Introduction
The EU was formed in 1957 and efforts to coordinate the currency into single formidable currency took place later in 1992 through the Maastricht Treaty that was later launched in 1999. This led to the introduction of rules that were to be followed the EU members so as to be allowed to use the euro.
The condition came to be known as the “Convergence criteria” of which low and stable inflation, stable exchange rate and sound public finances were to be followed strictly (Rossi and Aguilera 8-11). The introduction of the Euro lead to its adoption into the national central banks of each member states as a monetary measure.
This led to the formation of an independent European Central Bank (ECB) to serve this purpose. The formation of the EU has facilitated international trade among the member states (Rossi and Aguilera 12). However, this picture has not been the way it is found in the strategies of EU Commission.
The global recession that hit the world in years 2007 and 2008 and other financial crises have led to deep problems in the economies of Euro countries. The Euro zone crisis requires a serious study to understand the cause and the strategies needed to restore the Euro into normalcy. This paper will thus focus on these issues revolving around the Euro crises.
Background Information Causes of Euro Zone Crises
According to the Stability and Growth pact stipulated in the heart of European Union Economic integration, it was agreed that the member states should not borrow more than 3% of their economies. The problem seems to stem from large debts held by some of the member countries hence producing a spiral effect to other members.
The problem probably is as a result of structural maladjustments as IMEMO observes in their report of the crisis. Member countries like Spain, Italy, France, Germany and Greece have witnessed the fall of the euro against the dollar by 15 percent in the year 2010. The crisis has seen the euro plummet to below the 1.20 dollar benchmark forcing foreign efforts to intervene to save Greek on the verge of collapsing.
According to IMEMO, the crises have four key features. In the first feature as already mentioned, there exists the problem of structural and economic gaps between member states of the EU. An analysis of these inconsistencies reveals that Southern European member countries are not as advances as the leading European countries. This is reflected by the low quality education statistics that fall behind the framework of the EU.
These gaps reveal that disparities between the EU countries contribute to differences in the purchasing power of the low performing countries. These southern countries have backward moving and uncompetitive economies with constantly low GDPs.
The average purchasing power indicator shows that the following nations have below the average 108% value of more than half of the Euro Countries, Greece 95%, Slovenia, 86%, 78% for Malta and Portugal and Slovenia 72%.
Therefore, the problem lies in their grouping as members of the Euro countries yet they remain behind in term of competitive advantage. In the ensuing effect, these nations have the attitude of approaching the EU as a forum where they improve the standards of living.
Further, the strategies they use in this effort is only geared toward maintaining international standards as per the EU without working on the details of internal production, increased sale and cross border production. They have low labor productivity compounded by low levels of human capital that lags behind serious in the information knowledge technology economy (IMEMO para. 3-6).
Their R & D is almost absent, and the private business sector reveals lack of involvement leading to the backward trend. When compared with the leaders’ these countries will take time to get at par with the developed and advancing countries in Euro zone.
This led to countries living beyond their means since the wages grew fast at the pressure of trade unions and the need to maintain the standards of welfare at the expense of poor social security system, ineffective administration hence the need to borrow more for sustenance.
Efforts to devaluate the credit and monetary policy in different structured countries can only lead to varied results that are not feasible. This is because this measure leaves out the structural consideration needed to boost such economies.
The second problem lies in the systemic and institutional nature of the Union. The member nations have handed the monetary power to the Commission which through the ECB has done its bets to maintain the inflation rate at 2.5 percent, kept prices stable and the exchange rate between the dollar reflecting long term trends.
However, the lack of inclusion of other key economic policies in the hands of the Union leaves the national members states with the option of dictating their one course. In the long run, there arises an uncoordinated guideline in the nations.
These economic situations have worsened especially in individual member states. The situation is made worse with the lack of economic coordination. This had led to conflicts with ECB. This is because of the emerging issues and disagreements regarding individual governments’ economic problems, which spreads to the whole economic policy of the Euro community.
The third problem lies in the fiscal nature and abilities. All the euro states have breached the Maastricht criteria that stipulate that borrowing should not exceed 3 percent of the state’s budget of GPD. The reform brought by France and Germany in 2005 fuelled the problem by eliminating the measures designated to check the flouting of Maastricht criteria.
