European Union

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European Union The European Union (EU) is a unification of 27 member states united to create a political and economic community throughout Europe. Though the idea of the EU might sound simple at the outset, the European Union has a rich history and a unique organization, both of which aid in its current success and its ability to fulfill its mission for the 21st Century.

The precursor to the European Union was established after World War II in the late 1940s in an effort to unite the countries of Europe and end the period of wars between neighboring countries. These nations began to officially unite in 1949 with the Council of Europe. In 1950 the creation of the European Coal and Steel Community expanded the cooperation. The six nations involved in this initial treaty were Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. Today these countries are referred to as the "founding members." During the 1950s, the Cold War, protests, and divisions between Eastern and Western Europe showed the need for further European unification. In order to do this, the Treaty of Rome was signed on March 25, 1957, thus creating the European Economic Community and allowing people and products to move throughout Europe. Throughout the decades additional countries joined the community. In order to further unify Europe, the Single European Act was signed in 1987 with the aim of eventually creating a "single market" for trade. Europe was further unified in 1989 with the elimination of the boundary between Eastern and Western Europe - the Berlin Wall.

The Modern-Day EU
Throughout the 1990s, the "single market" idea allowed easier trade, more citizen interaction on issues such as the environment and security, and easier travel through the different countries. Even though the countries of Europe had various treaties in place prior to the early 1990s, this time is generally recognized as the period when the modern day European Union arose due to the Treaty of Maastricht on European Union which was signed on February 7, 1992 and put into action on November 1, 1993. The Treaty of Maastricht identified five goals designed to unify Europe in more ways than just economically. The goals are: 1) To strengthen the democratic governing of participating nations. 2) To improve the efficiency of the nations. 3) To establish an economic and financial unification. 4) To develop the "Community social dimension." 5) To establish a security policy for involved nations. In order to reach these goals, the Treaty of Maastricht has various policies dealing with issues such as industry, education, and youth. In addition, the Treaty put a single European

currency, the euro, in the works to establish fiscal unification in 1999. In 2004 and 2007, the EU expanded, bringing the total number of member states as of 2008 to 27.

The EU Mission
As in 1949 when it was founded with the creation of the Council of Europe, the European Union's mission for today is to continue prosperity, freedom, communication and ease of travel and commerce for its citizens. The EU is able to maintain this mission through the various treaties making it function, cooperation from member states, and its unique governmental structure.

European Union Countries

Causes of European Crisis • • • • • • • Living beyond its means Cheap debt Sharp rise in commodity prices Sharp appreciation of euro Rising interest rates Investors’ confidence waivers Key stake holders

IN GERMAN EYES this crisis is all about profligacy. Greece set the tone when it lied about its circumstances and lived beyond its means.

There is no disputing Greek dissipation, nor the fact that the euro zone's troubled members, which also include Portugal, Ireland, Spain and Italy, must now pay a heavy price. But those other troubled countries were not exactly profligate. Before the crisis the governments of both Ireland and Spain ran budget surpluses. Both meticulously kept within the limits for deficits and debts set down by the stability and growth pact—unlike Germany, which flouted the rules for four years from 2003 (and avoided punishment). Nor did Italy lurch into extravagance.

Debt in these countries has become a burden not because of government profligacy but because each enjoyed a decade of low interest rates and was then hit by the financial crisis. Easy credit fuelled debt in households and the financial sector. The European Central Bank oversaw a binge of cross-border lending. In the crisis unemployment and hardship have deepened, increasing the bill for welfare. Some countries, such as Ireland and Spain, have needed to find money to prop up their banks. These new expenses fell on the state just when tax receipts collapsed — catastrophically in countries that had seen a property boom.

At the same time interest rates surged. Before the crisis investor’s assumed no eurozone government would default on its debt. However, as Peter Boone and Simon Johnson of the Peterson Institute in Washington, DC, explain, Germany then signalled that defaults could happen and that investors would have to bear a share of the losses—a reasonable demand, but a hard one to introduce in the middle of a crisis. Some investors asked to be rewarded for the extra risk and others, unwilling to start paying for credit research, just walked away. This set off a spiral of falling bond prices, weakening banks and slowing growth. Even where troubled euro-zone countries had not been profligate, they have been running unsustainable current-account deficits. Low interest rates fuelled domestic spending and spurred inflation in wages and goods, which in turn made their exports more expensive and left imports relatively cheaper. But it was also because Germany was recycling the surpluses produced by its export machine, financing their consumption. Germany's economy is remarkable in many ways, but it was as unbalanced as the euro zone's peripheral economies. In their determination to save, Germans seemed to forget that in the long run the point of exports is to pay for imports. They must now regret having invested their savings abroad in American subprime mortgages and Greek government debt.
Your debt, your fault To end the crisis, the euro zone members agreed last month to write down half of the Greek debt owned by the private sector, recapitalise Europe's banks and boost the fund created as a firewall to protect solvent euro-zone governments. It is an ambitious plan, but Greece may need even more help and the firewall does not look strong enough to withstand a bout of contagion.

