Ever since the beginning of European culture and the European way of life began its journey in ancient Greece throughout the Roman times, the medieval ages or in the modern times, it has never been this integrated and peaceful as now. The continent has been one of the most diverse of all continents, if accounted for size. Europe was a strong continent, with countries that have ruled half of the planet at some points, but in the modern age the continent have became divided and weak, especially compared to the continent sized superpowers of the USA and the Soviet Union. This reason have brought forth the idea of a single, united Europe, which is able to held its own in both military and economic terms. After this enlightment, the leaders of the continent have gradually made changes in their policies and facilitated change so a supranational organization can be founded to unite the old continent. Even though the cooperation is much more developed as it was used to, but the fiscal and monetary cooperation is far from perfect. Only the fiscal policy is a common policy, but the monetary policy is at national level. The current debt crisis showed the dangers of this half integration.
Europe and the problems of unity
First of all, the European Union is using a same currency, with same interest rates for very differently developed countries. The needs of Germany are completely different and on a whole different level as of a smaller county such as Malta or even Belgium. The problem is that the common monetary policy is set for the whole Euro zone.
This means that the interest rates are similar for countries with different growth prospects. There is no “one size fits all” in economics what is acceptable for Germany or other countries, with relative high growth rate and developed financial markets, is not acceptable for other countries, which are dealing with recession. This has become clear when the Greek government have launched a campaign to change the mind of the policymakers and the leaders of the main countries of the EU, first and foremost, Germany (Bird, 2015). This continuous battle shows that the one size fits all economic policy is simply not fitted for such a diverse union. The ECB set higher interest rates to favor the German economy and help to boost the European economy through that, but these higher interest rates were not appropriate for some other countries such as Portugal and Italy (Pettinger, 2013).
Europe is really diverse and this makes it harder for workers to deal with unemployment, than it does in a country with less diversity in language and culture. Because of this, if someone got unemployed in Hungary, he would have a much harder time finding a new job in another country. The language and the culture are quite different in Europe, unlike the US.
The US is often thought to be the Optimal Currency Area. The main criteria are the labor and capital mobility. The second one is the price and wage flexibility across regions and the third is the ability to transfer government funds and adjust the taxation across region.
How do the countries of the EU compare to the states of the US in terms of the OCA criteria?
Labor mobility US > EMU
Capital mobility US = EMU
Price flexibility US = EMU
Wage flexibility US > EMU
Union level fiscal transfers US > EMU
(CES, 2009, Optimal Currency Area)
It is evident, that the US outperforms the European Monetary Union in 3 areas out of the 5, and even in the remaining field, the two unions are equals. The EU is not able to beat the US in any relevant fields, which leads to structural level problems, and smaller competitiveness compared to the US and the rest of the world economy.
To balance out these problems and to become similar to the US, the EU needs to remove language and cultural barriers throughout the Union. It also need to make the wages much more responsive to price and inflation fluctuations. This limits the labor movement severely. The last main issue is that the EMU cannot transfer funds or adjust taxes from one region to another. In the US these issues are resolved and it is a one of the main source of their general efficiency.
A similar, federal-local system similar to the US could solve funding issues in EU projects; as regions would be able to use their funding for the smaller issues, while the higher level could concentrate on European cohesion. This of course would also require that the EU would get more funding from the members, and this is unlikely in the foreseeable future (Knipton, 2013).
The fiscal policy is limited. It is important to have similar levels of national debts, because otherwise the counties which have a higher national debt will have a hard time finding buyers for their national debt. This caused a huge problem in the PIIGS (Portugal, Ireland, Italy, Greece and Spain), who have huge national debt, which is getting harder and harder to finance.
One of the main problems is that there is no Europe-wide fiscal authority. Each individual country in the EU controls its own budget and thus fiscal policy. It is a problem because the EMU cannot deal with the economic fluctuations on a regional level and it cannot eliminate the ups and downs. Because of the nationally lead fiscal policy, it is harder for the European Central Bank to cooperate with the national level authorities. Another setback is that these national authorities can and already have acted without regards to the common hazards and they already collected high national deficits (Pettinger, 2013).
The specialists argue that countries which are member of the Euro Zone, tend to fall into a sense of security and they think that they are safe from the currency crisis. This sense that for security can be a quite dangerous one, because countries and the local governments are delaying the structural changes and fiscal responsibility. This is weakening the Euro Zone, because the Economic and Monetary Union cannot affect the local fiscal policies.
Germany has a sense of recovery, as the investors are flocking to the largest and safest economy of the Euro zone. This made the Germans sure that their mix of fiscal and monetary strictness and discipline is the only working way; this perception have blocked the talks between Germany and Greece, as Germany is unwilling to accept alternative solutions or any kind of extra support (Smith and Rankin, 2015).
In the case of Greece, they benefitted from the low bond yields, because the Euro zone was backing up the Greek debt. Because of this, they delayed the structural reforms and this lead to a dangerous situation, where even the complete bankruptcy of Greece was imaginable (El-Elrian, 2012).
There is no lender of last resort yet, because the European Central Bank will not buy bonds from countries which have short term liquidity problems. Because of this, those member states that need the ECB the most – are excluded.
Also, there divergence in bank rates. The Euro zone is supposed to create a common interest rate, however we see something else. We see that the interest rates for the private sector in the peripheral countries are significantly higher than the ones at the central countries. Even though the ECB tried to counter it by cutting the official interest rate, but it was not effective, since the banks did not cut a meaningful amount from the interest rates charged after debt. So this move failed to solve the issues of the companies in the peripheral countries, such as Italy or Spain (Pettinger, 2013)
“Europe is facing its worst humanitarian crisis in six decades,” according to the general secretary of the International Federation of Red Cross (IFCR), Bekele Geleta. Even years after the financial crisis, there are millions of people falling under the poverty and staying there for indefinable time (Machaus, 2013).
The crisis made the poor poorer, and it also started to destroy the middle class as well. The middle class of Serbia for example had already been shirked.
The crisis also affected the hospitals and the social sector, because the countries cut from the funding of these as a reaction to the crisis. So now when the people need it most, there is less help than it used to be. The level of service in these sectors keeps declining, which is completely in contrary with the EU’s objectives.
The unemployment is also one of the largest concerns of European Union. The newcomers to the job market are affected even more severely. This means that the young people are not able to find jobs in their own country and they start migrating to other countries. In Spain the unemployment rate under 25 years is more that 50%. This leads to the overburdening of the receiver’s social sector and it also increases xenophobia and rising social turmoil, such as anti migration protests. The migrated workers are already causing problems, and it would only deteriorate; with a mass of peripheral Europeans migrating to the centre (Pipes, 2014).
These people are not only in the peripheral countries, with weaker economy. The number of people dependent on welfare is growing in the most powerful economies of EU as well. In Germany and France there are more and more people who are unable to afford food and rent at the same time. If it was not for the food aids, these people would either starve or would be homeless. According to the Red Cross, there are around 600 000 German citizens, who are in this situation and the number is still growing (Machaus, 2013)
The problems of the European Union can come from several reasons. The first is the Great Recession, which hit the Euro zone and crippled the economy.
However there are other factors as well, which can be equally if not more dangerous. The countries of the EU are not pushing the structural, fiscal and monetary reforms which are needed to secure the future of the European Union.
The rising problem of unemployment is also linked to both reasons. To stop this, the European Union needs to deal with structural reforms, because this problem cannot be solved by just policy changes, it needs real changes and real solutions for the problems of the European Union.