EU crises from microeconomic point of view and future of EU - Assignment Example

?Topic:  EU crises from microeconomic point of view and future of EU XXXXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXDate: XXXXXXXXXXX Introduction Economic integration of up to twenty seven independent states has given rise to the European Union (EU). These states have come together to establish a community that is politically and economically united through the provisions of an economic integration. A political union is the highest level of an economic integration, and therefore the EU member states have resulted to a union that is one of the hardest unions to achieve in the world. Many countries consider domestic welfare over that of other countries, thereby creating stumbling blocks to the establishment of a community like the EU. European countries that have constituted the EU have also been set to operate under common currency; the euro, making economic transactions between and among member states easy and favorable. This is more so because the member states do not face currency fluctuations in terms of foreign exchange, making international business prior to the member states favorable across the EU region. Though the current notion of the EU sounds simple in the domain of other countries in the world, the history behind the formulation and implementation of the EU is rich. The establishment of the European Union was not easy, taking into account that it required prior organization and unique treatment of variables that would operationalize the union. Enormous challenges characterized the establishment of the union, but as time went by, challenges were overcome and smoothening of the operational grounds achieved. The current success of the EU has been achieved over a significant period of time, within which diversity and dynamism have adopted to aid the process. However, the EU is not without its economic problems. The EU has been characterized by micro and macroeconomics problems in its economic and financial context. These problems will be evaluated in this paper alongside the future of the EU, in the context of the euro, enlargement of the EU and the economic characteristics therein. A Brief History of the EU Efforts to unite the European countries began in the twentieth century after the Second World War. Significant success was first realized in the year 1949 when some European countries began the uniting process under the umbrella of Council of Europe. One year later, a community by the name European Coal and Steel improved their cooperation and established a treaty that brought together six nations (Roland, 2005, Ch. 3). These nations made up the founding states of the EU, and even today they are recognized for this role. In the 1950s, a more pressing need to have the European nations emerged. This was during the cold war at the time, which saw the Eastern side of Europe divided from the Western side. Protests that characterized the cold war contributed to this division, raising a concern about the unification of the European community. In order to unite the two sides, the Rome Treaty was signed in the year 1957, allowing for the creation of European community that was at the time called the European Economic Community (Roland, 2005, Ch. 3). With the establishment of the community, people, goods and services could be moved across borders in the entire European community. As time went, more and more countries requested membership, thereby making the community grow larger and larger each year. The growth and development of the community necessitated the presence of a single market among the member states. Provisions of law were enacted to aid this process. Eventually, in the year 1989, the Eastern side of Europe was united with the Western side when the boundary between the two sides was eliminated. Since then and over the years, the united European community has grown larger and stronger with the incorporation and integration of more member states. The Modern EU The years between 1990 and 2000 were characterized by free practices of the single market phenomenon. Unification of the member states enhanced free trade among the member nations. The flow of goods and services from one region to another or from one member state to another was made easier. Consequently the interaction of citizens based in the member states was improved. This situation led to the realization of strong ties among the member states. In the context of the realized benefits, security and environmental ties also became stronger. People were free to travel in and out of member states without restriction, a situation that made all the citizens and the member nations loyal to the welfare of each constituent state. Many treaties had been put in place in regard the functioning and operation of the EU. The most important treaty that defined the modern European Union is the Maastricht Treaty. It was actualized in the month of November, the year 1993. Under this treaty, the unification of the European nations did not only take the economic dimension, but also encompassed other objectives therein (Heijdra, Keuschnigg and Kohler, 2004, pg. 200-210). These objectives are: Promote security of the member states through formulating and implementing fundamental policies. Improve member states’ efficiency in economics and business. Uphold democracy in governing of all nations bound to the union. Unify the member states economically and financially. Uphold social diversity and dynamism of the member states. In order to operationalize the above objectives, proper policies have been adopted. Global concerns in the context of the union are also accounted for. These are issues to do with sustainable development, global