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The Eurozone Crisis: More or Less Integration?

| November 13, 2016

Introduction

It is an incorrect, yet widespread belief that the United States financial crisis of 2008 and 2009 was a large contributing factor the European Debt Crisis; however the real impact of this financial crisis was rather to expose the unsustainable fiscal policies of countries within the Eurozone. To varying degrees, a number of European countries have become unable to meet their debt obligations and as such face worrying financial crisis. Spain is a particularly interesting country in the midst of this crisis, as until 2007, they could be considered on the more financially sound of the Eurozone-even more so than powerhouse Germany. This was because, until 2007, the Spanish government did not exceed 3% of the GDP in general deficit. This limit on international borrowing was implemented in 1997 and confirmed as of 9 December 2011 (Thompson, 2012). In addition to this limit on the general deficit, the participating European Union members are also expected to keep their debt below 60% of the GDP and the structural budget deficit to below 0.5%. Not only did Spain adhere to this limit, it also has the lowest national debt in relation to the size of its economy (BBC, 2011).

Despite these impressive facts, Spain was not considered to be the safe haven of the Eurozone and was not reaping the benefits of other more irresponsible borrowing habits of other Eurozone countries, which at the time included Germany – currently the largest Eurozone lender country. The downfall of the Spanish economy can in part be directly attributed to an increase in the local wages paid, leading to a decrease in competitiveness as an exporter generally and therefore the stagnation as a market. In addition to this, the adoption of the Euro encouraged a dramatic drop in the lending interest rate and as a result there was a boom in private sector lending and mortgages. This massive increase in private debt has led to financial instability in the banking sector which has in turn led to the need for massive loans and bailouts from various stakeholders.

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The Effect of the Eurozone Crisis on the Economy of Spain

The cause of the Eurozone crisis for Spain was briefly outlined above and it is fairly obvious that such irresponsible fiscal policing would have an enormous, if not crippling effect on the economy. An economy that saw an average of 3.7% growth annually in the period between 1997 and 2008, now has experienced an average shrinking of 1% since the global recession of 2008 (BBC News, 2012). The irresponsible lending of the Spanish banks has led to the need for loans of the Spanish government in order to bail-out its national financial lending institutions. It is tragic to see the mismanagement of funds by the private sector leading to an enormous national debt despite cautious lending by the government.

The dramatic drop in the interest rate leading to a vast increase in borrowing and mortgages saw a 44% increase in the price of housing in Spain (BBC News, 2012). With the hit of the global recession, this has reportedly dropped drastically by 25% (BBC News, 2012). The global financial recession in turn led the default in repayment of these debts by the borrowers and mortgage holders, with a parallel decrease in the value of the assets that were used as security for these loans. The banks therefore were left in a position where the low-interest loans were not being repaid with no reasonable prospect of repayment.  The money that was borrowed by these banks was funded through loans from international markets, therefore the inability of the banks to repay the money has led to a significant decline of market confidence. As a result of this, a significant percentage of the bailouts given to Spain will be concentrated on reforming the financial banking sector. Although it must be pointed out that the International Monetary Fund has indicated that this is not a description of the entire banking sector as there are banks that remain well managed and resilient (BBC News, 2012). The decline therefore of market confidence has led to an increasing difficulty for loans from the international market and has resulted in resort to emergency funding.

Funding therefore is clearly a major consequence of the Eurozone crisis compacted by the global recession. However to the credit of the Spanish government, the focus of the emergency funding is the Spanish banking sector rather than the economy through the central government. The advantage of this is that generally financing through the central government is attached to conditions of budget cuts and tax increases, which according to the BBC the Spanish were desperate to avoid (2012). Despite this however, the loan is attached to a condition requiring the decrease of the public deficit. One must of course always be mindful of the effect that any form of budget cut has on the unemployment rate and current wage levels. These are all interrelated as unemployment in Spain is currently at around 20% (BBC News, 2012) and an increase in this rate will lower the wage levels in an attempt to increase competitiveness in exports. This has a generally devastating potential effect on the ability of persons to repay loans and public support or political stability.

European Federalism

It is clear that those that hold the power to borrow, hold the power over their borrowers. This much is clear in the interventionist requirements of budget cuts and increases in tax that are requirements of the emergency bailouts. It is clear however that by examining the differences in the Eurozone crisis for the southern countries generally that there is a desire for more intervention in certain countries, however larger deference in others. The primary deciding factor should be the participation of the governments in the management of the debt crisis. Spain for example was led into financial crisis by an irresponsible private sector, however arguably countries with a higher government debt, such as Italy (Figure 1) should be monitored more strictly.

It would appear that Germany as the largest Eurozone creditor would be much in favour of such a federalist system in the European Union, as the lending of these funds to countries in crisis could be described as irresponsible (Meyer-Eppler, 2011) due to the long-term period that it would take to repay these loans – therefore ensuring some measure of economic and political intervention. It can be argued however that this is a by-product of participating in a trading block such as the European Union. The economic and political intrusion is caused by the mere participation in the Eurozone itself and whilst state autonomy has always been a large part of this existence, as a trading block the communal interests of the Eurozone are paramount to any national agenda that may exist. Therefore, the extent of the political and economic integration must be guided by the survival of these interests. As is necessary therefore, it will be beneficial for a larger degree of integration if it so serves the interests of the community as a whole, which at this point where governments seem unable to manage their own national debt, it seems highly necessary.

Conclusion

It is clear that the Eurozone crisis caused by the irresponsible fiscal policies of the member countries compounded by the event of the global recession has had massive impact on the national economies of all countries. Greater foresight and measurement of financial progress must be employed in the future to avoid similar circumstances, should these countries recover. The integration politically and economically by member states is clearly necessary as it would appear that countries are unable to manage their own affairs, and like with any loan, there are conditions attached thereto. In the case of states however, this seems to have come in the form of forced integration and the emergence of a kind of European federalism.

References

BBC News (2012) ‘Eurozone crisis explained’ BBC News Online [last updated on 12.19pm, 25 June 2012] Available on http://www.bbc.co.uk/news/business-17549970 [Accessed 8 July 2012]

BBC News (2012) ‘Timeline: The unfolding eurozone crisis’ BBC News Online [last updated 3.08pm, 13 May 2012] Available on http://www.bbc.co.uk/news/business-13856580 [Accessed 8 July 2012]

BBC News (2011) ‘What really caused the eurozone crisis?’ BBC News Online [last updated on 10.59am, 22 December 2011] Available on http://www.bbc.co.uk/news/business-16301630 [Accessed 8 July 2012]

BBC News (2012) ‘In graphics: Eurozone crisis’ BBC News Online [last updated on 13.02pm, 4 May 2012] Available on http://www.bbc.co.uk/news/business-13361930 [Accessed on 8 July 2012]

BBC News (2011) ‘Eurozone debt web: Who owes what to whom?’ BBC News Online [last updated on 9.20am, 18 November 2011] Available on http://www.bbc.co.uk/news/business-15748696 [Accessed on 8 July 2012]

Meyer-Eppler, Richard (2011) ‘Germany’s Policy on Eurozone Rebalancing – A Convenient Tale of Virtuous Lending and Irresponsible Borrowing?’ [online] Available on http://www.bridge.uni-koeln.de/fileadmin/wiso_fak/wisosoz/pdf/Meyer-Eppler/Meyer-Eppler_2011_Germany_s_Policy_on_Rebalancing.pdf [Accessed on 8 July 2012]

Thompson, Gavin (2012) ‘In brief: provisions of the fiscal compact and economic issues’ House of Common Library, Standard Note SN/EP/6224

 

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