Past and Ongoing Negotiations and Decisions made to Curb the Euro Crises - Research Paper Example

Past and Ongoing Negotiations and Decisions made to Curb the Euro Crises Introduction For the last two years, oneof the worst financial crises has threatened the European region. The crisis has threatened to total collapse of Greek economy and the Euro zone currency. By the start of the millennium, the Eurozone appeared to be performing well economically. Most countries in the European Union were performing well and some economists argued that the countries would be amongst the most competitive economies in the world. Countries such as Portugal, Ireland, Greece, and Spain popularly known as the PIGS enjoyed cheap credit in the international capital markets. Moreover, the EU supported these countries by offering structural funds. Additionally, the countries borrowed heavily from the international capital markets. Although investments increased in the PIGS, there was eventual increase in housing prices. Additionally, the economies became less competitive. Consequently, the countries experienced financial crisis resulting from excessive debts. This essay focuses on the negotiations in the Euro Crises and the decisions made from the beginning of the crisis until today. The 2007 financial crisis, which affected other regions of the world, resulted in collapse of the global financial markets. In 2009, the crisis intensified with the worsening of the Greece debt situation. The crisis spread to involve political as well as economic crisis in the entire Eurozone. This has threatened the permanence of the European Union. The challenges facing the Eurozone include increased credits and public deficits in some of the Eurozone countries, the destabilized European banking system, economic downturn, and persistent imbalances in the trading systems in the Eurozone. Additionally, the employment declined gradually in most countries in the Eurozone, especially the PIGS. These challenges have resulted in a political crisis from disagreements that have emerged as the Eurozone countries try to negotiate for a solution (Cooper Web). Negotiations in the Euro Crises and their Results In addition to Greece, most countries within Economic and Monetary Union (EMU) have been facing similar financial crisis. The Euro Zone crisis, which became evident in 2008 has been ongoing for quite some time and has threatened the economic future of the Eurozone. Following this crisis, several meetings, and discussions were held amongst politician, scholars, and businesspersons across the world and especially in the Eurozone. The discussion and meetings aimed at analyzing the crisis and ways to resolve it and prevent such occurrence in the future. The crisis started with deterioration of financial systems in some of the nation in the Euro zone. This resulted in bailouts for countries such as Greece, which was the first nation to receive aid from International Monetary fund and the European Union. This was followed by bailouts for other countries such as Ireland. Moreover, more countries especially the weaker economies in Eurozone have continued to demand for bailout. However, some countries such as Greece and Ireland are facing challenges related to European economic as well as the monetary union (Cooper Web; Bastasin 20-25). One of the major causes of the extension of the crisis is the lack of interest by most EU members on the decision-making processes. Moreover, most economies made decisions based on assumption. Some assumed that the Greek bonds were similar to German bonds in terms of riskiness. The assumption was grounded on the fact that Greek and Germany have similar currency. The assumptions affected the participants in the bond market who failed to understand the difference in competitiveness and internal politic of the different Euro zone countries and effect of such factors on the economy. However, this has changed and negotiation within the Eurozone has resulted in establishment of different interest rate charges for the different countries in the Euro Zone (Nelson, Belkin and Mix 1-5). In June, Spain, which is considered the fourth largest economy in the euro zone, emerged as a casualty of the debt crisis when it announced that it would cease borrowing from the bond market if other European Union nations did not come to her aid. The problem was quite intense and Spain needed more than billion euros to restore the banking system, which was at the verge of collapsing. This announcement triggered negotiations to rescue the banks. Spain tried to avoid austerity measures by entreating for backup aid for its banks (Cooper Web). This is because Spain wanted to retain the power of decision making on matters regarding Spanish economy and fiscal policies. It was thus avoiding austerity measures that have been executed on countries such as Greece. Nations such as Germany were open to such a measure since they feared exit of Spain from the euro zone, which would be catastrophic to the EU. However, some economist felt that there was need for negotiations to establish a common fiscal policy for the euro region. They felt that the increased negotiating power of troubled countries was risking the economies of other countries in the Euro zone. Therefore, there was need for establishment of rules and policies to ensure that all countries received equal treatment in times of crisis (Nelson, Belkin and Mix 7-12). Following the negotiations, there was an agreement to increase the economic pressure on some Eurozone countries to prevent the spread of the crisis. The decision was made after the crisis that had affected Greece, Portugal and Ireland began to spread to Spain and Italy. The measure used included the pronouncement of a new bond buying system by the European Central Bank (ECB). However, the ruling is being questioned especially on aspects regarding the implementation of the economic reforms linked to the financial for failing economies. Following EU negotiations, Greece was given 80 billion euros to resolve its financial crisis. However, it was agreed that Greece had to cuts is public spending. Moreover, the EU auditors were mandated to assess the financial spending within Greece. Besides, European Financial Stability Facility (EFSF) was established in 2010 to offer loans to struggling Eurozone nations. Following further negotiations, the rescue fund set aside for EFSF was increased from 500 billion Euros to 800 billion Euros (Cooper