And even when the crisis has abated, restoring Europe to health will take many years. That is because the troubled countries need to control their government deficits and to re-establish sound current accounts by improving their competitiveness. Germans feel that the responsibility for this lengthy adjustment lies exclusively with borrowers, which must urgently restore budget discipline. Significantly, the German word for debt, Schulden, is the plural of Schuld, meaning guilt or fault.

However, this strategy risks being self-defeating. By pushing for immediate austerity the euro zone is deepening recession in the troubled economies, which will only make their debt harder to service. Germany's approach suffers from a fallacy of composition. It is not possible for everyone to save their way to prosperity. As Keynes argued after the Depression, someone, somewhere must be consuming. In

Europe that should be countries such as Germany and the Netherlands that were running vast current-account surpluses during the boom. But the creditors are loth to accept that they are part of the problem. Creditor governments, most of all Germany, face a dilemma. They need to save troubled governments in order to prevent contagion. On the other hand they also want to keep up market pressure for reforms and to establish the principle that governments are on their own—so that German taxpayers will not be landed with the bill every time some EU country goes on a spending spree. So far Germany is trying to have it both ways, and succeeding only in getting everyone deeper into the mire.

FISCAL RISK IMPLICATIONS: (Greece, Ireland, Portugal) • • • Have lost access to interest capital markets Can’t refinance their state debt when it comes due Not much “Fiscal Space” left in the Euro Zone to respond to recessionary conditions.

Financial Sector Risk Implications • • • Results: Money credit conditions tightening, exacerbating recessionary tendencies Social Implications : Unemployment rate remained constant with no signs of falling Implications for the neighborhood To the EU: Slower export growth Many of the banks lost money In the pre-2008 real estate bust Need to raise new capital for their own sustainability

From the EU: • Slower Growth in

- Foreign investment -Remittances • • • • Outcomes Slower growth in GDP Consumption More poverty , social exclusion Less interest in EU accession, integration

The economy of the European Union generates a GDP of over €12.894 trillion (US$16.566 trillion in 2012) according to Eurostat, making it the largest economy in the world. The European Union (EU) economy consists of an Internal Market and the EU is represented as a unified entity in the World Trade Organization (WTO). Currency The official currency of the European Union is the euro used in all its documents and policies. The Stability and Growth Pact sets out the fiscal criteria to maintain for stability and (economic) convergence. The euro is also the most widely used currency in the EU, which is in use in 17member states known as the Eurozone. All other member states, apart from Denmark and the United Kingdom, which have special opt-outs, have committed to changing over to the euro once they have fulfilled the requirements needed to do so. Also, Sweden can effectively opt out by choosing when or whether to join the European Exchange Rate Mechanism, which is the preliminary step towards joining. The remaining states are committed to join the Euro through their Treaties of Accession.

GDP (purchasing power parity) Definition: This entry gives the gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year. A nation's GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States. This is the measure most economists prefer when looking at per-capita welfare and when comparing living conditions or use of resources across countries. The measure is difficult to compute, as a US dollar value has to be assigned to all goods and services in the country regardless of whether these goods and services have a direct equivalent in the United States (for example, the value of an ox-cart or non-US military equipment); as a result, PPP estimates for some countries are based on a small and sometimes different set of goods and services. In addition, many countries do not formally participate in the World Bank's PPP project that calculates these measures, so the resulting GDP estimates for these countries may lack precision. For many developing countries, PPP-based GDP measures are multiples of the official exchange rate (OER) measure. The difference between the OER- and PPP-denominated GDP values for most of the weathly industrialized countries are generally much smaller.


