greece and the european union

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Agenda

1.  Introduction - EU

2.  The Greek Crisis

3.  “Spillover” effects

4.  Neo-functionalism and Intergovernmentalism

Nationalism and Pluralism

5.  Conclusion

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Agenda






5.  Conclusion

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The European Union is a hybrid intergovernmental and supranational organization comprised of 27 member States

The EU - background

•  The EU has 27 member States; and 6 candidates – Croatia (maybe 2013), Iceland, Macedonia, Montenegro, Serbia and Turkey

•  Treaty of Paris (1951): European Coal and Steel Community (ECSC): BENELUX, France, West Germany, Italy

•  European Economic Community (EEC) – Treaty of Rome (1957)

•  European Community (EC) – single Community, Council of Ministers, European Parliament (1967)

•  First enlargement (1973): Denmark, Ireland, UK

•  Second enlargement (1980s): Greece (1981), Spain and Portugal (1986)

•  Treaty of Maastricht (1992): economic and monetary union – including a common currency

•  Third enlargement (1995): Austria, Finland and Sweden

•  1999: new currency established; put into effect in 2002 (except UK, Sweden and Denmark

•  Fourth enlargement (2004): Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and

Slovenia

•  Fifth enlargement (2007): Bulgaria and Romania

•  Treaty of Lisbon (2007-2009)

Source: CIA.

1. Introduction - EU

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The EU, like most Presidential or Parliamentary political systems, has an Executive, a Legislative and a Judicial branch

The EU - background

•  Executive branch:

•  European Council: heads of State of 27 members;

•  European Commission: 27 members, one from each State;

•  President of the European Commission: Jose Manuel Barroso (since 2004).

•  Legislative branch:

•  Council of the European Union (27 member-state ministers): main decision-making body of the EU;

•  European Parliament (736 seats): policymaking and budget.

•  Judicial branch:

•  Court of Justice of the European Communities (27 justices)

•  European Central Bank (ECB) – target inflation;

•  North Atlantic Treaty Organization (NATO).

Source: CIA; class readings.


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The Euro zone includes 17 member States, who joined in different periods of time conforming they met the criteria for so doing

The Euro zone

•  Member States:

•  1999 (11): Austria, Belgium, Finland, France,

Germany, Ireland, Italy, Luxembourg, Netherlands,

Portugal and Spain

•  2001 (1): Greece

•  2007 (1): Slovenia

•  2008 (2): Cyprus, Malta

•  2009 (1): Slovakia

•  2011 (1): Estonia

•  Monetary Policy is responsibility of the ECB; Fiscal

Policy, however, is responsibility of each member State

individually (independent) – a recipe for failure…

Source: The Economist; class readings.


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Agenda






5.  Conclusion

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The Greek crisis in not actually a very recent event, but a foreseen one; and the current outlook of its economy is not promising at all…

The Greek crisis – historical background

•  When Greece was to join the Euro zone (2001), it had a high level of debt; but was on the right

track and was thus allowed to join;

•  But after joining the zone, its levels of debt started to climb again - access to “cheap money” –

all countries treated the same;

•  In 2010, when the Sovereign Debt Crisis escalated, government expenditures expanded to

tackle the crisis (Keynesianism); but banks bailouts lowered the credit available, what

contributed to the rising debt levels;

•  In addition to that, Greek economy presents high levels of corruption and public employees and

lacks competitiveness in relation to other European countries;

•  In 2011, it reached 135% of its GDP;

•  According to The Economist (April 7, 2012), GDP dropped 7.5% in 2011 and is expected to

drop by 7.5% in 2012; unemployment rate is at 21.0%; current account balance is -5.1% of

GDP; budget deficit is -7.8% of GDP, and interest rates (10-yr gov’t bonds) are 21.27%.

Source: Class readings and presentations.

2. The Greek Crisis

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Therefore, two discussed solutions for the Greek crisis are bailing out or force Greece out of the Euro zone

Current alternatives for the Greek crisis

1.  Bail out:

•  Pay Greece’s debt;

•  The problem is this is not a warrant that Greece will make the necessary reforms to reverse

the trend of increasing debt (austerity measures – fiscal responsibility and other reforms

needed (reduce the size of State, change retirement age, etc.)

2.  Force Greece out of the European Union or the Euro zone:

•  Devalue its currency (Independent Monetary Policy)

•  Default on debt (?) – increasing rates of interest for investments and borrowing

•  The problem is, this will most likely, in the short term, increase unemployment, inflation and

social dissatisfactions (chaos); but, on the other hand, it will not be the first time countries

have done that and have recovered (e.g. Argentina)

Source: xxx

2. The Greek Crisis

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Agenda






5.  Conclusion

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To make matters worst, the crisis in not restricted to Greece, but to other European countries, and is getting worst quite fast

Public Debt - EU

Source: Class readings and presentations; European Commission; Eurostat.