warming, the general trend of climate change and the national security concerns. Microeconomic (and to a lesser extent macroeconomic) problems with the initial creation of the EU and the Euro Capital inflows and credit growth A number of countries joined the EU with expectations that they would improve their economic status within a short period of time. This optimism at some point got over-rated and therefore the expectations were not realistic. Several member nations expected that they would raise profits of their enterprises much easily. On the same note, joining the EU in the initial stages of its development was associated with high incomes for the member states’ households. As a result, capital injections and the creation of credit were accelerated to a point that the equilibrium levels were highly surpassed (Allard et al. 2008). The implication of this capital-credit process is that it resulted to high and unsustainable deficits in the current accounts of these countries. An intensive consideration of the credit growth in the EU context proves that there were evident bubbles in the real estate development and sustainability. These bubbles resulted to an unstable real estate sector in many EU member states. Mortgage loans contributed to this instability as more credit was fuelled to households. Credit growth is characteristic of dynamic evolution. It is this fact that makes real estate bubbles occur from time to time, causing the instability experienced in the real estate markets. Consequently, the instability causes fluctuations in the business cycle, resulting to variations in the economic performance of the economies of the member states. This situation was not an expectation for any given country that was interested in joining the EU. Denomination of foreign currency Members to the union operated on different currencies before joining the EU. On becoming members to the union, they were required to abandon their currency in order to operate a common currency. This requirement impacted different on the micro and macroeconomic variables of each member state. For instance, loans that had been issued on foreign currency needed to be harmonized after the adoption of the new currency. This resulted to inconsistencies alongside increased loans to some other countries where the loan issuer was prone to make a significant profit out of the variations provided by the foreign currency. Currency depreciation became more evident as economies tried to harmonize their performance prior to the requirements of the union. At some other instances, currency appreciation in some member states that had strong economies resulted in vulnerability of the smaller economies in terms of exploitation by the strong economies. The initial creation of the EU and the consequent adoption of the euro made cross border lending increase and become expensive at the same time (Angeloni, Flad and Mongelli, 2007, pg. 367-409). Local financial institutions were therefore forced to depend on parent financial institutions in other countries. Investment zones Economic crisis have in the past paralyzed many economies in the world. Problems associated with economic crisis in the world did not spare the EU counterparts in the 1990s when the EU finally took strong grounds of its functionality. Economic hardships during and after the EU became fully operational among the twenty seven member states resulted to declined trade levels and inadequate financing of the economies that made up the EU. As a result the success of the union was questioned and confidence towards the functionality of the union observed deteriorated levels. Adopting the euro as a common currency among the member states was expected to anchor stability in investment zones. However, the economic crisis in the 1990s and the adoption of a common currency in member states required that domestic policies be altered in order to accommodate the union’s differentials. This alteration complicated the entire process because some of the states were rigid in loosening domestic policies that would allow the unification process to take place even quicker. Consequently, large premiums characterized the change of domestic policies, thereby derailing the entire integration process. Investment is made from that part of income that is not spent. In other words, savings finance investments. When the unification was initialized, foreign savings were used to finance investments across the member states. Member countries therefore were quick to invest in lesser developed economies in order to take advantage of the market share. As a result, many countries that comprised the EU became overly dependent on the foreign savings. The end result of this was that the balance sheets of many member countries of the union became weak (Heijdra, Keuschnigg and Kohler, 2004, pg. 173-200). Corporates and households were adversely affected. Reforms and regulation of these activities were required, but unfortunately no measures had been put in place to account for such activities. Income convergence The EU has been experiencing enormous enlargement since its establishment. The unity that led to the current EU started with six member states. Currently, it is made up of up to 27 nations. Due to this growth, safeguarding the achievements of the union is important for the member states. The safeguarding process has been characterized by a number of challenges, especially in the context of converging income levels. Other aspects that have suffered the same fate include integration of financial services and the foreign direct investments. The EU had not in the initial stages provided frameworks that would account for these convergences. Dynamism injection into economies that experienced