the public finances of a country via the development of its credit ratings, it is simplistic to take devaluation as the cure. For instance, Greece is a country whose tax system is very incompatible with economic development. It is therefore difficult to see how devaluation would increase fiscal revenue. Indeed, it is unimaginable how devaluation would reduce the Greek population’s tendency of not fulfilling their fiscal obligation. Similarly, Iceland, which also was prey to a banking crisis, similar to the one in Ireland, saw its currency collapse by nearly 80% against the euro, without its situation ever improving. The fall in purchasing power in Iceland, experienced due to the increased cost of imports, went up beyond what austerity plans would mean to the euro zone population. Therefore, devaluation is rather more of a stratagem to mask the hard truth, than an inevitable solution. Another mistake for the European Union would be to remain focused on simple aspects of economic policy, especially budgetary policy. Spain, which came under fire, satisfied the criteria of stability and growth pact, perfectly in terms of budgetary deficit and debt, prior to the crisis. However, its growth, based on a surge in loans to fund an overestimated property sector, was a vector for serious imbalance, as revealed by the external deficit (OECD publishing, 2007:102). This mistake recurs in the discourse, on the need for budgetary federalism. It is quite clear that Europe has to implement budgetary policy though some homogeneous rule – the most evident being the management of automatic stabilizers. Adopting an increasingly strict control of member states finances as a central point would result in losing track of the goal. A country’s economic situation cannot reduce to that of its state. Moreover, it is impossible for a country to base its policy on decentralization of decision making, while at the same time advocating for the euro zone to centralize the process, in terms of public finance. In fact, for more economic convergence to occur in the euro area and beyond there has to be convergence of output performance, and an improvement in the mobility of productivity. Consequently, the two vital reforms – as revealed during the crisis- are the revision of the ECB’s powers, and continuation of the competition policy. Experts suppose that if there is no serious doubt about the USA’s ability to reimburse its debt, it is because the Federal Reserve is unambiguous ultimate lender. The same must apply to the EBC. Firstly, this, supposes that it is completely independent of any national reference (Carlos & Andronova, 2010:118). The national central banks have no power in the decision. It must not be the very first in a long list of monetary authorities, but the only, exclusive manager of monetary policy. Of course, this supposes that its mandate is total and complete, like that of a central bank, which means financing growth but without allowing inflation to get out of control. The view that budgetary policy underpins the fight against unemployment, and monetary policy counters inflation- known by economists as the Tinbergen principal- is now an outdated theory left behind by both instruments of economic policy, currently in application. At present, budgetary policy has to regulate the economic cycle, and monetary policy has to ensure an optimum funding of the economy. This means that the monetization of public debt, a means like any other to inject liquidities, must not in any circumstance lack from the tools that the EBC has at its disposal. For instance, the Greek state has a single bank, the EBC- it is this bank, and not the IMF that should reach agreement with it on defining the conditions governing its economic recovery, thereby allowing it to avoid a situation of random default imposition (Mankiw & Taylor, 2006:405). As for the convergence of the economies, this must correspond to the convergence in living standards and the well-being of the populations, based on a permanent stimulation of production infrastructures, by way of competition. When Europe backs over the issue, it delays convergence more dramatically than when it allows a state to fall into debt. However, when the Spanish government made the labour market more flexible, in order to improve growth, it was moving in the right direction (Tavlas, 2006:128). When Brussels looks into a direction to limit restrictions on working hours, Europe is converging. When Brussels dares to say that everyone should be able to retire at an appropriate age in all the member states, it is a directive that fosters convergence. Instead of splitting heirs over the budget, the union chose to help breathe since it is, and must remain one of the key elements of European integration. It is polite to speak of the optimum currency area, the best means to draw close to this is to ease restrictions on the circulation of individual capital and labour to the full (OECD publishing, 2007:201). The euro has been clearly in a crisis, but there are technical means that members used to resolve the situation, and rise above it. European Union overcame the crisis considerably when its members realised that doubting the euro –be it by predicting its disappearance or by calling for a redefinition of the euro area – was a catastrophe, to the point that even the European integration could be threaten. Silent opposition emerged, with some businesspersons in German instigating a split of the area into two (Carlos & Andronova, 2010:211). A number of central bankers and their economic advisors considered that monetary policy played little or no role in the run -up to the crisis. On this view, the economic upheaval was mainly the result of an external macroeconomics shock, made worse by the imprudent behaviour of some financial institutions. This argument is summarised as follows. Inflation (CPI) has been low and stable in recent years, showing that the fundamental objectives of the monetary policy (price stability), has been achieved; the financial crisis was basically the result of “excessive saving” and the balance- of – payment surpluses of major emerging economies (Tavlas, 2006:142). This caused a surge in housing and other assets prices, and allowed the financing of the United States recurrent- account deficit. The excess liquidity that created by these imbalances was not caused by monetary policy. Another factor that explains the crisis is the behaviour of a number of financial institutions (in particular “non-banks”, hedge funds and investment banks) that went too far in leveraging their capital (Heinz 2011:127). As an example, United States of America recorded the highest change in the debts of the private sector in the year 