The Gross Domestic Product (GDP) In the Euro Area contracted 0.60 percent in the fourth quarter of 2012 over the previous quarter. GDP Growth Rate In the Euro Area is reported by the Eurostat. Historically, from 1995 until 2012, Euro Area GDP Growth Rate averaged 0.36 Percent reaching an all time high of 1.30 Percent in June of 1997 and a record low of -2.50 Percent in March of 2009. The Euro Area is an economic and monetary union of 17 European Union countries that adopted the euro as their currency. The countries it comprises are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain. The Euro Area is the second largest economy in the world and if it was a country it would be the fourth most populous with 330 million inhabitants. France, Germany, Italy and Spain are the most important economies accounting for over 74 percent of the Union’s GDP. The current economic crisis affecting some of the Euro Zone per ipheral countries has been raising doubts over the euro’s future and is the major obstacle to growth. This page includes a chart with historical data for Euro A rea GDP Growth Rate.

Unemployment in Europe
Recent developments in unemployment at a European and Member State level
The euro area seasonally-adjusted unemployment rate was 12.0 % in February 2013, stable compared with January; it was 10.9 % in February 2012. The EU-27 unemployment rate was 10.9 % in February 2013, up from 10.8 % in the previous month; it was 10.2 % in February 2012. Among the Member States, the lowest unemployment rates were recorded in Germany (5.4 %) and the Netherlands (6.2 %), and the highest rates in Greece (26.4 % in December 2012), Spain (26.3 %) and Portugal (17.5 %). Compared with a year ago, the unemployment rate increased in nineteen Member States and fell in eight. The highest increases were registered in Greece (21.4 % to 26.4 % between December 2011 and December 2012), Portugal (14.8 % to 17.5 %) and Spain (23.9 % to 26.3 %). The largest decrease was observed in Ireland (15.1 % to 14.2 %).

European Fiscal Compact
In March 2011 a new reform of the Stability and Growth Pact was initiated, aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the 3% deficit or the 60% debt rules. By the end of the year, Germany, France and some other smaller EU countries went a step further and vowed to create a fiscal union across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties. On 9 December 2011 at the European Council meeting, all 17 members of the eurozone and six countries that aspire to join agreed on a new intergovernmental treaty to put strict caps on government spending and borrowing, with penalties for those countries that violate the limits. All other non-eurozone countries apart from the UK are also prepared to join in, subject to parliamentary vote. The treaty will enter into force on 1 January 2013, if by that time 12 members of the euro area have ratified it.

Understanding the chart
The "Public debt to GDP ratio" is calculated as public debt divided by GDP. These figures are provided by Eurostat for each country at the time this chart was created (August 2012). Public debt is money owed to investors by the government. It does not include private debts owed by individuals or corporations. An increase in the debt to GDP ratio indicates the country is carrying more debt relative to the size of its economy, which is considered an unfavourable trend. All of the countries presented consistently increased their debt to GDP ratio during the 2008-2011 period, except Germany, which was able to lower its ratio from 2010 to 2011. Note: The UK does not use the Euro as its currency. It is included for comparison. The EA17 refers to the seventeen countries that use the Euro as their currency.

Effect Of Euro Zone Crisis on GDP

Member State sorted by GDP

GDP in billions of USD (2011)[9]

GDP % of EU (2010) 100.0

Annual change % of GDP (2011) 1.5

GDP per capita in PPP US$ (2011) 31,673

Deficit (-)/ Public Debt[10] Surplus (+)[11] % of GDP % of GDP (Q3 2012) (2011) 85.1 -4.5

European Union[14] 17,610.8


2005 European Union Eurozone 2.1 1.7

2006 3.3 3.2

2007 3.2 3.0

2008 2009 2010 0.3 0.4 −4.3 −4.4 2.1 2.0

2011 1.5 1.4

Effect of Euro Zone Crisis on GDP(MP)






European Union





Inflation Rate

Gini Index
In 2005 the GINI index for the EU was estimated at 0.31 and as a comparison the USA had 0.463. UNEMPLOYEMENT RATE =10.7% in 2012

The Human Development Index - going beyond income
Each year since 1990 the Human Development Report has published the Human Development Index (HDI) which was introduced as an alternative to conventional measures of national development, such as level of income and the rate of economic growth. The HDI

represents a push for a broader definition of well-being and provides a composite measure of three basic dimensions of human development: health, education and income. PORTUGAL: Between 1980 and 2012 Portugal's HDI rose by 1.0% annually from 0.644 to 0.816 today, which gives the country a rank of 43 out of 187 countries with comparable data ITALY: Between 1980 and 2012 Italy's HDI rose by 0.6% annually from 0.723 to 0.881 today, which
gives the country a rank of 25 out of 187 countries with comparable data.

