Should Greece leave the European Union, or the Eurozone - Essay Example

?Should Greece leave the European Union, or the Eurozone? The concept of a unified Europe goes a long way in the 9th century when the Frankish emperor Charlemagne dominated over a major area of Europe. In the 19th century, the French leader Napolean Bonaparte tried to capture many regions of Europe. In the 1930s, Adolf Hitler wanted to conquer the whole of Europe. In all these cases, the goal was to control and dominate Europe. For many centuries, wars were fought in Europe for religious and political reasons but with no positive results. After the World War II ended, it became clear that war and violence cannot create a unified Europe. By the end of the war in 1945, there was destruction depicted in all the European cities. Many people lost their homes and families. Production and trade were also crippled as factories were destroyed. Many bridges and railroads were also destroyed by bombings. Many Europeans who lost their homes and means of income were devastated as they became helpless and did not know how to rebuild their lives. It became apparent that the need was to adopt an entirely new kind of strategy and concept to recreate the nation, and guide the Europeans to bring their lives back on normal track. For this, it was required that the European people make a peaceful community by working together to rebuild their nation. The traditional concepts of capturing and controlling Europe because of rivalries had to be eliminated and had to be replaced by a “new spirit of cooperation.” This new philosophy of cooperation was remarkably followed in the post WWII era. The two instances were the Marshall Plan and the Berlin Airlift, and these were examples of how the allied nations helped the defeated nations of WWII. This was the beginning of a new phase in the history of Europe, and paved the way for a peaceful unification of Europe. During the WWII, smaller countries like Netherlands and Belgium entered into economical and trade agreements; the idea was that economical unification of smaller countries will make them competitive rivals of larger countries. This concept was already established in 1921 by the governments of Luxemburg and Belgium. In 1948, the Benelux Customs Union was formed which “enabled the free movement of goods, workers, services, and capital between the countries.” In 1952, six European countries began the phase of forming the European Union (EU). The Benelux treaty was signed in the year 1958 which formally provided free trade facilities to the Benelux countries (Introduction to the European Union, n.d., p.2). This paper focuses on Greece joining the EU in 1981, the economic crisis faced by the country and in the final part it has been discussed whether Greece should or should not continue to remain as an EU member country. Decision-making in the European Commission EU has a standard process of making decisions which is termed as joint decision. This means “the European Parliament has to approve EU legislation together with the Council based on a proposal from the Commission.” (Decision-making in the European Commission, n.d.) There are three major institutions which participate in decision making process of EU. The first one is the European Commission which looks after the interests of EU and makes decisions that are in favour of the interests. It also has the responsibility to formulate proposals for any new laws to be established in Europe. It has the additional duty of ensuring that the EU policies are efficiently implemented and also manages the spending of EU funds. The second institution is the Council of the European Union where the ministers representing each EU country assemble to generate new laws and implement policies. It also approves the annual budget of EU and has signing authority on any agreements between and other countries. The third and final institution is the European Parliament which is a body of members elected by citizens of each EU country which it is a representative body of the countries’ common people. The European Parliament monitors the functions of the other two institutions to see that they are performing their activities democratically. Economic and monetary union The economic and monetary union (EMU) was formed in order to establish a common monetary policy by amalgamating the economic of EU countries. The formation of EMU led to adopting a common European currency, euro which replaced separate currency systems of individual EU countries. EMU was first formed in the year 1989 by a committee headed by Jacques Delors who was president of the European Commission. The integration of the economies of EU countries ensures efficient economic structure in each country leading to economic stability and higher employment opportunities which were direct positive impacts on the EU citizens (Krugman & Obstfeld, 2008, p.571). The EMU was formed for several major reasons. The first purpose was to integrate the markets of all EU countries by eliminating the risk of EMS (European monetary system) currency realignments and reducing the trade costs by liberating traders from costs of conversion between different EMS currencies. The second purpose was to eliminate the threat of competitive devaluations. It means devaluation of currency by one country to enhance exports, and in response the trading partners would do the same. Such hazards of competitive devaluations although is limited by current exchange rate in Europe, such devaluations cannot be totally removed as long as there are multiple currencies whose exchange rates are determined by decision makers rather than by a floating exchange-rate system. The third purpose was to prevent speculative attacks that can be common in an exchange rate mechanism. If there is a possible risk of devaluation of a currency, then speculators will sell their holdings. This creates lack of confidence in currency valuation and may compel the government to devalue even if there was no such intention. Since speculative activities are concerned with speculation of relative devaluations between different European currencies, therefore in order to eliminate such activities it was decided to establish a single currency for EU (Eudey, 1998, pp.14-16). European single market The single market theory is a policy to create a single economic environment in the whole of Europe to make it a free trade zone. It is also referred to as the internal market. It is one of the most pervasive and important symbols of economic integration