these divergences was therefore challenged all together. Medium and long term plans of the member countries under the union had provided for free and fair dynamism injection into the economies of the member states. However, this was hardly realized due to the individual economic policies that each country had adopted domestically. Institutional frameworks in many countries that made up the EU in its initial establishment were inappropriate or they inadequately met their purpose. As a result, the divergences already identified installed economic hardships on these countries. In this regard, economies failed to meet the expected levels of performance that were stipulated under the union. Expansionary pressures The private sector moved into the new economies once the borders were opened up. This sector invests where expected returns are high, meaning that they are profit-oriented. With the establishment of the EU, a private sector boom was experienced in almost every member state. As a result, expansionary pressures emerged. While these pressures could have been accounted for by the fiscal policy, the adoption of the euro by all member states complicated the role of fiscal policy. Applying this policy on all the members could have worsened the economic performance of other nations while making better that of others. Before the union was initiated, the member states had different economic performance levels. The fiscal policy therefore would fail to achieve its purpose if it was uniformly applied in all member states. As a result, financial and macroeconomic instability was realized. Issues of inflation, employment and unemployment became evident in countries that did not face these difficulties before. Wage and price shocks EU brought about single market operations among the member states. This promoted competition among member states in a bid to reap full benefits of the integration. On the same note, investment activities were highly injected into the EU economies. Single market operations that kept on enlarging as more countries joined the union resulted in high exploitation of the small and medium enterprises in these economies. Goods, services, labour and financial markets integration deepened (Breuss, 2002, pg.245-274). However, wages and the general price level in many economies were adversely affected by the shocks that resulted from the integration process. Social, economic and political reforms were required in order to alleviate these shocks and set the wages and the price levels back to normal. Unfortunately, reform fatigue characterized many member states. Therefore, price and wage shocks were experienced in many economies. What is your opinion of the future of the EU in terms of the Euro, Enlargement and Economics? The establishment and development of the EU has been procedural over the years. More countries have joined in since it was set up, continuously contributing to the over the years enlargement that the EU has experienced. Unification of the member countries has resulted in a single market economy. This unification is the key factor that the future of the EU is based on. The enlargement and the adoption of the euro as a common currency have had tremendous benefits for the member countries. Individual economies have experienced economic growth and development from this integration. Jobs have been created, innovation has been spread across nations and economic productivity boosted to a greater extent. The single market concept of the EU is fundamental in considering how far the EU will go and how its future is going to be defined. Under the single market aspect, future trend determinants and influencing factors will be considered. Consumers and the small and medium size enterprises The European Union has had its achievements over the years it has been functional. The efficiency of the single market system is expected to improve and provide better functionality to the entire EU economy. In this regard, innovative markets are expected to come up. High efficiency and innovative markets will further trigger high production of goods and services. Prices of goods and services will also go down, thereby favouring the consumers in the economy. It is important to note that the consumers in this context are the individuals and countries bound to the union. However, for this to be realized, it will be important for the stakeholders to account for the necessary conditionality and framework of operations so that large operators do not suppress the small and medium size enterprises. Globalization This is the process of converting the world market into a single global village. Globalization is a necessary tool for enhancing competitiveness among nations in a bid to reap the maximum benefits in the world market. EU firms are an integral part of the globalization process. In order to effectively acquire a relatively significant world market share, the EU firms will need to increase their competitiveness, not only among the EU member states but also in the rest of the world market. In order to effectively compete worldwide, the EU firms will have to adopt strong competition strategies, remain innovative over time and adopt relevant technologies in production and distribution of goods and services. The EU is the next big world market controller if it keeps the pace of its enlargement and the capacity of production characteristic of the community. Globalization is also set to benefit the EU in investment and hosting of parent companies that are affiliated to other foreign firms. EU members are turning out to be potential places of investment and a relatively critical environment for producing and manufacturing firms. Global companies are targeting the EU due to its