The European Union, officially implemented in 1999, created history as the first political and economic integration of its kind. However, in recent news, this union has been undergoing a series of severe economic crisis among member countries. The following paper will look to analyze this issue by examining its main causes, the reasons behind their severe suffering when compared to United States, European nationalism, and the future of international businesses in the case of a Eurozone collapse.
Main causes of Eurocrisis
The causes of the Eurozone crisis are both numerous and complex creating somewhat of the perfect storm within the member countries’ respective local economies at the ...view middle of the document...
4%, and 61.3% respectively (Roscini & Schlefer, 2012, p.69). Evidently, this illustrates that the European Union, as a whole, was already experiencing critical debt issues, but chose to ignore them in favor of the political agenda, hoping they would disappear. Ten years later, the Euro debt had gone from 71.6% in 1999 to 87.2 % in 2011 (Roscini & Schlefer, 2012, p.69). Article 25 or the “no-bailout clause”, which implied that no member’s government should cover or support any of the other member’s debt, only created a downward spiral into a greater debt for the European Union where governments had no other choice but to adopt recessionary policies (i.e. spending cuts, increased taxes) that forced their economy further into a depression.
As a result, this lack of solvency created major issues with the banking sector as governments had overextended themselves, which increased the risk of defaulting on loans. Interest rates surged and the price of bonds fell dramatically. Taking Greece as an example, the value of its government bonds became close to nothing, which spread fear of losses within the private sector and discouraged any further investment. The once established relationship between banks and government had disseminated, and a new role of which they took on government debt emerged. This created a vicious cycle of debt replacement with more debt without really re-establishing confidence among investors.
Last, the role of politics and labor comes into play. It may seem that the unification of European states may not have been principally for economic reasons (less variation in the currency). Namely, after the fall of the Berlin Wall, France was somewhat skeptical about the German’s unification and saw the Euro as a way to ensure Germany’s good behavior, bringing both peace and stability to Europe. Therefore the structure may have had more flaws than initially believed. Also, the unification brought labor problems especially in Italy, who lacked unemployment insurance, limiting their ability to let someone go based on the size of the business (article 18 claiming firms with more than 15 employees cannot fire employees without a proven misconduct). This discouraged firms from hiring more than 15 employees at a time in order to maintain the option of letting someone go. This limited the growth need to recover an already falling economy.
US vs. Europe: Who suffered more?
Before discussing the reasons for which the EU suffered extensively, one must consider the differences in regional economic integration. The United States has a political union that allows its governing body more control than that of the economic union of the European Union. This difference in power can have enormous effects on the macroeconomic level as illustrated by the Euro Crisis. For example, the Treaty of European Union’s “no-bailout clause” restricts member governments from assuming the debts of other members. When the Global Financial Crisis hit the EU,...