The European Financial Crisis: Economic and Political Environments - Essay Example

To What Extent has the Financial Crisis Challenged the Notion Economic and Monetary Union Has Been a Success in Economic and Political Terms? Course: Tutor: College: Date: Introduction Many countries and the world in general have been experiencing financial crisis in one time or another starting from the famous 1930s great depression in USA, 2008/2009 US economic crisis to the most recent one, European economic crisis. The main goals of forming this European Union were to try and regulate economic and political environments within that particular region using policies covered under European Monetary Union (EMU) (Fratzscher and Stracca, 2009, p. 325). However, the effectiveness of EMU in controlling political and economic environments of the member states has been questionable because of the current economic crisis that some member states are still struggling to recover. This has made the focus of the European politics in the past few years to be focused on the European economic crisis. This has led to raise of various political issues between the member countries which some political analysts claiming that the crisis is likely to ruin the future of the union. Economic and Monetary Union(EMU) refers to a trade block which has a common market and uses a common currency (Hodson, 2009, p.514). The merger has policies that have been set by member states primarily to converge the economies and the political environment of the member states. The policies are set in stages namely stage one, stage two and stage three with each stage stipulating the conditions that every country has to meet in order to be a member state. However, all the 17 Eurozone countries are members of EMU (Purnhagen, 2013, P.95). Only member states in the third stage are allowed use euro currency in doing financial transactions, a condition that most of the Europeans countries except Denmark and United Kingdom have already complied with. EMU has numerous achievements since its realization. Some of the most notable ones include creation of friendly economic climate in the euro zone, introduction of a common currency, continuous maintenance of the stability of the currency, application of monetary policies in controlling inflation in some member countries among many others. Introduction of a common currency and friendly trade tariffs, free movement of goods and services, and human capital goods are remarkable achievements that cannot be overlooked while discussing about EMU. Introduction of a common currency is not just a way of promoting economic prosperity, but also a prudent method of maintaining peace and stability in the European Union member states and its participants like UK (Purnhagen, 2013, P.50). The use of a common currency has been promoting economic stability since the implementation of this brilliant idea back in 1999. Use of a common currency has been one of the strategies that the EMU has been applying in regulating political and economic environments within euro zone. Another strategy that the union applies in controlling financial crisis is the use of monetary policies. Initially, member states of European Union used to have their individual government bonds that were relatively unstable. With the introduction of this union block, all government bonds markets were converted to become European bonds market, a factor that proved to be brilliant for the way it successfully controlled economic crisis in the region for almost a decade. This means that all monetary policies in euro zone are now within the control of European Central Bank, a common bank the union members established and based it in Germany(Verdun and "Conceptualizing the New Europe: European Monetary Integration and Beyond", 2002, p.29). Despite the remarkable achievements made by this trade block, the body has failed in a number of ways in controlling financial crisis. This has led to raising of questions and doubt over the effectiveness of the trade block in controlling economic and political environment. Despite the existence of this trade block and other policies that had been established to prevent and control economic crisis, Europe was hit by a serious economic crisis whose roots started from the 2008/2009 US economic downfall (Lynn, 2010, P.189). The 2009 European debt crisis began the moment Greece (one of the member states of European Union) was struck by a serious economic downfall. The crisis in Greece had resulted from the failure of the government to make necessary financial policy reforms that could have helped the country recover from the slow growth that it was experiencing back then (Kenen, 2012, p.85). The economic retardation in Greece had originated from the USA economic crisis of 2008/2009, a crisis that not only affected Greece, but also many other eminent countries in the world. However, the level of its implications were extreme in Greece to a point that the country’s prime minister publicly admitted that the country had so much debt that had exceeded its entire economy. This economic situation of Greece made investors to start demanding for higher returns on the bonds that the country (Greece) had owed, a factor that pushed Greece government into huge debts to a point of seeking money bailouts from European Central Bank. After Greece, many more member states of EU followed the suit with the only option they had being to