Current Recession and European Integration - Essay Example

Current Recession and European Integration 1. Introduction The global economic crisis, which originated in USA in the form of the asset-pricing boom in 2007, has affected countries all over the world including both developing and developed nations. As a part of this, the countries in the European Union as well as its trading partners have also got affected considerably. Both the real sector including trade, GDP, fiscal capacity etc and the financial sector in all nations of the European Union have got affected significantly by the current crisis (ONB, 2009; Francois and Worz, 2010). Reports show that the present crisis has also posed many threats and challenges to the integration of European Union countries, which are of considerable concern (Dabrowski, 2009). In this essay, the challenges that the current crisis has imposed on the advances that European integration that have been achieved over the last 25 years are discussed. Moreover, the possible changes in the future direction of the integration in the light of the present crisis are also discussed. This essay is organized as follows. Section 2 discusses the origin of the crisis and the effects of the present crisis on the EU nations. Section 3 discusses the main issues associated with the European integration in the light of the financial crisis. Section 4 concludes the essay. 2. The Global Economic Crisis and EU Nations Global financial crisis, which has originated in USA in 2007 end, is hitting now countries all over the world. The financial crisis had its origin in USA with the sudden boom in housing prices creating high optimism among investors and lenders between 1990 to 2006.This resulted in the creation of many mortgages and finally as the housing price boom came to an end in 2006, subprime defaults1 started rising. Since the households became unable to repay their debts, the leading financial institutions worldwide had to write off their investments since August 2007. This deteriorated their balance sheet positions which ultimately resulted in a tightening of supply of credit to households and firms so as to finance their consumption Thus the financial crisis led to economic crisis which spreaded all over the world (Agarwal et al, 2008; Gwimmer and Sanders,2008 etc). In the context of the current global financial crisis that affected all countries, the prospects for international business and FDI came down drastically (UNCTAD, 2008). The developed nations have been affected most by this decline than the developing nations. Many industries have been affected by the financial crisis due to the decline in the prospects for international business and FDI. The global economic crisis has resulted in the reduction of credit availability worldwide including EU member states, falling stock market indices and declining consumer confidence (Eurostat, 2009). The real sector also has affected considerably as a consequence of all these. Reports show significant decline in output measures in the aftermath of the crisis in all member states of EU (Eurostat, 2009).The following diagram illustrates this. It shows that from 2008, all the output measures in EU member states show a declining trend. Figure 1: Global Financial Crisis and Declining Output Measures in EU Member States Source: Eurostat(2009) The next figure shows the differences in the output measures among the EU member states in the aftermath of the crisis. It shows the output from 2000 onwards. Figure 2: Differences in Output Among EU Member States (Seasonally Adjusted Indices) Source: Eurostat(2009) The above diagram shows the differences in output among the member states of EU. It shows the lowest growth rated achieved by the larger states while the higher growth rates were achieved by the newly joined EU member states. In the study by Filippov and Kalotay (2009), evidence of massive downsizing in the manufacturing industry particularly in the automotive industry in the EU member states including Hungary, Bulgaria, the Czech Republic, Estonia, Latvia, Slovakia and Slovenia is shown. The study shows that this has resulted in significant decline in employment in manufacturing industries particularly automotive industry in these nations. The following figure shows the declining trends in OECD trade from 2008 onwards. In the figure, the import growth is measured as three-month moving averages. Figure 3: The Trends in Import Patterns of OECD Nations by Product Categories Source: Francois and Worz, 2010. The figure above shows that the import growth of mineral fuels and related materials showed the most significant decline followed by the machinery and the transport equipment import growth. Figure 4 Source: Francois and Worz, 2010 Figure 4 shows the quarterly trends in GDP and the export patterns in 2007, 2008 and 2009 for the nations of Central Eastern and South Eastern Europe (CESEE). It shows the significant decline in GDP and exports particularly in the first quarter of 2009 of 11.4 percent and 21.2 percent respectively for these nations. The study by Francois and Worz, (2010) shows that the major share of value added in the old EU member nations, which joined the EU before 2004, is in service sector while for the CESEE nations, which joined the EU in 2005, the major share of value added is in industrial supply and machinery sectors. Hence, this study shows that the effects of the current crisis were most seen in the CESEE nations than the older nations. Thus, the GDP and world trade of the CESEE nations were affected most by the present crisis when compared to the older EU member nations. The section above shows the disparities in the effects of the present crisis among the different EU member states. This gives a preliminary indication of the threats imposed by the present crisis on the European integration. The next section discusses the challenges imposed by the current crisis on European integration in detail. 3. The Challenges to European Integration The process of European Integration started with the 1957 Roman treaty (Keefe, 1995). At that time, there were only six western European nations involved in this process (Dabrowski, 2009).It was mainly intended to resolve all the conflicts existing among the member nations which have resulted in the first and second world wars(Dabrowski, 2009). In spite of the integration process, each member nation was granted national sovereignty also. This meant that all common policy decisions were able to be implemented only with the permission of each member state involved in the integration process. Hence, consensus among all member states was difficult to achieve and the integration process evolved gradually after that. Hence, in spite of the integration process, there were lot of institutional asymmetries involved in the integration (Taylor, 1996; Oner, 2004; Dabrowski, 2009). Studies show that the EU has achieved considerable progress in the integration process in areas like common trade policy, common currency, single European market etc while much progress has not been achieved in the political area (Keefe, 1995; Dabrowski, 2009). The studies show that the institutional asymmetries involved in the integration process were most visible in the aftermath of the present economic crisis (Dabrowski, 2009). In other words, the effects of the crisis made the institutional asymmetries more visible, which pose great challenges to the European integration process. These are discussed in detail below. 