European Union Crisis: An Evaluation

16 Mar

The history of modern Europe from 1600 onwards to late 1980s was one of conflicts, two great wars, bloodshed and continuous armament race on the one hand and great scientific and technological development, better quality of life, industrialisation and ever increasing prosperity and regional co-operation on the other. At the end of the Second World War, European economic and political cooperation was seen as an important element in the post-war reconstruction and was therefore supported by the U S. As wholesale abrogation of sovereignty was not practical, focus shifted to co-operation between France and Germany and prevention of war between them. This resulted in European Coal and Steel community (Treaty of Paris, 1951) among the so called original six. The co-operation created by the European coal and steel community and importance of increased trade to economic growth provided impetus for broader and further integration. Treaty of Rome 1957, established the European Economic Community and Euro tom.

European Economic Community quickly becomes the focal point of efforts for European integration. It was hoped that the tangible economic benefits of common policies would provide ongoing impetus for the integration process. This resulted in establishment of European Community. In 1993 the official title of European Community was changed to European Union; European Economic Community is its pillar. European Union is the most thoroughgoing example of regional economic and political integration. As an international organisation, it goes beyond traditional intergovernmentalism in policy making and has substantial elements of supranationality. The various Union treaties contain fairly open-ended commitments to closer Union among 27 member states. EU had three pillars, namely, European Economic Community, Common Foreign and security policy and Justice and Home affairs. However, now European Economic Community is the most significant one and it absorb other two pillars. EU membership has increased from 6 to 27 and not surprisingly the policy jurisdiction of EU has deepened dramatically. Rapid Trans- boarder integration of national markets, foreign and military co-operation, and co-operation on immigration, asylum and criminal matters are significant development. The most radical step so far is the Economic and Monetary Union that began in 1999. It involved the adoption of the euro as the single EU currency with a single monetary policy run by European Central Bank and a degree of macroeconomics policy co -ordination. The introduction of Euro  accelerated the process of market integration, building on the single market programme and propelled  the process of integration and has seen the European Union emerge as an increasingly state like entity in international system.

Scholars’ like Jurgan Habermas, Andew Linklater and many more consider EU as success story and possible role model of supranational government. Neo-liberals often portrayed EU as a success story of economic integration and as an example of triumph of their theory. Worldwide EU has been hailed as role model of regional co-operation and success story of Neo-liberalism. However, post euro era and after 2008 economic slowdown, European Union is facing various problems viz., rising inflation, unemployment, slow economic growth, increasing poverty and falling standards of living and political turmoil associated with such economic sufferings. Though European Union is still very strong and nowhere near disintegration, it is it nonetheless, in deep trouble. Considering one of the main motives behind EU formation was economic growth crisis on that front could easily lead to disintegration of EU.

It should be noted that the main economic impetus behind EU’s policies are broadly in conformity with the neo-liberal agenda. EU has a strong and free single market with emphasis on common external tariffs, customs Union and free flow of goods, capital and labour in EU. European Union members reduced various subsidies, spending on social sectors like health, education and made room for more privatization. European Central Bank established political and business community is more worried about budget deficit and tax reforms for economic growth rather than rising unemployment and increased hardship for people in EU. Recently, Greece faced a number of economic problems and it even appeared before the recent election that it would secede from EU. Spain, Italy, Portugal and Ireland are also facing severe economic crises. Unemployment is 13% and rising and harsh cut on essential public sector is making life difficult for in those countries. It is becoming increasingly clear that free market fundamentalism is aggravating the problems.

A)     Reasons behind EU crisis.  

1) Single currency without single government.

The main reason behind the in EU crisis is its monetary policy. By introducing a single currency without the institutions needed to make that currency work Europe effectively reinvested the defects of the gold standards. This means the same flaws that played a major role in causing and perpetuating great depression was been re-enacted. Worse still, creation of the Euro fostered a false sense of security among private players unleashing huge unsustainable flows of capital into nations all around Europe’s periphery. As a consequence of these inflows costs and prices rose, manufacturing become uncompetitive and nations that had roughly balanced trade in 1999 began running huge trade deficit.