appeal for aid from EU (Lynn, 2010, p.189). This reveals that EMU completely failed to control the US economic crisis that hit the world with some of its member states feeling the pinch in an extreme way. After Greece crisis, many more of the 17 member states that make up European Union ended up in almost an equal financial crisis among the being Spain and Italy. This was a big failure for such a reputable trade. In actual sense, some economists ended up labeling the EMU as a ‘toothless dog,’ which means that it is not effective. However, this crisis ended up jeopardizing the economies of the member states because of a number of reasons that the policy makers had not foreseen. One of the major weaknesses of EMU or generally EU is the issue of lengthy procedures followed while making important decisions. Member states had to wait for long before they could get aid from EU because the block acts like an international conglomerate. EU is relatively slow on making decision over such matters since the trade block comprises of 17 different member states who must agree first before taking any action. Before all or the majority of the members agree on the way forward, the process becomes very lengthy even for critical issues like that of Greece that demanded taking appropriate actions swiftly. Nevertheless, EU has been trying to look into this issue and it has already made remarkable progress. Since spring 2010, EU has distributed more than 300 billion US dollars as money bailouts towards helping Greece economy recover even though up to date more and more member states are still finding themselves in financial crisis. Portugal and Ireland among other countries were however given money bailouts from UE, a factor that really help in saving their once downsizing economies (Ehrig, 2010, p.135). Other countries like Italy and Spain inclusive of some Western Europe countries have found themselves in situations whereby economic crisis is a real threat to their economies. This financial crisis therefore acts as one of the major evidences that leave the effectiveness of EMU in controlling economic and political environment questionable. Another major loophole that led to the domination of the European crisis is despite presence of a common currency and a monetary policy is the fact that there exist no fiscal policies for the euro zone. The European Central Bank is only mandated to manage monetary policy of the currency (euro), maintains its stability as well as keeping the rate of inflation being low(Buti and Franco, 2005, p.65). This makes member states remain with just a few benefits that they fully enjoy. The benefits can be said now to be limited to the elements of making transactions cheap since there are no transaction costs in currencies, facilitation of cross border trades and also the element of attracting investors also known as foreign development investments (FDI). On matters concerning the common currency, their currency is very strong since it is the second most strong currency in the world with more than 330 million users worldwide (Habermas and Cronin, 2012, p.92). Nevertheless, matters concerning controlling financial crisis at national and international level demand the member states to awaken. The European debt crisis has still taken roots up to date with more than 13 members out of a total 17 member states having debts that exceed the convergence benchmark which is a maximum of 60%. The crisis has also led to collapse of many financial institutions with some citizens of the member countries like Greece making nationwide demonstrations and seriously condemning their own governments (Featherstone, 2011, p.470). Among the economies that had gone past the convergence criteria maximum of 60%, include Germany with 81.9%, France-89.4%, Spain-70.2% and Italy with 121.4%. The crisis has also prompted a significant loss of faith by the investors over the European business and economies. The crisis in Greece was such extreme that by December 2012, the government was still settling old debts by borrowing more money. European crisis has become a vicious circle with some member countries making the agreement on effective and solid assistance program unreachable, a major factor that may contribute to the future break up euro zone. Economists and political analysts give different arguments on the reasons to why the crisis dominated that much with the bodies efforts to tame the crisis becoming fruitless. However, they seem to agree on two major reasons one of them being the confusion brought about by the contradiction of the national independent fiscal policies and the monetary system. Most of the member states have different economic development levels, a major factor that makes it difficult for European Central Bank’s monetary policy unable to meet financial needs of every single state (Bean and London School of Economics and Political Science, 1992, p.215). This has been a fact that the member states have been ignoring for long especially during those periods that euro zone’s economy was flourishing, only for the bitter reality to attack at once. This contradiction has been revealed since the European economic tsunami that affected most almost all the members. The principal contradiction that European Central Bank officials was the fact that members had different economic levels thus some wanted to decrease interests in order to control inflation with others hoping to increase