Why The EU May Need To Change

Why The EU May Need To Change

The small European country of Greece is known as a beautiful tourist destination– a country typically associated with great history, beautiful islands, seemingly endless coastlines, happy people as well as gorgeous weather year-round. But it is not all those positive aspects about this small Mediterranean country in south-eastern Europe that have made international headlines around the world these past few months. It is Greece’s economic meltdown which has made it a major center of attention. Greece is bankrupt and confronted with an extremely disastrous economic and financial situation, namely a 300 billion euro (approximately 400 billion dollar) debt and an annual budget deficit of 13 percent of total GDP, which are a product of decades of uncontrolled spending and lending. So, when the worldwide economic downturn struck in 2007 and 2008, Greece found itself exposed. The European Union had to help Greece out with billions of euros to ensure the stability of the whole European economy and the euro. The Greek meltdown hurts the rest of Europe and reflects badly on the reliability of the euro as a currency,which can already be witnessed in the decline of the euro’s exchange rates against other key currencies. And given that the world has increasingly become one financially-integrated reality, the U.S. now finds itself negatively impacted by the crisis.

After it became obvious that Greece was in such a terrible financial position and the meltdown occurred, the European Union had to help Greece. Greece tried to reduce its enormous deficit by imposing new taxes and increasing old ones on goods such as fuel, tobacco, and alcohol. It also increased the retirement age by two years and cut wages in the public sector. It was, however, not enough for Greece to pay back its enormous debt or stabilize its economy just by these efforts. For decades, Greece has lived extremely above what they could afford. The Greek government was much too “benevolent” with many of its policies. A good example of this “benevolence” may be summed up by their retirement policy. Up until a few months ago, Greece allowed civil servants to retire in their 40s – which no other country in Europe, or the whole world, has ever done or even dreamed about doing. Now that Greece is in this terrible economic position, however, it cannot reverse its bankruptcy fate by simply changing its ridiculous, never reality-tested policies. Hence, the EU’s entrance into the cradle of western civilization. But the EU did not help Greece because of mere kindness but because it feared a collapse of the whole euro-zone if Greece was not helped. Therefore, early in May 2010, the finance ministers of all 16 countries in the euro zone came together in Brussels and agreed on a rescue plan of some 700 billion euros for the struggling nation. The individual country contributions to this aid package are proportional to their respective GDPs. As such, this means that Germany will be giving the most money, followed by France. According to Josef Ackermann, Chief Executive Officer of Deutsche Bank and chairman of the Institute of International Finance in Washington D.C., had Europe not helped Greece and “let it fall,” it would have led to a “complete European meltdown”.

Ever since the collapse of the Greek economy and the bailout from other European countries, second thoughts regarding the Euro as a currency have evolved. The logic behind this is that a Greek crisis might well progress into a European one. Some bankers and investors think that the Greek financial crisis will lead to the demise of the euro. There are, of course, still plenty of experts who do not think that the euro’s “good days” are over, but just the fact that renowned economic experts ask questions about the viability of the euro now shows that much trust in the currency has been lost due to the crisis in Greece. Bob Hancke, a professor of economics at England’s prestigious London School of Economics, even sees the euro completely or partially gone in a few years, with only Europe’s largest and richest economies such as Germany, France or Finland keeping it as its currency. In any case, Europe has learned that it is not as strong economically and wealthy as it thought it was. The Greek crisis made it apparent that the economies in the euro-zone are deeply and extremely integrated; and that if one country, like Greece, struggles, all the other countries are affected by that as well. Also, the Greek economic catastrophe cannot be seen as isolated. There are some other countries, especially Portugal, Spain and Italy (under the terrible leadership of Berlusconi) which also have enormous deficits that might lead to an equally as catastrophic a scenario as Greece. According to Ackermann, the probability for economic disasters happening especially in Spain and Portugal is quite high, and he personally is very skeptical that the austerity measures on the Iberian Peninsula will be enough to prevent a second tragedy like the one in Greece. Portugal has already had its credit rating cut to “junk status,” and its efforts to reduce deficits and revitalize economic growth seem to be failing. In addition, Spain and Italy have also been named as potential next-in-line candidates when economic experts speak about the troubled European economy. And as reported by the German news weekly Der Spiegel, European Central Bank chief Jean Claude Trichet has noted that Europe is in the “deepest crisis it ever experienced since World War II – perhaps even World War I.” Because of all these concerns, the Euro has experienced a swift decline in its value since the Greek economic problems rose earlier last year. Investors now believe that Greece’s crisis might be contagious to other countries, and they simply do not like holding currencies in markets where there is a likelihood of financial turmoil. Hence, while trust in the euro has waned, investors have turned to the dollar in their search for a safe haven. Nonetheless, there are bright sides: a weaker euro makes exports cheaper, making products produced in Europe more attractive to foreign buyers. On the flip side of this, the American economy could be potentially harmed by the weakened euro, given that a stronger U.S. dollar will make American products more expensive.