with the EU. It includes many of the policy areas for the unification of Europe like the European Monetary Union, European Customs Union, the Schengen Convention among other policies and laws. The single market system is still in the development process in the current times (European Single Market, 2012). European Customs Union The European Customs Union (ECU) means “a group of economies with no internal barriers to trade and a common external tariff.” (Kesner-Skreb, 2010, p.99) ECU is comprised of all the member countries of EU along with a few neighbouring countries like Norway, Iceland, Liechtenstein and Switzerland. The concept of single market can be implemented only when there are common trade laws in the borders of each country of the Customs Union. Under the single market concept, no custom duties are imposed on goods traveling between different countries of the Customs Union, and also the countries impose a single tariff on goods that are imported by the Union. One significant result of the Customs Union is that the EU has to act as a single entity in the global trade market like the World Trade Organization (Kesner-Skreb, 2010, p.99). Benefits of joining EU There are many benefits for a country to join a monetary union like EU. In absence of multiple currencies there will be no exchange rate fluctuations and no attached costs thus increasing competition, and leading to more international trade because of larger investments. In Figure 1 a country’s monetary efficiency gain due to economic integration after joining a monetary union is depicted with an upward sloping GG schedule. In Figure 2 reduction of economic instability faced by a country due to economic integration after joining a monetary union is depicted with a downward sloping LL schedule. In figure 3, GG and LL intersect to show the degree of economic integration between the joining country and the monetary union like EU. A joining country will get positive economic benefits if the integration level is above 0 (McCallum, 2003, p.38). Fig 1: The relationship between monetary efficiency and economic integration between a joining country and EU GG Fig 2: The relationship between economic stability loss and economic integration between a joining country and EU. LL Fig 3: The balance between loss and gains for a joining country in EU 1 Loss exceed Gains exceed gains loss LL (McCallum, 2003, p.39) Greece as an EU member Greece joined the European Union in the year 1981. Before joining EU, for ten years Greece was facing a decline rate of 9.7 per cent in its labour force because of large number of emigrants. However, in the post joining EU period in the 1980s there was an increase of labour force by 12 per cent since economic benefits in the form of low investments and high returns in their own country induced people to return to Greece. Statistics procured on movement of people shows that even those who have legalized their emigration options revert their decisions to stay back in Greece, and even if they do emigrate they do so for short terms (Stevens, 2011, p.84). Economic liberalization due to joining the EU had a mixed effect on Greece. There was a decline in the output growth in the country after joining the EU, and also rate of unemployment increased. Before Greece joined the EU in 1981, the country “received significant EU structural transfers intended to offset the adjustment costs associated with accession.” (World Bank, 1996, p.45) By the year 1993, the net official transfers which mainly included EU transfers were 5.6 per cent of GDP of Greece. There was also a deficit of government budget of Greece. In 1983-87 it was 10.1 per cent which was a huge increase from an average of 4.5 per cent in the five years before joining EU; this was in spite of Greece receiving sufficient aids from EU nations. Greece received little inflow of portfolio capital after accession, and foreign investment dropped marginally. There was also an increase in inflation rate in Greece which reached 20 per cent post joining EU. Thus Greece could not enjoy the benefits of increased currency value and membership of monetary union. However, large number of cheap manufacturers was imported in Greece after accession which offset some of the negative impacts of inflation on tradable sectors (World Bank, 1996, p.45). (Historic Inflation Greece, 2013) Greece is mainly a consumer country and focuses much on expenditures thereby incurring huge debts in much of the last two centuries. When it joined the euro in 2000, it was expected that there will be an improvement, but there was actually an enhancement of problems. It was for this reason why the EU initially did not permit Greece to join the euro in 1999, the year when euro was stated as a single currency among the EU member nations. The economic condition of Greece during that time was not promising with high debts and inflation rates. It was in 2000, that EU permitted Greece to join euro although there was suspicions that country provided false reports of its figures to fit into the strict regulations of euro. The general concern was that Greece would revert back to its previous dangerous levels post entry. During 1999-2000 Greece inflation was around 4 per cent which was higher than the European average, and there was 10 per cent unemployment rate which was even more than Britain which was going through recession. However, the interest rates in Greece fell substantially as it was able to borrow in euros. During the 1990s, the interest rate for borrowing money was 10 per cent or high with maximum of 18 per cent in 1994. After joining euro, the interest had a drastic fall to 3 per cent to 2 per cent. However, Greece did not utilize this windfall by repaying the accumulated debts, but went on a spending spree. In this context, Ben May, a Greek economist said “their mistake was to go out, borrow money and use it to fund huge wage growth, rather than pay down its already substantial debts.” (Wallop, 2010) Greece began to double the wages of public sector workers, and the ageing population enjoyed one of the most generous pension systems in the world with nearly 92 per cent of their salary they received before their retirement. Moreover, the rich middle classes in Greece were habituated in evading taxes which means a major source of income was not sufficient to fill the coffers of the Greek government, thus expenditure exceeded income. In the year 2004, Greece was the host country of the Olympics whose cost was initially estimated at €4.5 billion, but the actual expense was