previously known performance. As a result, the world market has been observed to depend on the EU in the formulation and implementation of worldwide rules of market operations as well as in the realization of convergence in the global setting of business. The EU therefore will get to a point where it will control global imports and exports, where it will be required that exports to the EU meet the EU set standards. On the same note, the EU will uphold its quality policy by ensuring that its member states export goods and services that meet the EU standard. Therefore, the EU is set to take control of the world markers in the near future. Knowledge and innovation Technological and the knowledge base of the EU have so far surpassed that of many other internationally competitive countries. Sectorial specialization has characterized many EU member countries’ economies. This has been aided by the adoption of appropriate technologies in the production sectors of the EU economy. The EU will be next role model in the world and the source of proper means of research and development. The aim of this knowledge base and consistent innovation in this community to enhance an overall growth in value added aspects of the EU economy. Future impacts of this process are exacerbated employment opportunities, social cohesion, improved health and protection of the environment (Darvas and Szapary, 2008, pg. 44). Social and environmental dimension Marketing opening and the creation of a single market among the EU member states is associated with numerous externalities. On the same note, adjustment costs are incurred in the process of opening up the market. It is because of this reason that market opening is often resisted, thus failing to be realized if the participating countries are rigid in order to safeguard their interests. Social and environmental dimensions are also highlighted as possible stumbling blocks in the establishment of an open or a single market. Social and environmental aspects in the context of the functionality of the EU are important to consider, because the general idea behind its establishment is to benefit the different societies that constitute the union. Social and environmental dimensions will therefore have to be accounted for in the future market policies that the EU will adopt. Market opening have and will continue having implications on the social and environmental dimensions. In order to counter these implications that may negate the purpose of the union, measures that allow citizens to exploit new opportunities provided by the union will need to be put in place. Once this is done, distributing and balancing externalities among member states will be done with ease. However, if other countries will need to join the EU, they will definitely face significant difficulties in conforming to the already set rules and regulations as well as in being integrated into the established member-benefits programs and systems. As the EU develops and enlarges, other countries may want to join. However, as the present trend depicts, it will not be easy for new members to get integrated into the union. Conclusion Europe has been unified under the EU umbrella, thereby leading to the realization of enormous benefits to citizens and nations bound to the union. The union has promoted division of labour and specialization. Efficiency in both division of labour and specialization has seen an increase in the comparative advantage of the EU in the global arena. Legal frameworks have been set up to assess the progress of the union as well as to guide the activities undertaken by the union. Regulatory measures have been formulated and implemented to account for the overall performance of the union. As a result, enlargement of the union has been realized over the years. The unification of the member countries has also led to increased competitive pressure in the EU economy, thereby prompting efficiency in each and every aspect of the economy. The position currently taken by the union allows it to compete globally. As a result, the EU in the world economy context takes a leading role. This economic integration also acts as an example of ways of governance for many states in the world. The success of the union cannot be refuted, and so are the benefits that have been realized by the member states under the union. References Allard, C. et al. (2008), ‘Macroeconomic effects of EU transfers in new Member States’, IMF Working Paper, No. 08/223. Angeloni, I., M. Flad and F.P. Mongelli (2007), ‘Monetary integration of the new EU Member States: What sets the pace of euro adoption?’, Journal of Common Market Studies, Vol. 45, No. 2, pp. 367-409. Baltzer, M. et al. (2008), ‘Measuring financial integration in new EU member states’, ECB Occasional Paper, No. 81. Breuss, F. (2002), ‘Benefits and Dangers of EU Enlargement’, Empirica, Vol. 29, No. 3, pp. 245-274. Darvas, Z. and G. Szapary (2008), ‘Euro area enlargement and euro adoption strategies’, European Economy - Economic Papers, No. 304, Economic and Financial Affairs DG, European Commission. Heijdra, B., C. Keuschnigg and W. Kohler (2004), ‘Eastern enlargement of the EU: jobs, investment and welfare in present Member countries’ in Berger, H. and T. Moutos (eds.): Managing EU enlargement, MIT Press, pp. 173-210. IMF, (2004b), ‘Adopting the Euro in Central Europe - Challenges of the next step in the European Integration’, IMF Occasional Paper, No. 234. Roland, G. (2005), ‘After enlargement: institutional achievements and prospects in the new Member States’, Ch. 3 in C. Detken, V. Gaspar and G. Noblet (eds.): The New EU Member States Convergence and Stability, Third ECB Central Banking Conference, 21-22 October 2004, European Central Bank, April. Read More