Countries like Britain had not been in this excessive budget deficit due to the concern of the pound. Therefore, when the world financial and economic crisis hit, Britain was not affected. The European nations at this time went overboard in borrowing in order to revive, restructure and rearrange their economies for effective energy use at the expense of diminishing budget revenues.
This had the effect of increasing budget deficits to unimagined magnitudes. In this case, the euro zone governments spending rose to 50.7 percent in 2009 from 46 percent in 2007 as budget revenue decreased from 45.4 to 44.4 percent in a span of two years. This resulted to a deficit of 6.3 percent (IMEMO, para 5).
This debt problem is explained by unjustified growth backed by borrowing. This problem was compounded further by the previous surge in household debts base on mortgage and consumer debts that read about 99 percent in the make up of GPD in 2007. I other countries like Spain, this had shot up to 125%; however, when compared to 134% recorded in the US, these were lower.
This had a serious effect on the Euro zone debt problem just like the increased foreign debts of the euro zone bank’s liabilities. This was indicated by high financial leverages of 21 to 49 in European Banks s compared to 12 and 17 in US banks. Also, the problem of bank cross border integration led to some banks becoming more vulnerable from the operations of foreign others in the Euro zone (IMEMO, para 8).
This problem is also compounded by leading behaviors of banks and especially the German and France banks. This forms the fourth feature of the Euro crisis know as the credibility gap of the financial institutions, in the member states as well as the Euro region governance as a whole. This was compounded by the need and insistence for integration against the least effective anti crisis measures by some member states.
The crisis in each member countries has had various effects due to these problems. In the export oriented countries, GDP has gone down like in Germany 2009 being overtaken by the productivity values of south European countries like Greece and Spain.
The rising unemployment rate has compounded the problem in Euro nations rising to two folds in nations like Spain and Ireland. This forms the basis for social protests that hinder the implementation of anti-crises measures. This results to state problems like those of Greece.
Greek in the Middle of the Crises
Greece faces debt from the external and internal point of view. For internal debt, the public sector has for a long time run one budget deficits. In the case of external debts, deficits have been caused by too much current account deficits hence an illustration of living beyond its means. The international crisis has affected the Greek economy in a severe way since the last quarter of 2008.
Hellenic Statistical Authority noted that in the last quarter of 2008, the increase in GDP was only 0.7%, compared to the rest of the year in which it was over 2 per cent. This trend started 2009; and since then, the economy has deepened into economic recession.
According to Hellenic Statistical Authority; “In 2009, the annual decrease in GDP was 2 %. In addition to this, the Greek economy has faced the problem of fiscal disorders. Indeed, in 2009, the deficit was 12.7 % of GDP [whereas] the public debt was estimated at 113.4% of GDP” (p.20).
The IMF report noted that “the Greek economy enjoyed a period of considerable growth (1994-beginning of 2008). According to the IMF, in 2009, the Greek GDP was decreased by 2 %; in the last quarter, the reduction in GDP was 2.5%. The IMF predicted that the 2010 Greek GDP to be 2% (p.19). Also, predictions about the economies reveal a gleam picture.
The IMF also predicted that during 2011; the Greek economy would remain in depression and that the GDP would continue to decrease by 1.1%. On the other hand, the Euro region would go to an increase of 1.5% (IMF, 20). There is a prediction by economists that public debt will reach 150% of GPD by 2014.
Table 1: Important Statistics
Greece’s:
* Economist Projection
+Per cent ++Percentage Points
Source: The Economist, para 6.
Table 2: Competitiveness Index
Source: Sklias and Galatsidas, p. 169.
Of all the members’ nations of the Euro Zone, Greece is the worst hit country. Other nations like Italy, Portugal, Spain and Ireland face the problem of “domino effect”. Greece is the leading nation in government finance problems. The debt has risen to 300 billion euros, which translates to over 100 percent of the state’s GPD. This is mirrored in other states that have poor financial strength amid rapidly growing national debts.
Greece has been unable to meet the anti-crisis program targets due to different social economic positions when compared to other nations. Greek’s strength on information technology is poor as compared to Ireland, and its mortgage sector contributed largely to the crisis. The reduction of exports has hurt most economies Germany included.
The problem of Greece has been noted by many, and IMEMO indicate that Greece is on the brink of default. However, it is worth noting that Greece was not the first to get in the deep circle of crises. Countries like Ireland and Portugal had to work hard to get foreign assistance in order to avoid default (IMEMO, para. 9).