3. “Spillover” Effects

A sustainable level of debt, according

to many economists is around 60-70%

of GDP.

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And what is more surprising is the speed of growth it has achieved in most EU countries, especially Greece, Ireland, Portugal, UK and Spain!

Public Debt EU – 1998-2012E [% of GDP]

Source: OECD Economic Outlook (2010)


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1995 2000 2005 2009

60%

70%

100%

120% Italy

Greece

Portugal

Ireland

Spain

Just in the PIIGS countries, it is clear the level of debt as a percentage of the GDP has accelerated since 2007

Level of debt as a % of the GDP – 1995-2009

Source: Eurostat.


2007

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And the level of nominal debt, in the other countries of the PIIGS, is much higher than that of Greece – amounting to probably more than USD 8 trillion…

Level of debt – USD [2009]

Source: http://trueeconomics.blogspot.com/2010/05/economics-03052010-world-debt-wish-4.html.


USD 2t USD 6t USD 10t USD 14t

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In addition to debt, it is also important to notice the high levels of unemployment and public spending as a % of GDP in some of the Euro zone countries

Public spending, % of GDP

Source: The Economist, March 31, 2012; The Economist, April 7, 2012.


Unemployment, %

10.8% 7.2%

10.0% 6.7%

21.0% 9.3%

23.6% 11.6%

13.5%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Euro Area

Belgium

France

Germany

Greece

Italy

Spain

Hungary

Poland

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Therefore, the solution for the Greek crisis in not only a Greek problem, but an European one, if it spills over to the other nations with high levels of debt

Comments

•  The level of debt of Greece is ~120% of the GDP, or USD 600-700 billion;

•  The problem is the equivalent numbers for the other European nations are:

•  Italy: more than USD 2 trillion;

•  Spain: more than USD 2 trillion;

•  Portugal: more than USD ½ trillion;

•  Ireland: more than USD 2 trillion;

•  Therefore, the main question is not if and how to bail out Greece, but if the other

countries will also need to be bailed out; and that would add over USD 8 trillion in

debt to the equation…

Source: BBC; Eurostat; TrueEconomics; class readings and presentations.

Would the European Union (esp. Germany, whose GDP is USD 3.2 trillion) be able to bail out that whole

amount? France already has over 80% of debt (on GDP) and its GDP is of USD 2.6 trillion, a little over

Brazil’s USD 2.4 trillion GDP (with 40-50% of debt)


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Agenda






5.  Conclusion

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4. Neo-functionalism and Intergovernmentalism

According to Moravcsik, two main theoretical approaches would better explain European integration: Neo-functionalism and Intergovernmentalism

•  Supranational Institutionalism:

•  Ability of a central institution (the EC) “to assert itself in such a way as to cause strong positive or negative expectations.” Moravcsik

•  Transnational interest groups and supranational officials

•  Bargaining: upgrade common interest of member States

•  Spillover effect

“Coherent and comprehensive theory of European integration”

•  Heads of government and top officials of larger member States

•  The importance of “power and interest”

•  Lowest-common-denominator bargaining: large state interests: France and Germany (+) UK

•  Protection of sovereignty

Important role of supranational institutions; BUT primary source of integration lies in the

interests of the states themselves and the relative power each brings to Brussels

Neo-functionalism Intergovernmentalism

Source: Moravcsik, Andrew. Negotiating the Single European Act (class readings).

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In understanding the success thus far of the EU it is also important to understand the concepts of Nationalism and Pluralism

•  Reaction to the French Enlightenment – separation of Church and State;

•  Nationalism is a “primordial historical phenomenon”; “a phenomenon of the European nineteenth century. It is a political consequence of the literary-intellectual movement called Romanticism, a Central European reaction to the universalizing, and therefore disorienting, ideas of the eighteenth century French Enlightenment.” William Pfaff1);

•  Still, “what is called nationalism is an expression of the primordial attachments of an individual to a group, possessing both positive and destructive powers.” Pfaff; the concept of nation-State (Walker Connor)

•  Liberal nationalism: “nationalism, at moderate levels of intensity, is a needful form of social bonding”; but “there is no ‘new world order’ (…) Neither through the UN nor in any other way can the West solve all the world’s problems or create harmony among competing nationalisms.” O’Brien.