If the peripheral notions still had their own currencies, they could and would resort to measures such as devaluation to quickly restore competitiveness but now they cannot do so. This means they are in for a long period of mass unemployment and slow grading deflation. Their debt crises are mainly by-product of this sad prospect because depressed economies lead to budget deficits and deflation magnifies the burden of debt.

The single currency without any single institution to control it is fundamental structural flow of EU. United States worked more effectively because it has a strong central government which provides automatic bailout to states that get into trouble. Florida, for example, which is facing the aftermath of a housing bubble, gets Federal bailout on a scale, no European nation could dream of. Florida is not expected to manage its social security programme with its dried up revenues. In contrast in Europe there is no single institution to manage euro. So crisis ridden Greece does not have anyone to bail them out and have to take care of things.

2) Unnecessary austerity and spending cuts.

EU is in crisis and the mandatory emphasis on austerity, budget deficit control and spending cuts is not only slowing down the recovery of EU but also aggravating the problems. Yet established political actors and policy makers believe that austerity measure will bring economy back on track.

Ireland was considered success story of austerity measures twice in early 2010 and again in the fall of 2011. However, the supposed success turned out to be mirage; three years into its austerity programme, Ireland has yet to show any sign of real recovery from the slump that had driven unemployment to 15%. Similarly for years Spain and other troubled European nations were told that they can only recover through a combination of austerity and “internal devaluation” basically meaning wage cut. It’s now completely clear that these strategies do not work unless there is strong growth and moderate amount of inflation in European core mainly Germany.

Central bank cites the example of Latvia’s 5.5% growth with austerity programme as a success story of its own policies. However American economy grew at almost 10.9% in 1934, as it rebounded from the worst of the Great Depression and yet the depression was far from over. Spain is undergoing austerity measures and harsh spending cuts. Spain’s economic problem is not the result of government spending but the bursting of huge housing bubble. Large deficits emerged when the economy slowed down due to it and revenues too reduced. Indeed Spain has trouble in borrowing to finance its deficits due to possible political turmoil that is reducing investor’s confidence in Spain.

Research done by International Monetary Fund (IMF) clearly state that spending cuts (austerity) in troubled economy does not solve the problems; but it make the economic recovery painful and awfully slow. It will also reduce the faith of stock market and investors in economic recovery and hence causing further trouble.

3) Reduction in government spending

Neo-liberal framework necessarily reduces government spending in essential social sector. German and French scholars have been blaming GIPSI (Greece, Ireland, Spain & Italy) nations for spending too much on social sector and state that this is death throes of welfare state. But this is not true by any account. None of the (GIPSI) nation is among top five in terms of how much they spend social programmes before crisis. Only Italy was spending more on social programme but its welfare state was smaller than Germany. Only Greece fits the large spending trouble economy story partially. Italy ran defects in the year before crisis, but they were only slightly larger than Germany. Portugal’s deficits were significantly smaller, while Spain and Ireland actually ran surplus. Sweden which is far more welfare oriented than GIPSI nations and even Germany and France is a star performer with economic growth faster than any other wealthy nation. Hence arguing that government spending on social sector is responsible for current crisis is flawed.

Besides, cuts in government expenditure in an already depressed economy caused more serious economic troubles like unemployment, inflation and public suffering. This could transform into political crisis; large scale public demonstration and protests against government; increasing levels of political extremism in Europe is strong indications of political trouble. This can complicate situation and slow down recovery. As Marx contended economy and politics are inter dependent and has strong influence on each other. Economic turmoil often transform into political one and vice versa.