their interests so as to stimulate investments while at the same time relieving the debt pressure. In addition, there exists a controversy on whether to devalue euro or not with the weak economies advocating for it while the strong economies on the other hand are advocating for its value to remain intact. This issue greatly affects the commercial competitiveness in the euro zone (Cline and Wolff, 2012, p.71). The second reason that is being associated with the dominance of the crisis is the application of different economic models by the member countries. Countries with high debts were applying a model of economics that focuses on the high welfare, which on the other hand is associated with low output. Countries such as Greece are well known for their social welfare, which involves high wages, pensions, and early retirement age of 53 years for its civil servants. Other countries like Spain are famous for their special consideration of the health welfare of the citizens whereby citizens are just required to pay very small amounts of money for insurance in order to enjoy free medication. Application of such a model for some countries like Greece is putting the government at a very high risk of getting into huge debts. Greece economy has three main pillars namely tourism, agriculture and shipping with revenues collected from the tourism industry accounting for approximately 20% of the national GDP. The level of industrialization in the country is far much below compared to its fellow EU members and the fact that Greece spends a lot on social welfare can be seen to automatically run it into huge fiscal deficits (Egan, 2001, p.36). European Union has been successful in a number of ways as mentioned above but the future of EMU is at stake since there seems to exist wrangles and disagreements among the member states. German Prime minister was fully opposing the idea of giving Greece among other countries cash bailouts in order to solve the problem. In a way, his argument is justified because Germany does not have to spend its revenue that it collects from hardworking citizens in funding other nations which have extravagant social welfares. EMU is supposed to learn a lesson from this global problem and adopt better strategies that would enable it control such crisis in the future among other turmoil (Purnhagen, 2013, P.95). However, there have been various changes that have been made primarily to meet the challenges that EMU was facing like the establishment of European Stability Mechanism (ESM) (Grauwe, 2006, p.720). Many economists and political leaders from the region and other parts of the world have termed the crisis as a drastic failure and it is likely to affect the future of the union (Donnelly and Oxford University Press, 2010, p.145). In conclusion, the European financial crisis is one of the vilest crises that has ever hit some of the euro zone countries. The crisis started in Greece, a problem the country inherited the problem from the great 2008/2009 USA economic crisis. This was as a result of Greece, a member state of EU and EMU was using a totally different economic model that gives room for extravagance by the government. However, EU has a very slow method of approving decisions because its constituent members have to come into an agreement. The lengthy process of acquiring money bailouts ended up spreading the crisis to other countries within the euro zone. By the end of it all, almost all the member states were in financial crisis that they could have not forecasted. Some of the challenges that were making the crisis a hard nut to crack is the fact that the EU members have economies that have grown in different scales. In such a critical moment, European Central Bank officials had a difficult moment as some countries wanted to decrease their interest rates with others hoping to increase interest rates in their country in order to control the situation. The issue of independent fiscal policies versus the European Central Bank monetary policy was also a major challenge that was making the situation to continue worsening. Up to date, some countries have not yet recovered with some being on their way to economic stability. However, the crisis has led to emergence of several issues and facts that member states have been ignoring for long especially during the period when the European economy in general was doing relatively well. The failure of EMU to curb the European crisis significantly challenges the notion that EMU has been successful in controlling economic and political environment in member states. A lot more has to be done in order to make EMU more effective, or else the future of the union is jeopardy. Bibliography Bean, C. R., & London School of Economics and Political Science.1992. Economic and monetary union in Europe. Centre for Economic Performance.London. Buti, M., & Franco, D. 2005.Fiscal policy in economic and monetary union: Theory, evidence and institutions. Elgar. Cheltenham [u.a. Cline, W. R., & Wolff, G. 2012.Resolving the European debt crisis.Peterson Institute for International Economics. Washington, D.C. Donnelly, S., & Oxford University Press 2010. The regimes of European integration: Constructing governance of the single market. Oxford University Press. Oxford. Egan, M. P. 2001. Constructing a European market: Standards, regulation, and governance. Oxford University Press. Oxford. 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