almost double, and this worsened the economic condition in Greece. In the beginning of 2010, Greece’s debt was €300 billion and the budget deficit was 13.6 per cent of its GDP, which was double of Eurozone average (Wallop, 2010). Economic crisis in Greece Like many small economies, Greece was under the illusion that ratio of national debt to GDP is not important. They used Japan as an example whose national debt differed from GDP by 200 per cent. But, Japan did not match with Greece’s credentials since in 2008 Japan still had its own currency, and all national debts were managed internally. The 2008 US crisis put a rein on the spending spree of Greece. During this time rating agencies financed by all major banks entered into the scenario to measure the national wealth of many countries including Greece for safeguarding the lenders. Since Greece during this time followed the policies of bigger countries like US and France, it did not focus much on the hazards attached to the excessive national debt over GDP. To begin with, the economic policy makers of Greece adapted polices that were not suitable for the Greek economic environment. They got consent from the US and the European financers. Ironically, when Greece entered the free market that was the time when the core financial crisis of Greece happened. In the year 1996, a socialist leader Costas Simitis came to power in Greece who was a staunch supporter of free markets as he was attracted by the benefits of market power in economic development. He was determined to make Greece enter the eurozone without judging the pros and cons of such an option. During this course of action, “Greek officials saw the EU as too big to sink and the EU, in turn, saw the Greek economy as too small to affect European trends or other European economies.” Both the assumptions were proved wrong when US faced the major financial crisis. Greece faced the same fate since it had already adopted the US policies (Choupis, 2011, p.81) Should Greece leave the EU In recent years there has been a rising debate whether Greece should leave the EU, which means Greece will have to revert back to its drachma. A drachma is an ancient currency unit of Greece and it much below what is needed for the country to clear its monumental debts. Since Greece has not been able to devalue its currency, the country is deeply embedded in loans that seem far-fetched for it to clear. Although Greece has managed to bring down its debt to almost half of what it was before joining the EU, there has been severe social unrest in the country because the global recession and “bailout-imposed spending” have affected the lives of the citizens. In May 2012, most of Greek population voted for those parties who were against the bailout agreement between Greece and the EU and the IMF (International Monetary Fund). So then the question arises that how Greece would leave the euro. The new government in Greece will first want to negotiate parts of the bailout agreement and if they are fruitful, then the country will simply refuse to pay its debts which will lead to euro default. This will however not be the first time for Greece since in early 2012 it renegotiated 50 per cent of its debt which it failed to pay. The concern is that the other 16 EU member nations may not agree to such euro defaults. In 2011, Greece was already warned by the French leader Nicolas Sarkozy to “abide by the eurozone rules or leave.” The major issue here is that there is no clear way to exit the eurozone without leaving the EU as per the Maastricht Treaty of 1992 which created the euro. However, in Article 50 of the Lisbon Treaty in 2007 there are clauses for exiting the EU. The rule simple because the country concerned, in this case Greece, will have to notify European Council. Then the council approves the decision by majority votes of the leaders of the EU member countries (Chibber, 2012). If Greece exits the EU or the eurozone, then there will be a financial calamity. If the EU or the IMF decide to give bailout money to the new Greek government, then it will only postpone the calamity. If bailout money is not given, then Greece will become bankrupt in a very short time and this will put pressure on Southern Europe. On personal front, on exiting the EU, Greece will have to cease being a part of the global private capital markets, and when it will need further loans it will have pay such a high price that economic development can almost seem impossible. Moreover, since Greece has to create new currency, there will be a huge loss of valuation on the day the notes will be printed. Therefore, it is prudent for Greece to remain in the eurozone in spite of the country’s difficulties (Rehman, 2012). Conclusion Greece is badly entangled in the current global recession, and its economy has been steadily declining since the last few years. The unemployment rate is also high. Due to the increasing budget deficit of the government, the financial system of Greece is in an extremely bad state. Greece has been saved from its near bankruptcy state by the EU and the IMF when they gave the country €110 billion to pay off its debts. Even then Greece has not been able to completely repay all loans (Creighton, 2011, p.11) In the current period as well as in the near future Greece’s economic condition is such that it will be disastrous for the country leave the EU or the eurozone. References 1. Chibber, K. (2012) How would Greece leave the Euro? BBC News, available at: http://www.bbc.co.uk/news/business-15575751 2. Choupis, M. (2011) The Crisis in the Greek Economy and Its National Implications. Mediterranean Quarterly, Vol. 22, No.2, pp.76-83 3. Creighton, A. (2011) b. 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McCallum, B.T. (2003) Theoretical issues pertaining to monetary unions, pp.7-41, In Capie, F.H. & G.E. Wood (eds) Monetary Unions: Theory, History, Public Choice, Routledge 12. Rehman, S. (2012) Greece Leaving the Eurozone Would Be a Disaster, US News, available at:: http://www.usnews.com/debate-club/should-greece-leave-the-eurozone/greece-leaving-the-eurozone-would-be-a-disaster (Accessed on May 1, 2013) 13. Stevens, J. (2011) States without nations, Columbia Univ. Press 14. Wallop, H. (2010), Greece: Why did its economy fall so hard? The Telegraph, available at: http://www.telegraph.co.uk/news/worldnews/europe/ greece/7646320/Greece-why-did-its-economy-fall-so-hard.html (Accessed on May 1, 2013) 15. World Bank (1996) Global Economic Prospects and the Developing Nations, World Bank Publications Read More