Breakup or Makeup? What should happen to the EU relationship?

Posted on August 23, 2012

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The Euro-Zone crisis is a big worry to the world right now and it should be. There are various things that have happened and there are various other things that could still happen to make this crisis better or worse. One of the things that could happen is that the European Union can split up. There are however mixed emotions on whether this will be good or bad. Before this issue is addressed, let’s take a look at the cause of the crisis and what was done to rectify it.

The Greek Budget hole.

Greece was living beyond it’s means, they were lending money at an astonishing rate and not producing enough to pay of the loan or even the interest on the loan. So now Greece had one of two choices, they could default and start over, sounds like a good idea? But if this had happened then the rest of the European Union would have to cover the dept. Obviously the other EU countries would not stand for this, so Greece’s only choice was option two, to loan more money to pay of the previous loan. Greece could not get a loan because of their struggling economy, so the EU gave them a bailout of 110 billion euro, a parachute fund was also awarded along with various other loans which all had to be paid back. These loans were only given if the country implemented austerity measures. This upset the general population. They did not want to pay for mistakes that the government made. This looked like a solution (a long term one, but a solution none the less), the thing is that this problem was not isolated only to Greece, it has spread to Ireland, Italy, Spain and Portugal. These counties had an external dept to GDP ratio of over 100% in fact Ireland had a ratio of 1103% (http://bonds.about.com/od/advancedbonds/a/What-Is-The-European-Debt-Crisis.htm).

Now one thing to remember is that all the bailout money has to be fronted by the fiscally strong European countries like Germany. The Germans were not happy with this and said that they would only fund the money if Greece and the other countries implemented austerity measures and changed their economic policies. As stated previously this did not sit well with the general population of the country and inevitably lead to regime changes in some countries.

OK, so now everything is spiraling out of control, you have hyperinflation, taxes are up, social benefits and pension packages are modified to save money for the state, unemployment is rising and the countries are becoming unstable. It can be seen that the previous measures did not work. A new option is put on the table, Euro-bonds. With this option the rest of the EU invest in Euro-bonds to give the struggling countries a leg up, in this way the economies can stabilize over time and the countries who invested in the Euro-bonds can make some money of them. But still the Germans do not want to play along. This begins to give rise to roomers that Germany and other countries want to break away from the EU because the union do not want to resolve the problem in their way. So acting like a spoiled child Germany wants to take its toys and go home. To be fair lets see what Germany did when they were in a financial crisis.

The German Recovery

After World War two Germany had massive war dept, there was hyperinflation, unemployment and low levels of production. To make matters worse the economy was being regulated. To make the economy bounce back so successfully the following was done. Germany underwent a currency reform, market liberalization and received targeted aid from other countries and institutions. Twenty years later Germany was back on to and growing at a great rate although still struggling with unemployment (http://www.helium.com/items/989654-german-economic-recovery-after-the-world-wars).

When considering the above facts it can be seen why Germany want to do this their way, because it worked for them. But what they do not understand is that this is not the 1950′s this process will not work as well as it did that time. During the 1950′s most of Europe was still recovering from the war and things like government pension funds and social benefits basically did not exist. The population of a country did not even have basic sanitation in some areas so if the state tightened their expenditure on road repairs the people did not care because most did not have cars.

Breakup or Makeup?

The Italian government has already showed its concern about the breakup of the EU and are strongly advising against it. If the EU breaks up there will be major political instability, the financial systems and banks in many countries will collapse completely and the trade market to the EU will meet the same fate. This will have the same effect as the contagion that spread from Asia. The market collapse in the EU will spread to America because of their also high levels of dept the same thing will happen. If this happens the whole world will plunge into depression (http://www.economist.com/node/21555916 ).

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The only viable option that will stabilize the EU economies that are struggling in the short term and benefit the stronger economies in the long term is the Euro-bonds investment plan. So in conclusion, Germany should rather resolve its differences with the struggling economies and become a team player before this situation becomes an “economic nuclear holocaust” and nothing is left.

G.F. Robberts

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