World peace cannot be safeguarded without the making of creative efforts proportionate to the dangers which threaten it.
This was the idea behind the formation of the European Union which was initially formed by the ‘Inner Six’ countries like France, West Germany, Italy, Netherlands, Belgium, and Luxembourg. The origins of the European Union sees its history of 70 years of war and unrest between France and Germany which led to the formation of ECSC(European Coal and Steel Community) under the SchumanPlan of pooling the coal and the steel of France and Germany. The European Union grew out of the aim to build a common political entity to undo the adverse effects of wars and to build up for an ‘internal single market’ with common laws and systems. It was culminated on 7th February 1992 under the Maastricht Treaty.
The Eurozone Crisis began in the year 2008 with a rise in debt of countries like Greece and Ireland. In 2009, Greece had a budgetdeficit of 12.9% of the GDP. That was more than 4 times of the limit suggested by the European Union which is 3%. The investors were discouraged. As a result, the investors sold the bonds of these countries to purchase the bonds of more credible countries like Germany and France. The uncertainty of the European Central Bank to act in such a situation led to a liquidity crisis and an erosion of the credibility of the European Union. Eurozone Crisis also demonstrated that it was the delayed collective action by the European Union that strengthened the ulterior motives of the Financial markets to make profits out of the difference in the bond prices of the different member states. The economic conditions in the year 2010 exposed the loopholes in the European Union’s foundation. There can be numerous reasons for this. They are as follows: –
Lack of a single currency – A single currency means a union or a political union but that is a distant dream as member states think that it would jeopardize their sovereignty.
No Federal European Government– Because of a no common governing body, there is no mechanism to set a central tax or budget policy. All member states under it are sovereign having their own political complexities in their respective countries.
No common Euro Bonds– Due to the lack of a common budgetary policies, well to do countries like Germany have rejected to subscribe to a common euro bond. They withdrew to underwrite Europe wide bond issues.
The United States Link-What happens in a country doesn’t stay in a country in the interconnected financial system of the world. The European Debt crisis was not just limited to Greece, but it had connection with the spending of the US government budget. US contributes approximately forty percent to the International Monetary Fund’s Capital. Waiving off the debts of Greece means adding additional burden to the Taxpayers in US.
Not just economic, Even Political Issues involved in emerging the Crisis. They are as follows: –
Austerity led to Protests: – The countries who were adversely affected by the Eurozone crisis switched to austerity. (Austerity is a set of political and economic policies which intends to reduce the government deficits either by increasing taxes or cuttingdown expenditure). Austerity leads to decline in the consumption and the employment rate of a country. A lot of protests occurred in Spain and Greece against the government because of the increased unemployment. Austerity measures even led to the removal of party in power in countries like Italy and Portugal.
Financially sound countries vs High Debt countries: – European Union saw a strain in the relationship between fiscally sound nations like Germany and the nations under high debt like Greece. Germany was not ready to ratify to a region wide solution rather pushed such countries to make changes in their budget policy. These situations might have led any of the member state to leave the Euro. There was a high possibility of the weakening of Euro against the other currencies in the global market. This crisis, indeed,witnessed the periodic weakness of the Euro.Slovakia andLithuania refused to bear the burden of Greece’s debt. Even these two countries resorted to austerity measures but without any aid from the EU.
Greece had manipulated its balance sheet to conceal its debts and it was also the result of long years of tax evasion, fiscal mismanagement and authorities misleading the reports.
The European Financial Stability Facility paid a bailout of 190 billion euros in the year 2011. It was only in the year 2014, that Greek economy was able to recover a bit and grew by 0.7% and successfully balanced the budget by selling its bonds. The crisis was not just limited to Greece.
Even Ireland’s banks borrowed loans from the housing market in the year 2008 which led to a huge debt crisis by 2010. $112 billion EU- IMF package was given to Ireland in exchange of following Austerity measures. This was again a severe Eurozone crisis with the Irish economy’s decline in output by 10% and Unemployment rising to 13% in the year 2010.
Portugal also received an aid of $116 billion in the year 2011 from the EU as it fell into recession as the deficit grew for about more than 10% of the GDP in the year 2009. Not just this, the deficit shifted to large countries like Italy and Spain too leading to an overall Eurozone crisis.
WHY DID GERMANY REFUSE TO ADJUST IN THE EUROZONE CRISIS?
Germany had the world’s largest current account surplus of almost 8% in the year 2017 (IMF 2018). And Regional Imbalances have led to the Balance of Payment crises (Schularick and Taylor 2012). Consequently, there had been a resentment against Germany in the international arena. But the following reasons can be the attributed why Germany didn’t behave accordingly: –
- Current account Surplus may not be always interpreted as beneficial to the economy. It indicates that investments in public and private sector has not been enough. (Bach et al. 2013, Sudekaum and Felbmayr 2017).