First recent news that Greece doctored its statistics to a favorable image for EU zone explains a series of problems back at home. Also, massive corruption and lack of private investment regulation has led to the process that has put Greece at the center stage of the Euro Zone crisis. The Greek debt is further compounded by serious streets protest that hinder anti crisis measures to help alleviate the brink to bankruptcy.
The in the last two years the government has received two bail outs from the Members of EU circle but these have not solved the problem. Today Greece faces a daunting task of reducing wages at the cost of street protest. The government contemplates on imposing austerity measures in spending that will help in the overall plan of hoisting from the pit.
Many businesses in Greece are facing challenges while others have collapsed due to the weight of the repercussions. Greek’s problem of tax evasion and the government’s inability to collect taxes crowd the country with more than it already has. Also, its membership to EU requires that the country does not devalue its currency to make exports cheaper hence more quagmires (Sklias and Galatsidas, p. 173).
Solutions for Greece crisis problem
The problem with Greece’s debt crises started in the 1980s; therefore, simple strategies meant to help the nation can only suffice for short periods. The path to the future does resemble interventions recommendations that can be suitable for other economies like France, or UK. Greece specificities allow for structural changes in order to stabilize the fiscal sector. These must be accompanied by development incentives.
The government must seek ways to stabilize the public economies and the fiscal sector hence the need for stable leadership as this may take long. Greece would be able meet the Lisbon’s treaty requirements and increase market trust by doing this. This would become a firm base upon which sustainable economic growth can be based.
In the short term, Greece must make macroeconomic policy cuts and increase taxes tough at the face of mass street protest. In the long term, structural changes in public expenses and revenues are needed in order to stabilize the public economies without choking the developmental perspective (Sklias and Galatsidas, p. 171).
Greece’s condition allows many possibilities, but they must be evaluated on the feasibility and effectiveness bearing in mind the serious problem in the country. The only option that Greece has is to adopt actions that will guarantee stability. This lies in structural reforms that are backed by austere measures.
Greek has to follow its Stability Program which needs EU supervision on issues like fiscal transparency and national statistical agency. The need for massive bail out is required; however, this must be coupled by a determination to grow slowly.
This should focus on strict measures that will involve recession in order to correct the imbalances and help the public finance become strong again to exude credibility (Sklias and Galatsidas, p. 174).
The goal is increase production base through sustainable growth. This should be done through appropriate planning of the best development model that should emphasize on competitiveness and extroversion. This has a long term advantage in stabilizing public situation.
When fiscal stabilization and fiscal consolidation test the economic development the creation of appropriate economic environment allows investors to prosper (Sklias and Galatsidas, p. 175).
Therefore, key stabilization structures can encourage economic growth through private initiatives and entrepreneurs taking risks in order to avert depression by other measures like public expense reduction or reduction of public investment (Batten and Szilagyi, 29).
The existing resources in the public sector as measures in structural strategies have to be used. These resources, when used in competent ways, may lead to sustainable reduced public expense. The evaluation of public infrastructure works should guide the policy and decision making process that would help in examining financial and human resources.
With this line, the process of rationalizing the public resources should help in actions that lead to evaluation and appraisal of public managers. This should be done to determine commensurate rewards through independent processes and criteria. Secondly, evaluation of the civil servant and thirdly record and assess job positions duties and their required qualifications.
Also, reforming the public servant regime to ensure flexibility and reconstruction of public-staff transfer framework should be done to allow public servants moving from one service to another. Finally, lifelong education and training processes should be focused on public servants in order to realize public resource management.
Increasing tax collection should be the next solution not just as a reason for the crisis, but as a requirement for economic and structural interventions. Tax collection in Greece is one dimensional. It targets the over burdened tax payer group those who are salaried and pensioned as well as those who have invisible income.
This forms about 79% of the tax revenues, and thus there is a need to increase tax payers. Out of the 5.5 million tax returns, 4.1 million (74%) do not pay taxes or get tax rebates leaving a paltry 26 % as the tax revenue yearly contributors.
Therefore, there is a need to record real estate electronically and analytically, expand the control of new real estate purchases and to direct this to some groups of people should be the way forward in tax revenue management. There is the need to control suspects who evade taxes and at the same time take measures against the off-shore company transactions.
