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Monday, March 15, 2010
Greece financial woes raise EU alarms
By Jerry Pacheco
For the Journal
When it was established in 1957, there was deep skepticism that the European Union would survive. After all, weren't founding member countries France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg at war only eight years before?
The central key to the EU's growth and success has been the understanding among its members that European nations need to bond together as a union in order to be able to compete in the global market.
Since its establishment, the EU has become more and more regionally integrated, culminating with the implementation in 1999 of the euro by 11 of its then-15 member states. Today, the EU has grown to include 27 members. Sixteen of these members have adopted the euro as their currency.
Nine more EU members are implementing economic policies that will allow them to join in the future what is called the "euro-zone." Only Denmark and the United Kingdom have opted out of being legally required, by virtue of their membership within the EU, to adopt the euro as their national currency.
The skepticism of 1957 surfaced again in 1999 when the euro was implemented. This time, the skepticism centered on how such diverse economies, from the standpoints of size, industrial makeup and economic goals, could adopt a common currency. It was widely believed that these differences would sink this initiative. The U.K. has traditionally accepted lower unemployment rates at the cost of higher inflation when managing its monetary and fiscal policies. Germany, with post-WWI hyperinflation seared into its memory, accepts higher unemployment in order to keep inflation low. These are examples of the historically different approaches among the stronger, more established EU economies.
In the 1980s, the EU took a risky move in its expansion when in 1981, Greece was admitted as a member, followed in 1986 by Spain and Portugal. Up until this time, only Ireland (admitted in 1973), with its small, struggling economy, stood in stark contrast to its more developed and industrialized colleagues. However, Ireland's economy had been strongly tied to the U.K.'s. Greece, Spain and Portugal, when compared to the rest of the EU from an economic standpoint, looked like underdeveloped nations.
To the surprise of critics, these three members began to thrive within the EU during the next 15 years. However, the skeptics again reiterated their concern that a smaller economy such as Greece would have trouble adopting the euro, and would be subject to the influence of larger economies such as Germany and France, whose economic goals might influence the euro in ways that would be damaging to Greece's economy.
The current 16 members of the EU that have adopted the euro, and the nine nations that will adopt this currency in the near future, have agreed to harmonize their economic and fiscal policies in order to successfully support a common currency across borders. These policies include adhering to certain limits on government taxation and spending, and adopting objectives concerning inflation, unemployment and interest rates. Failure to adopt these measures would create financial instability for the euro, which could hurt members' economies within the EU.
Since 1999, the euro has had ups and downs, most notably its low value against the dollar and other world currencies when it was implemented. However, the euro has subsequently become a successful pillar of the world financial community. The major problem of late has been Greece, that small, historic nation on the Aegean Sea.
With a population of 11 million, Greece has approximately 2.2 percent of the EU's 500 million population. It has an annual GDP estimated at $357 billion, approximately 2 percent of the EU's total economic output. So how could such a small EU member become the source of financial concern within the EU? Over the past several years, Greece has experienced a wave of government spending, mostly due to borrowing at low EU interest rates, resulting in a debt that is approximately 113 percent of its total annual economic output.
This massive debt has caused widespread fear that Greece could default on $23 billion that is coming due. A potential default of this magnitude causes concern that the crisis will spread to other EU nations, and thus undermine the value of the euro in world markets. As this concern mounts, leading EU countries such as France and Germany have remained noncommittal in terms of offering any bailout assistance. Out of desperation, and in an obvious attempt to shame the EU into action, Greece has turned to the International Monetary Fund for financial assistance.
The Greece problem underscores how extremely difficult a task it is for diverse economies to come together under one big economic tent. It also illustrates how easy it is for the problems of one member nation, in this case, a smaller one, to spread throughout the union. How the EU acts to resolve this crisis and whether it institutes preventative measures will affect its future economic welfare.
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