Web). Other countries that are in the process of bailout include Portugal and Ireland. However, there are ongoing negotiations on the establishment of European Stability Mechanism (ESM) to be launched in 2013 to provide permanent measures for crisis resolution in the Eurozone (Cooper Web; Bastasin 15-19). There have been disagreements regarding some measures to deal with the crisis. Germany’s chancellor, Angela Merkel insists that use of Eurobond will not resolve the crisis since some countries such as Italy and Spain will decrease their efforts in cutting the budget deficits. According to Merkel, the approach of rescuing the Eurozone should revolve around stringent spending cuts for struggling countries. The negotiations on whether to continue aiding Greece have been ongoing. There is fear that Greece might be marginalized from the Eurozone if it does not follow the regulations set to make it reduce its public spending. This is because most banks in Greece are even unable to borrow form European Central Bank due to lack of enough collateral to obtain loans (Bastasin 147-150). During the crisis, emergency summits have been held and important decisions made. One such decision was discarding of the European Parliament. The roles of the parliament were entitled to Germany and France. However, there are criticism that most of the meetings and summits were not transparent, lacked political leadership and accountability. Moreover, most governments are in a dilemma on whether to follow the EU market requirements or what their nationals want. This led to the agreement that ECB should act as the main supervisor in the crisis resolution (Cooper Web). There are certain factors that complicated the negotiations in the Eurozone. The EU lacks the legal power to prevent some occurrences such as those regarding bailout negotiations. This has led to some nations taking advantage in pursuit of national concessions. There have been ongoing negotiations regarding the people entitled with making decisions for the Union. This is because the national politicians and electorates, who make current decisions, are often faced by disagreements (Cooper Web). Another negotiation outcome was the Brussels agreement of 26 October 2011. 17 countries from the Eurozone met and agreed cut off 50% of the debts that Greece owed banks. Moreover, Italy was obligated to set up measures of reducing its national debt. Furthermore, 35 billion Euros was reserved for credit enhancement purposes. The funds will be used to alleviate losses that the Eurozone banks are likely to incur. Moreover, European banks are required to improve their capital ratios to deal with the banking crisis. Currently, there is an ongoing negotiation to create a banking union for the entire European Union. The European crisis is attributable to the inadequate regulation and control of the financial market. Therefore, the Eurozone agreed on the need for establishment of supervisory frameworks to standardize the operations of the financial systems. A unitary financial system will lead to establishment of a Single Supervisory Mechanism (SSM) aimed at aiding in resolution of the ongoing crisis. The agreement was initiated by acceptance of some nations such as U.K., Germany, and France to compromise and allow ECB acquire supervisory mandatory over all EU banks with an asset of more than $ 39 billion. Moreover, the ongoing negotiations will address the issue of the future of single currency for the Eurozone. Also, the negotiations aim at converging the fiscal policy and financial regulation further. In addition, EU agreed to leave smaller banks under control of national regulators while larger banks will be regulated, restructured, and audited by the ECB. Moreover, there is an ongoing discussion on when the new European regulator will start functioning. The Eurozone countries are expected to agree on this before December 31 2012. Another ongoing negotiation regards the multiannual financial framework 2014-1020. The negotiations started in June 2011. The negotiations involved different parties such as European Parliament, European Commission, European councils, and the European parliament. Low-level issues have been agreed upon. However, high-level issues have not been discussed seriously. The negotiations have been greatly affected by the crisis, which has resulted in national cutbacks as the Eurozone struggles to stop the crisis. Moreover, there is increased public tension regarding EU from the Eurozone, which has slowed down the negotiations. However, the Eurozone states hope that the negotiations will convert the budget into a tool for resolution of the crisis (Cooper Web; Bastasin110-114) Conclusion The Eurozone has been going through one of the worst economic crisis, which has threatened the collapse of the EU and the common monetary currency. The crisis has been characterized by deterioration of the banking systems in most states. Some countries such as Greece, Ireland, and Portugal have had to seek financial bailout from the Eurozone. In the attempt to rescue the struggling countries, several discussion, and negotiation have been held to establish measures. Such negotiations were on the conditions the struggling nations were supposed to meet to be bailed out. The Eurozone agreed that the nations had to cut their public spending. Moreover, there are ongoing negotiations to establish how the Eurozone can use the 2014-2020 financial budgets to deal with crisis. Another decision made during the negotiation includes the obligation of European Central Bank to monitor large banks in the regions. Greece. Moreover, European Financial Stability Facility (EFSF) was established in 2010 to offer loans to struggling Eurozone nations. Additionally, the EFSF reserve was increased from 500 billion Euros to 800 billion Euros for continued bailout of struggling countries. However, the Eurozone have not yet agreed if Greece will continue being a member of the Eurozone. This is because Greece has not fulfilled all the conditions for bailout and continues risk the financial status of other countries in the Eurozone. Works Cited Bastasin, Carlo. Saving Europe: How National Politics Nearly Destroyed the Euro. London: Brookings Institution Press, 2012. Print. Cooper, Rachel. "Debt crisis: as it happened." The Telegraph 30 October 2012: Online:. Web. . Nelson, Rebecca, et al. "The Eurozone Crisis: Overview and Issues for Cogress." Cogressional Research Service (2012): 1-25. Web. . Read More