American economy was able to recover due to F D Roosevelt’s New Deal programme which was based on spending by government in economy. John Maynard Keynes’ argument that government spending in depressed economy would successfully end the Great depression and give strong impetus to economic growth was shown to be correct. It was contented that this would create demand by increasing purchasing power of people and brings economic growth back on track. Investors only invest in economy when there is a guarantee of return and that is possible only when people have purchasing power. Reduction in government spending only reduces purchasing power of people and hence slows down the economy. Private sector is unwilling to invest as there is no guarantee of return. EU’s emphasis on cut in government’s spending is thus historically flawed and existing situation also made its total failure crystal clear.

4) Huge economic inequalities

Political power is easily influenced by monetary wealth. Huge economic inequalities in EU ensure that the elites influence their respective state and institutions like Central Bank more successfully than people at large. This influence makes political actors’ blind to reality and sufferings of people at large and continue the cruel and destructive policies of austerity and deficit control.

Germany and France, especially the former, are very reluctant about ending austerity measures and providing monetary support and bail them out. Germany should do it as it will definitely bring EU’s economy back on track. German economy was in doldrums in 1980s but Germany managed to recover based on huge surplus trade relation vis-à-vis other EU countries especially those who are in crisis now but were booming then. European countries facing crisis could have emulated Germany’s path of recovery if rest of Europe, especially Germany,  was experiencing a bit of inflationary boom. It is the most possible road to bring EU on track but strong hold of economic elite on German politics and the Central Bank make it much difficult. Additionally, prejudiced German public opinion considers Greeks as lazy, corrupt and as having spent lavishly and unreasonably and hence must pay for it. Though the Greeks committed some mistakes much of the responsibility for crisis in EU has to be shared by structural and monetary policies.

To conclude, the hype about EU as a model to replicate world over is waning away fast. EU’s integration is based on economic benefits from it. As long as economic benefits are delivered by EU or there is optimism about it in near future, it will stand intact. For this to happened EU must give up its obsession with fiscal austerity, budget deficit control and accept more expansionary policies and share responsibility for crisis in the GIPSI countries. Crisis in EU vividly shows the inherent structural problems in the kind of economic integration promoted by neo-liberalism.  Strong grip of elites on political actors and institutions reveal elitist nature of democracy and democratic deficit in Europe. The way German and French governments are influenced by their economic elites underlines the Marxist notion of state as executive committee of capitalist and the hidden class character and conflict of interest among classes though not in orthodox Marxist sense. Failures of supranational governmental institution in bringing uniform economic prosperity and also address the grievances of crisis ridden people underline hollowness of current models of supranational government. Economic crisis in EU is now transforming into political crisis and this indicates the inseparable nature and interdependence of economics and politics and rejects autonomy promoted by neo-liberalism. In economic crisis people are driven by national boundaries “We” vs. “They” ideology and receive political extremism much more easily. Though European Union is far from collapsing recent developments do compels scholars across the world to contemplate over it. Any further escalation in EU crisis will have serious repercussions for Europe and rest of the world with unseen repercussion. But ray of hope is emerging as many scholars now admit the insufficiency of Neo-liberalism and its principles for peaceful and prosperous world. This is a very welcome change indeed.

By- Vikrant Halkandar

      Reference:

1)   Krugman, Paul, “Europe’s economic suicide”, The Hindu, April 17, 2012, p.11.

2)   Krugman, Paul; “What ails Europe”, The Hindu, February 28, 2012; p. 13.

3)   Krugman, Paul; “Death of fairy tale”, The Hindu, April 28, 2012, p. 15.

4)    Krugman, Paul; “Those revolting Europeans”, The Hindu, May 8, 2012, p.13.

5)   Krugman, Paul; “Another bank bailout”, The Hindu,  June 12, 2012, p. 13.

6)   Krugman, Paul; “Greece as victim”, The Hindu, June 19, 2012, p.11.

7)    Krugman, Paul; “Europe’s austerity madness”, The Hindu, September29, 2012, p.15.

One Response to “European Union Crisis: An Evaluation”

  1. zithromax bestellen April 14, 2013 at 6:57 am #

    Hi there you have a nice blog over here! Thanks for posting this interesting information for us! If you keep up this good work I’ll visit your blog again. Thanks!

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