2008 when the change was over 183% (from 112% to 295%). This was the same range of change in Britain when the ratio of household montage debt to that of disposable income increased with a 50% from 1990 to 2008. In US, there was a recorded increase in credit of 5%, which changed from 10% in 2004. This data was collected from OECD publishing (2007:112). In the publication also, the author depicted that there were chances of monetary issues due to the high increase in debts. This was because central banks were allowing low interest rates to a point that some rates were zero. This increased the rate of credit having advanced consequences on the monetary aggregates. Scholars have asserted that credit allocated to domestic and external monetary stability is of great importance. With this understanding, European Union has shown little concern to the fact. For policy makers, analysis of monetary issues has been a problem for several years. With this continued problems and controversies in the monetary issues, the scale exhibited by credit bubble should have raised an issue focusing on correcting the problem but no positive results have been yielded (Loukas & Janis, 2011:341). With the massive casualties left behind after the crisis struck, it is important for the lost defenders of the central banks to concede how accurate it would have been to have a close inspection of the credit indicators. In any case, the proposal of having a “systematic risk council” is agreed upon to have repetition of the experiences of the past. According to others, in case regulatory instruments are not sufficient, monetary policy can substitute and serve the same function. Expansion of credit, a contributor to the increased prices of assets, is a critical aspect of the credit bubble. If an individual is rich, it is more likely that such individual to be tempted into loan. This confirms the fact that wealth effects come from the increased asset prices resulting to addition of value to the credit bubble. When an environment charges low interest rates, the chances of risks are minimal. This is because the individuals who borrow at such rates are more likely to pay. When organizations make use of “mark-to-market” accounting, the chances of increased asset prices is high. The reason is that the profits realized after accountants balance books increases accordingly leading to an increase in valuation rates (Tavlas, 2006:153). The diagram below shows the relevance of economy performance in favour of the housing market. The change for the last approximately 20 years is illustrated in the picture. There are expectations to tighter credit conditions given the factors slowing the amount of housing demand. The positive growth of housing market is supported by the uncertainty of the UK economic recession. Accessed on February 18, 2012 from, http://www.marketoracle.co.uk/images/2008/uk-GDP-growth-and-house-prices-feb08.jpg The systematic pegging to dollar, that took place in countries in the Middle East and China as well led to a consequential increase in liquidity eventually resulting to reduced rates of interest. Therefore, it is evident that monetary policy can give verdict to have foreign exchange markets fully intervened. The IMF together with its investors caused the occurrence of piling of excess dollar, which in turn caused the occurrence of international liquidity consequent surge (Smith & Grant, 2003:121). In addition, lack of regulation and financial advancement caused financial institution to take advantage of the situation. The misuse of off-balance-sheet operation and the ability to initiate save ways of handling difficult situations immensely increased the rate of credit. Consequently, bringing together of simple monetary policy and an unstable regulation was advantageous to financial products since the prices increased drastically with guided rates of interests that are short term (Carlos & Andronova, 2010:76). Applying the general equilibrium theory, concentrating on production by individual members in the euro zone has more significance. In so doing, their focus should be on foreign markets and import substitution. The rate at which trade deficits are increasing shows the significance of the aforementioned statement. This trade deficit occurs because the euro currency is weaker in the international trade marketer than the dollar, which is its main competitor. It is obvious that devaluation and monetary policy has the ability to control recession in the deteriorating economies of many states. However, controlling inflation rate is possible if austerity plans are put in place. This contribute to GDP growth, which its ultimate resultant if devaluation of currency (Reinert, 2004:213). European Union has an evident influence on monetary policies to all its member states. Therefore, it is crucial for the euro zone to appeal to its powers to regulate. This is imperative since austerity measures implementations are well on watch eventually impacting monetary and budgetary policies of disturbed economies. This has the positive impact of increasing production and trade among the members of the euro zone. Consequently, it minimizes the effect of inflation caused by currencies that have lost value. Like the case in Greek and Spain, the measure contributes to small, unstable, and ever-struggling economies. This occurs especially when these small economy countries trade with stronger countries and the currencies of Middle East and china that have already lost value (Sussmuth, 2003:54). In conclusion, alteration of tax regimes among euro zone may not favour many of the members. However, member states are encouraged to get involved in trade between themselves. Making political governance more efficient to enhance economic growth will promote union’s attempts to control debt crisis. Greek as a case study has the potential of realizing high debt relief it the entire population within the country pits into exercise tax obligations. This initiative cannot work successfully unless recital political leaderships are put in place (Smith & Grant, 2003:56). Ultimately, these measures will yield positive results in the efforts to fight recession minimizing the chances of euro zone collapsing. Bibliography Carlos, A. & Andronova, V. 2010. Sovereign Debt and the Financial Crisis: Will This Time Be Different? New York: World Bank Publications Heinz, D. 2011. European Debt Crisis 2011. Bucharest: Epubli Kontolemis, Z. G. & Samiei, H. 2000. 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The collapse of exchange rate regimes: causes, consequences, and policy responses. London: Springer. Thierry, C. 2011. Schuman Report on Europe: State of the Union 2011. London: Springer. Read More