- With an intention to balance against Germany by reducing its current account surplus may not work. It may lead to their improved infrastructure, higher wages, higher inflation and also a higher consumption.
- With the rise in inflation, the debt burdendeclined, and the wages of the workers in the Non- Tradable Section rose. The High Export dependence of Germany on the foreign nations tarnished its image. Also, the current account surpluses are also related with net capital outflow.
The solution here was not to punish Germany but coming to terms with the fact that Internal Adjustment too, may not have positive consequences all the time. Moreover, A current account surplus was needed for an ageing country like Germany.
GREECE- LEARNING FROM THE MISTAKES OF THE EUROZONE CRISIS
Greece, which were the odd ones out in the Eurozone crisis and had its credibility crippled in the past ten years seemed to have learnt lessons. At present, it is one of the best performing countries in Europe with respect to flattening the Covid curve according to an analysis by the Bridge Tank. Not all perish in a crisis, few turn it into an opportunity.Kyriakos Mitsotakis, The Prime Minister of Greece along with the Sydney born Harvard immunologist Sotiris Tsiodras received praises for handling the Covid crisis. The deaths due to Covid was controlled unlike Italy which turned out to be a disaster.
According to Dr.Ladi, an expert whose field of study includes the Eurozone crisis and role of experts in the public policy said that “ Because of the previous crisis the people were better prepared to react and the country’s leadership worked very quickly compared to others who reacted late’’.
IS BULGARIA JOINING THE EUROZONE ANSWER TO IT’S PROBLEMS?
Bulgaria and Croatia are the latest Eastern European countries who are ready to adopt the Euro currency after meeting certain economic and regulatory criteria. This enlargement has come after a decade long of crisis which deterred the countries from joining. However, the inclusion of these two relatively poor countries may bring risks along with it. The Eurozone has already suffered much because of Greece’s rising debt which destabilized the entire currency in the former decade. Analysts have warned before hand only that the two countries in question may have a hard time in fulfilling criteria like Low Public Debt and the Rule of Law. Croatia is expected to increase its debt to 86% of the GDP by this year which is yet again above the 60% level that the European authorities accept.
Bulgaria joined the EU in the year 2007 and has expressed its intentions of joining the euro area since the year 2009 until the debacle in the form of Eurozone crisis occurred which hindered its entrance at the prevailing circumstances then. With the economic recovery in the year 2018, It again wanted to join the Euro Club. To join the club, it needs to fulfil two conditions: –
- It must join the Exchange Rate Mechanism (ERM ii) – a waiting room where a country introducing the euro is required to stay for a minimum period of two years at least.
- The Public Debt levels must not exceed 25% of the GDP (Bulgaria’s GDP here)
Few officials of the Eurozone have expressed their concerns and are quite apprehensive about Bulgaria in the zone. According to them, Bulgaria’s entry will do no good or rather repeat the ‘Greek scenario’. Besides this, Bulgaria also must fulfil the ‘additional’ requirements of joining the Banking Union which was not a requirement before but would be implemented from now onwards. Joining the Banking Union means the scrutiny of the Big Banks of Bulgaria. This is quite obvious with news of the collapse of the Biggest bank in Bulgaria in the year 2014. The European Central Bank is being a watchdog here and Banks in Bulgaria have been given time to create additional capital buffers till April 2020. It must be noted that the FI Bank has still not fulfilled the criteria.
There are other factors as well which act as an instrument to demotivate Bulgaria to the Eurozone. Those are as follows:-
- No adequate support from the public for the introduction of Euro in Bulgaria.
- The EU area crisis is also a factor.
- Depiction of EU as a fading power.
- Bulgaria is also seen as an under- performing state and the common currency works in the interest of the third parties.
- Gaining domestic support and Anti – EU voices is much easier than in favour of it.
The Bulgarian government doesn’t want to escape this opportunity of joining the EU zone in the Corona crisis. It would be interesting to see whether it gets successful or not.
Today, in the times of Corona, The European Central Bank seems to have learnt from its past mistakes unlike the Eurozone Crisis. It has acted quickly and has kept the borrowing costs low for all countries in the Euro Zone because as per the forecasts done by IMF, the public debt will reach almost 100% of the GDP by the year end. To cope up with this, the head of the ECB, Ms. Christine Lagardesaid that economic implications of Covid- 19 would result in decrease in the supply chain by approximately 35% and would also expose us to a rise in the inequalities in the Euro- Zone. Factors such as Climate Risk and bio-diversity will be taken into account while drafting plans. The ECB also created a Pandemic Emergency Purchase Programme worth of € 750 billion involving both government and private debt. A decision regarding the same is to be made in the upcoming EU Summit which will be held on the 17 and 18th July 2020.