GREECE: Between 1980 and 2012 Greece's HDI rose by 0.6% annually from 0.726 to 0.860 today, which gives the country a rank of 29 out of 187 countries with comparable data. SPAIN: Between 1980 and 2012 Spain's HDI rose by 0.8% annually from 0.698 to 0.885 today, which
gives the country a rank of 23 out of 187 countries with comparable data





On the Road to Recovery 1. OMT – outright monetary transaction in secondary, sovereign bond markets, are aimed at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. OMT is considered by the European Central Bank once a Euro zone government asks for financial assistance. The Euro zone has established the European Stability Mechanism (ESM) is an international organisation located in Luxembourg, which provides financial assistance to members of the euro zone in financial difficulty which will function as a permanent firewall for the euro zone with a maximum lending capacity of €500 billion. It will replace the two existing temporary EU funding programmes: European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). All new bailout applications and deals for any euro zone member state with a financial stability issue will in principle from now on be covered by ESM, while the EFSF and EFSM will only continue to handle transfer and monitoring of the previously approved bailout loans for Ireland, Portugal and Greece. The European central bank can, henceforth, buy government-issued bonds that mature in 1 to 3 years, provided the bond issuing countries agree to certain domestic economic measures. The aim is to bring bonds down to levels that lower borrowing costs for countries that face problems selling debt, and, thus, provide investors with confidence in the euro for them to buy up bonds in a normal market.

2. Internal devaluation - Internal devaluation is an economic and social policy option whose aim is to restore the international competitiveness of some country mainly by reducing its labour costs - either wages or the indirect costs of employers. Sometimes internal devaluation is considered as alternative to 'standard' external devaluation, although social implications and speed of economic recovery can significantly differ between the two options. Internal devaluation was pursued with an aim to restore competitiveness and to balance national budgets. 3. The European Central Bank (ECB) is one of the seven institutions of the European Union (EU) listed in the Treaty on European Union(TEU). It is the central bank for the euro and administers the monetary policy of the 17 EU member states which constitute the Eurozone, one of the largest currency areas in the world. It is thus one of the world's most important central banks. The capital stock of the bank is owned by the central banks of all 27 EU member states. The primary objective of the European Central Bank is to maintain price stability within the Eurozone, which is the same as keeping inflation low and preventing deflation. The Governing Council aims to keep inflation. The basic tasks of the ECB are to define and implement the monetary policy of for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and to promote smooth operation of the financial market infrastructure under the payments system and the technical platform for settlement of securities in Europe. Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states could issue euro coins, but the amount must be authorised by the ECB beforehand. Although the ECB is governed by European law directly and thus not by corporate law applying to private law companies, its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euro which is held by the national central banks of the member states as shareholders. The initial capital allocation key was determined in 1998 on the basis of the states' population and GDP, but the key is adjustable. Shares in the ECB are not transferable and cannot be used as collateral.

Reasons for slowness of EU’s recovery 1. Political and social unrest – caused by unemployment and falling living standard due to tax hikes, spend cuts and also by devaluation of the currency. 2. Reforms are generally pressure driven – they only start paying attention to reforms during a crisis, but as soon as the crisis is over the reforms come to a halt. 3. ECB agreement is signed but no common fund or treasury for continent wide deposit insurance scheme or resolution fund were not made 4. Introduction of mutually guaranteed and jointly issued euro bonds not established as per requirement. 5. Political instability in many countries enforced the reforms like Spain asked its Prime Minister to step down; Italy and Netherlands have come to become sick units. 6. Comparative study – A comparison of this crisis with the one which had taken place in Asia in 1997 – 1998. We can see that most of the national currencies of

the Asian countries had collapsed, to overcome the crisis these countries controlled their demand of domestic consumption while increasing the supply of production so as to generate cash inflows through exports helping in recovery from international debt crisis. Also the Asian crisis occurred when global economy was stable and strong as exporting became easier for the Asian countries helping in recovering from the debt. But the European crisis came when the global economy was shaky and it was also difficult to control the domestic demand as another cutting edge over and above the crisis was not acceptable to the public at large. The idea to increase the supply of production, for the purpose of increasing the exports, also, proved not reaps any benefits. As the global economy is shaky making it difficult for the European countries to export. Another point to note is that the Asia’s debt crisis was confined to the corporate sector whereas Europe’s economy is going through a crisis at the corporate as well as government’s level.

Conclusion In view of the slow recovery from the crisis and increasing political instability it is difficult to say anything for certain, but the fact that euro has survived so far certainly seems to be a cause for optimism.

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