3.2.Economic Crisis and Single European Market One of the main pillar of the European integration process, which is identified as the Single European market has been affected a lot by the present crisis. The global economic crisis started in USA and the consequent credit crunch spreaded to the European member nations due to the spill over effects and the results were the significant appreciation of the Euro against the US Dollar, declining demand for EU exports from the US, heavy inflation and the collapse of housing markets in many nations. A coordination of policies among different EU member states was difficult to be achieved since the crisis affected different EU nations with different speeds and intensities due to the differences among the nations as explained in the previous section (Dabrowski, 2009). Hence, many nations gave importance to their national sovereignty than the common policy coordination among the EU member states thus violating the single European market policy. For example, bailout packages were announced to the big companies in the automotive industry by many EU member states violating the pledge taken in the G20 summit of November 2008(EurActive, 2009, February 10). These include mainly subsidies and other support packages. Estimates show that subsidies to auto industry have multiplied and are now about $48 billion (Gamberoni and New Farmer, 2009). These measures have been mainly intended to enhance the availability of credit throughout the economy. The controversial aspect about the policy response has been whether the plan of credit availability is entirely to national industry or to both national and foreign investors (Aaken and Kurtz, 2009). If the credit is entirely to national industry, then it will be a kind of discrimination against foreign investors. Thus, it can be seen that the present crisis has posed great challenge to the single European market framework. 3.3. Economic Crisis and EU Fiscal Capacity Automatic stabilizers are considered as the main tool for the fiscal policy to help minimizing asset bubbles .The present global financial crisis however demands the need for more active fiscal policy to stabilize the situation as shown by studies like Anderson (2009). The fiscal capacity of the EU as a whole is reported to be very limited around 1 percent of GDP (Dabrowski, 2009). The focus areas of these small available resources were Common Agriculture Policy, the Cohesion Policy, R&D programs, and official development assistance. To help the crisis affected member nations, in the Brussels Summit held on November 20, 2008 the EU council approved the Economic Recovery Plan, which included only limited funds. Due to the lack of consensus among the member nations regarding creating extra funds for supporting the crisis-affected nations, the EU council had to depend on coordinating national fiscal stimulus packagesGros & Micossi, 2009; Dabrowski, 2009). This was very difficult to obtain due to the differences existing among the different member nations in terms of power, economic capacity, fiscal capacity, borrowing constraints etc. The coordination was also difficult due to the anticipated free riding problems by the most powerful states and the reluctance of many member nations to share their domestic resources with other nations (Dabrowski, 2009). 3.4. Economic Crisis and Single Financial Market in EU In EU lot of inconsistencies were obtained between the domestic supervisory rules for financial markets and the global and cross border characteristics of the financial markets mainly due to the absence of a common financial supervisory authority for the entire member nations of EU (Veron, 2007; Vives, 2009). A lack of consensus was seem among the member states especially by UK regarding the appointment of a common EU authority to supervise the financial sector at national level due to many differences existing among the member nations regarding the role and importance of financial services industry in the national economy and the importance of national budgets in allocating resources for support programmes to financial crises etc (Goodhart, 2009). Though many reporst like Larosiere Report suggested many measures for the harmonization of financial sector practices among the EU member states , they were not proved to be effective due to the lack of consensus among the member nations(Lanoo, 2009; Vives, 2009 etc). The challenges posed by the financial crisis to a single EU financial market has created many threats to the weaker member nations like the CESEE nations due to the special characteristics of these nations as mentioned in section2. Their financial sectors were affected more strongly than the other EU member nations like high-risk premia and high spreads for government bonds, higher exchange rate volatilities etc. Even among the CESEE nations, studies show significant disparities regarding the effects of the crisis. Hence, due to the lack of a common policy at the EU level to protect the financial sector of these nations, has posed serious challenges to these nations. The main reason for the lack of the policy action at EU level is their limited fiscal capacity as explained earlier. Studies show that most resources that were provided to support these nations were from outside the common EU area like the IMF, World Bank and directly from the EU member states(Dabrowski, 2009). 4. Conclusion In this essay, the challenges posed by the present crisis to the European integration process have been discussed. It is shown that the main pillars upon which the European integration process has been evolved are now under serious threats like single European market and single European financial market. The global economic crisis ahs affected the different member nations with different speeds and intensities. Hence, policy coordination has been difficult to be achieved in response to the crisis. Thus, the crisis has exposed the institutional asymmetries involved in the European integration process. It has also intensified the divisions between the core and periphery EU member states. Moreover, the fiscal capacity of the EU as a whole is limited to provide rescue operations to protect the strongly affected member nations. The coordination among the national fiscal packages was also difficult to be achieved among the member nations. Thus, the fiscal decisions are mainly left to the national governments. Hence, the member states have to depend on the external resources for support measures In the case of financial supervisory decisions, due to the lack of a common financial regulator, the decisions of the national governments mainly dominate the financial sectors in each nation. The future of the European integration process has to be directed in the light of the above-mentioned threats and challenges. The division among the core and periphery nations can have serious implications in the future like they can either speed up or slower the accession of more countries by the EU in the future. Policy coordination among different member nations needs to be achieved regarding the fiscal matters and the financial sector supervisory decisions. This can help to reduce the divisions among member states. The fiscal capacity of the EU needs to be improved through policy coordination among the member states. There needs to be a common regulatory authority at the EU level for the financial supervisory decisions at the same time maintaining the sovereignty of the national governments to some extent. These need to be achieved to face the threats posed by the present crisis and for the future progress of the European integration process in the light of the present crisis. 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