The need to exercise a fair tax system for real estate properties should allow inclusion of specificities in the income of such properties to the owner. Lastly, Greece should carry out high value commercial exchanges by only debiting and crediting professional bank accounts. These accounts should be accessible to the revenue services.
In this case, fiscal stabilization, consolidation, and competitiveness for sustainability in economic growth should be the measures necessary for the Greece economy in the face of crisis and a “weak economy”. This should set the exit strategy out of the financial problem and form the basis for long term sustainable economic development (Batten and Szilagyi, 12).
Solutions and strategies to EU crisis
The solutions for Euro zone crises lie in timely mobilization of economists and leaders towards anti crisis measures. The design of anti crisis measures involves the implementation of reduction of the budget deficit to less than 3 percent. Before carrying out of these measures, there is a need to establish whether they can work in socio-political countries should be done to assess the viability.
The solution to timeliness and sufficiency should help nations in the future to avert serious problems like those already in the zone. The precision to provide Greece with help as already done should be as a temporary measure. Since Greece is about to be bundled out of the EU membership, serious strategies should work to help Greece and other nations get rid of the crises (Sklias and Galatsidas, p. 167).
The issue of aid euros to Greek first solves only problems in the political process like the referendum issue at hand. The real solution lies in improving the productivity of the country. This means that Greece should focus on increasing the value of exports to other nations whether members of EU or not.
At the same time, the need for South Europe countries to cut public spending should take foremost backing by the member states and the states themselves. The idea that Germany should help the crisis is far-fetched.
This is because each nation is endowed with experts who have to help the country forge forward in hard and good times. Although German is the leading economy in the Euro zone, it has its fair shares of problems to handle. Therefore, depending on it may be disastrous (Sklias and Galatsidas, p. 168).
The ECB policies have been right so far; however, the question that should be asked is how well it does its work. The fact that Greece and other nations like Bulgaria have falsified their statistics leaves the position worrying. However, this may be a case of “tied hands” as already noted. The powers to dictate about structural and other economic policies in a nation rest within the nation’s capability and policies.
Notably, if the integration in Monetary and Market policy has to be effective; then there is a need to develop strategies to ensure that member states’ economic and other fiscal policies are coordinated. These strategies must be outlined on supranational forum. In this case, the most advanced countries can have the chance to train and guide the lowest performing nations on measures to attain the outlined measures.
In the heat of the moment, political comments suggest the implementation of procedures that ensure nations reach certain requirements needed to join European Commission. These include administrative, structural and financial aspects (Ker-Lindsay 74).
If the EU leaders strongly advocate about Stabilization Fund as a long term solution, then the problem of debt will never end. Nations sell their debts to private investors where reasons for debt are not serious like in the Euro zone. For long term solutions to work, normalization of government finance in the countries experiencing the problem is critical.
These economies need to become competitive in terms of the economy, which should be backed by strong institutional changes. A total change in the economic models pursued by such countries, which have a restrictive impact on anti-crisis measures, is also critical.
Such measures must be based on a number of factors. The political condition of member states should be ready to execute and adopt anti-crisis solutions which must be based on available knowledge and competencies. The need also for preparation of the public in order to agree on reforms meant to prevent rolling back in anti crisis measures.
There is also the need for political stability in to guarantee the stable functioning of the government in the decision making processes during a crisis. Within the EU powers, there is the need to support a nation that is undertaking the anti crisis efforts.
The need for conditional support package within the EU policies should be based on the criteria of demonstrative show of support, which indicates confidence in the future of the euro zone.
Impact of the Crisis to European integration
The Euro crisis has had serious effects to integration and enlargement of the euro zone. The notable increase of the euro zone in the recent past has dwindled due to the current issues. In other aspects, it was considered that the noted increase was a politicization effort to influence states to join the EU (Savona, Kirton, and Oldani, 56). From the crisis point of view, it can have positive and negative impacts.
Positively, the requirements of nations to fulfill certain requirements before being accepted in the EU makes nations engage in hard work that guarantees success and viability. The requirement for political stability puts the states on toes, and this improves the EU member states.
It is important to note that member states are faced with the issue of never withdrawing from the EU. If withdrawal happens, the state risks an undervalued national currency and difficult and costly legal obstacles. This would place the whole region in an image that is not desirable (Sklias and Galatsidas, p. 176).