•  Idea that power is dispersed among a variety of economic and pressure groups and that diversity is beneficial to society

•  Government holds “power” but is influenced by different non-governmental groups

•  According to Diana L. Eck (Harvard), Pluralism is:

•  The “energetic engagement with diversity (…) it is not a given; it is an achievement”;

•  “Not just tolerance, but the active seeking of understanding across lines of difference”;

•  “Not relativism, but the encounter of commitments”, which does not mean to leave our identities but to hold our differences in relationship to one another;

•  “based on dialogue, give and take, criticism and self-criticism”, which does not mean everyone will agree with one another.

Nationalism Pluralism

1) From O’Brien, Conor Cruise (1993). The Wrath of Ages: Nationalism’s Primordial Roots. Foreign Affairs. Source: Connor, Walker. A Nation is a Nation, is a State, is an Ethnic Group, is a… (in Kesselman’s class readings); The Pluralism Project at Harvard University (http://pluralism.org/pages/pluralism/what_is_pluralism); Britannica Encyclopedia.

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The challenge now, though, is to understand if the concepts that formed the basis of success for the EU will remain still with increasing “dissatisfaction”

Comments

•  Europe has been going through a series of crisis:

•  Treaty of Rome (1957) established the European Economic Community after the fiasco of the European Defense Community;

•  UK, especially during the Prime Minister Thatcher years (e.g. “No, No, No” speech) – the union without Britain idea;

•  Former economic crisis: oil (1973), Mexico (1994), Asia (1997), Russia (1998);

•  Political crisis: the Orange Revolution in Ukraine (2004), the Cold War, the authoritarian regimes of Portugal and Spain;

•  Military crisis: the war on Kosovo (1998-1999), the recent events in Libya (2011), among others.

•  However, this seems to be unprecedented:

•  Economic crisis seriously affecting several European countries at the same time;

•  Nationalism movements spreading over Europe; with ideas of Protectionism increasing all along; immigration; NATO; etc.

According to Grygiel, Jakub, “Europeans will not be created by the Euro and a common market,

and what we have right now is a set of EU institutions with no Europeans.”

Source: Grygiel, Yakub. One Market, One Currency, One People? (course readings).


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Agenda






5.  Conclusion

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My recommendation is to eliminate Greece from the Euro zone, in order to enforce austerity measures and to generate a sense of responsibility within EU

Recommendation – eliminate Greece from the Euro zone

•  Possible effects on Greece:

•  Greece will learn a hard lesson, but will most likely learn, as did countries in Latin America in the 1980s and 1990s

•  Will restructure and recover in the medium term; and will be able to approve necessary reforms under “shock therapy”

•  Possible (additional) effects to the Euro zone:

•  It will show other nations facing similar debt problems the possible consequences of not implementing austerity measures – a

viable option for punishment and pursue of discipline

•  It will also give the European leaders a clear sign that some reforms might be needed in the Euro zone (e.g. integrating fiscal

policy, creating clear procedures for nations be eliminated from the Euro zone, create some sort of mechanism that does not

allow “local” elections to interfere in European politics, which is happening now with France and Germany, etc.)

•  It will also show the different economies they cannot lie on money from the ECB, but have to develop competitiveness at home

– countries like Italy, Spain and France have lost competitiveness to countries like Poland, Hungary, etc.

Source: xxx

5. Conclusion

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The other option, I believe, might not be as effective: Greece could be only the “tip of the iceberg”, France may not be able to help and society may unrest…

Recommendation – why not bail out Greece???

•  Spain: budget deficit of >8% of GDP;

•  Ireland: budget deficit of >8% of GDP;

•  Portugal: budget deficit close to 6% of GDP;

•  France:

•  Increasing protectionism: "European protectionism” (Jean-Luc Mélenchon, leftist candidate - Front de Gauche); "social and

economic protectionism," a catchall synonym for nationalism (Marine Le Pen, candidate of the far-right Nat’l Front).”1)

•  S&P reduce France’s AAA credit rating; the National Bureau of Statistic projects no growth in the next 18 months and OECD

projects unemployment to reach 10.7% at year end; and according to Les Echos, 880 factories shut down from 2008 to 20112)

•  The Economist from March 31, 2012, suggests (pg. 31) the social system of France is in the verge of collapsing; and quotes a top

French finance boss: “The real risk for the euro zone now is not Greece, but France.”

•  Other issues: an ever deteriorating situation could increase even more nationalist movements and jeopardize the whole pluralist

concept that held Europe together thus far.

1)  Meunier, Sophie (March 30, 2012). The French don’t know their place (in the global economy). Foreign Affairs. 2)  Kamdar, Mira (March 30, 2012). A Lesser France. Foreign Affairs. Source: The Economist, March 31, 2012.

5. Conclusion

greece and the european union

Economy & Finance