The U.S. could, although not as severely as Europe, still become immensely affected by the Greek economic and financial meltdown. Realizing that the U.S. is already paying for Greece’s debt through the IMF, another important point to note is that American banks hold a significant amount of sovereign debt from European nations. The first issue that the U.S. will face is that American banks hold an unknown, but expectedly high, amount of sovereign debt from European nations. Also, most American companies hold securities in European banks. Defaults on any of these bonds could harm U.S. bank capital ratios and earnings as well as those of private corporations. Another significant problem is that if the European economy continues to deteriorate, European nations will have less capacity to purchase American exports. So, if Europe slides into even more economic trouble and the crisis spreads from Greece to Spain and Portugal and maybe eventually even to the rest of the continent, this would vastly harm America’s economy.

It is not just the deteriorating European economy that could harm the U.S. but also the fact that the dollar will climb higher as the euro faces peril. In a recent State of the Union address, President Barack Obama laid out plans to double U.S. exports within the next five years that would eventually create two million new jobs. However, according to the respected Petersen Institute, it should be noted that a strong dollar will jeopardize those plans, particularly given the reality that for every 1 percent increase in the dollar in average against other key currencies, American exports are projected to decrease by approximately $20 billion (Beck, Rachel. Strong dollar hurts American exports, which have been driver of U.S. economy. Business News Online, February 12, 2010). Thus, it is easy to see how a strong dollar can turn out to be a great disadvantage for an export–driven U.S. economy. Foreigners will have to spend more to purchase U.S. goods, and with increasing prices, the demand will decrease. And it is not just higher prices on U.S. products in Europe that will potentially affect the U.S. negatively: American companies also will have to convert the profits from the weak euro to the stronger dollar and hence lose even more money. It is noteworthy that some companies have already begun to reduce their earning expectations.

All in all, the fact that Greece is being helped out with billions of euros makes one ask if the European economies are too interconnected under the umbrella of the European Union. Polls taken in Germany show that more than two thirds of the German population did not approve of the government’s decision to bail out Greece. Hence, helping Greece was a decision very hard to sell, and German chancellor Angela Merkel’s popularity fell precipitously after she decided to give her approval to rescue Greece. The election in Germany’s biggest state, North-Rhine Westphalia, shows how unpopular the rescue package was, and Merkel’s party, the conservative Christian Democratic Union, got only 34.6 % of the vote, down from 45 % in 2005.

For many people in Europe, helping Greece with billions of bailout money is also a question of whether one really saves the Euro as a currency or just the bankers. At present, a majority of citizens in a country like Germany do not understand the complex construct of the European Union anymore and do not see the reasons why the weak economy of a small country like Greece can jeopardize a stronger German one. Already facing a budget deficit of their own (although of course by far not as severe as the Greek one) a majority of Germans simply have no appetite to help the Greeks who – in the opinion of most – “lived above their means” and are responsible for their own past “mistakes” and policies. The European Union and the way it is organized will have to change to prevent such economic predicaments such as the Greek one last year from happening again. The European Union is a confederation of many different countries, and, hence,  does not give its people something like a “national identity.” First and foremost, the people in Europe consider themselves denizens and patriots of their own respective countries and not as “citizens of Europe.” A great many people across Europe have long been wary of an influential European Union, and the Greek economic meltdown has reinforced their concerns. As the European Union does indeed exist of many sovereign nations, it should come as no surprise for policy makers that everyone has its own self-interest in mind. The EU desperately needs to figure out a swift way out of this mess or will otherwise face a growing number of euro-skeptics who are more vocal in their opposition.

The great crisis that Europe is currently facing shows that the European Union has failed, at least to some extent, in its objective to strengthen the whole European economy. As such, it is not surprising that so many Europeans now desire a greater focus upon their own countries rather than surrendering power to an already failing EU. Speaking on behalf of many Germans, I do agree with Time magazine when it declared in its September 2011 issue that “Germany can’t save the world”.

Mr. Backhaus is a student of economics and guest contributor to Catholic Journal. He lives in Germany.

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Felix Backhaus