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Puerto Vallarta News NetworkEditorials | Issues | April 2009 

Effects of the Economic Crisis on the European Union
email this pageprint this pageemail usAlberto Mucci - PVNN


Much has been written on the similarities between the current economic crisis and the infamous one of September 1929. Simplistically, an economic crisis implies the forgetting of others, fostering a state of nature of all against all. During a crisis people, as nations seek their own interest, which in the short run is divergent from the one of the community or of a political union. Leaders of the major counties in south east Asia as in Europe have cried out a pledge for unity for over one year, the last being Obama at the G20 in London. Obama warned against protectionist behaviour and the risk of a repeat of the Great Depression.

The European Union is no different from the world system and its political and economic coherence rest on a firm response to the economic crisis. The difficulty of the European case rests on the fact that, Europe as we address it now is not an homogeneous economic entity. It is the sum of many and differentiated economic entities and to analyze the effects of the economic crisis on Europe is to analyze the effects of the economic crisis on one member at a time. The E.U.'s economic problems are almost as diverse as the number of its members, ranging from slumping exports in Germany and Eastern Europe, to anaemic consumer spending in France and to property bubbles in Britain, Ireland and Spain. To seek an aftermath scenario of the E.U. is, in primis, to deconstruct the idea of E.U. in its components. The most important partition has been between the core and the periphery countries. To seek an aftermath is to analyze the different drives within the E.U.

In the U.S. the economic and financial crisis was triggered by the subprime mortgages crisis. In the E.U. the pressure on the underlying economic model can be said to have been caused by a subprime country crisis: The former Soviet Union members whose growth was bolstered by easy access to capital from core European countries, Austria in particular. As the former Soviet republics are sinking into recession, western banks are closing the flow of money that has sustained its export-led growth in an East Asian fashion.

The rushed enlargement of the European Union to its coeval status quo has been driven by an optimistic assumption of economic growth for the new proselytes of the European Union. The recent crisis has shown this is not the case. Results of the crisis have been visible throughout the whole Eastern Bloc. On the 27th of March Hungary's Prime Minister Ferenc Gyurcsány resigned over widespread unpopularity caused by the mismanagement of the economic crisis. In Latvia, Prime Minister Ivars Godmaris resigned amid popular upheaval, a series of clashes with the police and an IMF forecast of a 10% fall in GDP for the next year. For the periphery countries being part of the European Union implies a first advantage: Brussels will ultimately not allow a total economic collapse within its borders. For instance, Hungary recently received a combined aid from the IMF and the E.U. and Germany lifted its veto over the ceiling it first posed on aid to Eastern Europe doubling it to $50bn.

The majority of the periphery countries are not part of the single currency having to prove to be able to converge with the economy of the core countries. As a consequence, the corporate sector was borrowing in Euros to invest in the local market to reduce cost of borrowing and relying on an assumed future adoption of the Euro. The sharp devaluation has made the level of debt almost unbearable for many corporate sectors, exacerbating the problem with the banks and adding to the negative effects of the crisis. Depreciation of their currencies vis a vis the Euro has continued steadily for a year: the Hungarian Forint, for instance, is down 18% compared to last year at the same time. Countries such as Hungary, Denmark or Iceland in order to protect themselves from sharp declines in the real value of their currencies will consider strongly entering the Euro Zone and maintain both themselves within the European Union and the idea of European Union in existence.

Differently, countries parts of the Euro Zone are disallowed to pursue independent economic strategies because of the ECB. The actions of the Irish government at the start of the crisis were not easily swallowed by Brussels. European commission officials indicated that the Irish government, which failed to consult it could be forced to rescind it under EU competition rules. The Irish decision accompanied by the similar attempt by the Greek government could trigger a fragmentation of Europe's cross-border banks. The problem is that every bank has a nationality and there is no willingness to engage in a concerted effort. Silvio Berlusconi's attempt to found a joint European rescue fund failed in front of Berlin's Veto. Germany has been predicted to contract at an annual rate of 8.4pc in the next year. The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for E.U. union bonds should the debt markets take fright at the rocketing trajectory of Italy's public debt.

Lastly, a country's political stance is influenced by the votes backing the government. Economic policies mirror the short term content of the voters. Hence when the French government has to face a widespread unpopularity caused by the economic crisis it is hard for it to take into considerations decisions taken for a transnational union. The economic crisis, because of the difference consequences it fosters, nurtures antithetical desires fort a broader European alignment. The core because of its own internal economic crisis does not want to support the bailing out of Eastern Europe. Differently, the periphery countries, unable to sustain with domestic capital the start of a new growth will favour a European response to the crisis.

Alberto Mucci writes from Italy. Contact him at albertomucci(at)yahoo.com



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