Positively, the EU will keep on checking the quality changes happening in economic forums of individual nations hence improving the overall economic development of the EU. In terms of cultural integration, countries wishing to join the EU need to be at par with the leading EU members.
This prospect allows advancement of cultures on to desirable welfare levels in order to benefit from the economic integration. This is positive in that nations may utilize this option to produce and export for better profits. Negatively, this notion assumes that weak nation’s cultures may face foreign mixing and eventually fade which may be a source of discomfort to conservative nations (IMEMO, para. 11-13).
In terms of technology, there is a need to improve basic sending, receiving, and manipulation of information for nations to work at par with the leading EU countries. In the event that integration of technology happens between member states, this means a more advantageous position to members against other non member states.
The chance to improve technologically is placed as an ambitious program which can get funding from the EU guidelines hence leading to improved employment. Integration brings advantages to nonmember states, as well as advantages.
The EU policy on foreign policy for non member states must strive to help nations to come to terms with emerging issues. In this context, it can help to secure financial support for such nations from large financial institutions. This is because the performance of such states affects the EU directly and indirectly (IMEMO, para. 14-16).
The issues with border relationships are also impacted by EU between countries that are interested in joining the EU. Nations can make border issues peaceful or conflicting depending on the treatment from EU.
The member states’ fee and funding from EU creates sustainable fund for processes and administration. However, the crisis at hand has reduced this fund, and in case of any conflicts, there may be serious problems (Savona, Kirton, and Oldani, 59).
On another front on integration, reforms in existing guidelines may help to create contingency fund to a nation in case of difficulties that cannot be addressed by the country. This may be a result of the amendment of Lisbon Treaty. The EU may seek to support the G-20 efforts aimed at reforming the global financial institutions. This is aimed at gaining advantage for harmonization of economic policies in the EU states.
This will help the EU to shape the economic policy of the region. At the same time, it will help in progress towards to innovative economy in the southern members’ states. This will give the chance to help solve the problem of structural inconsistencies between nations as well as the low GDP.
The crisis has put Germany back in the leading role of economic integration in the European region due to its favorable and stable economy. Germany has become an important partner in upgrading European Integration.
Conclusion
The intervention of other EU countries in helping PIIGS members is a strong indication of the future force of this association. Although viewed by many as a one that may not offer the world with solutions, the management of the Euro zone crises will restore the world confidence in the EU.
The crisis is a big learning lesson to the EU PIIGS, other EMU nations and the world at large in the process of public and fiscal management. This serves a lesson in the collection of taxes and the insistence of stable and accountable management budget revenues as well as expenditures.
The Euro Crises has not subsided, and in the wake of new calls, it is going to improve other policies between nonmember and member states. The force of economic integration allows the Euro to have a voice on the world stage to join hands with G-20 in discussing issues that affect the world.
The resolution of this crisis should allow the world to have a view that even the environmental problem is achievable if serious strategies are put in place. Therefore, global warming as an international crisis can also be tackled.
Works Cited
Batten, Jonathan and Peter G. Szilagyi. The Impact of the Global Financial Crisis on Emerging Financial Markets. Bingley, U.K: Emerald, 2011. Print.
Hellenic Statistical Authority. Latest Statistical data. 2010. Web.
International Monetary Fund. World economic outlook April 2010: rebalancing growth. 2010. Web.
IMEMO RAN. Eurozone crisis: causes and consequences for the Euro-Atlantic Region. Moscow. 2010. Web.
Ker-Lindsay, James. Crisis and Conciliation: A Year of Rapprochement between Greece and Turkey. London: I. B. Tauris, 2007. Print.
Rossi, Vanessa and Rodrigo Delgado Aguilera. No Painless Solution to Greece’s Debt Crisis. Chatham House, International Economics. 2010. Web.
Savona, Paolo, John J. Kirton, and Chiara Oldani. Global Financial Crisis: Global Impact and Solutions. Farnham, Surrey: Ashgate, 2011. Print.
Sklias, Pantelis and George Galatsidas. The Political Economy of the Greek Crisis: Roots, Causes and Perspectives for Sustainable Development. Middle Eastern Finance and Economics. Issue 7 (2010): 166-177. Print.
The Economist. Greece’s sovereign-debt crisis. 2010. Web.