International Trade

International Trade

The current news indicates that countries like Greece are back in a downturn. Others like Italy have stagnated while Portugal has grown with barely half the expected rate. The information can never be clearer as the crisis in the Eurozone delves into another level. The expected performance of the EU economy has faced a devastating downplay regardless of the major re-establishment of proactive strategies in a bid to subjugate the relapse. This is the situation facing many states forming the larger EU who were the primary benefactors of the currency zones and policy convergence. Many have been unable to refinance or repay their debts or even duck out their over-debited state banks. As such, they run to other Eurozone countries or the ECB (European Central Bank) for bailing (Bibow, n.d.). This, however, leaves the countries poorer, the burden being rested on the taxpayers. The results are reduced wages, increased taxation and hence low living standards. Such is the debt crisis facing individual sovereign countries both as state or non-state partisans of the EU. Some have reached the critical debt levels and are suffering from the low economic growth. While the idea of consolidating the currency to form joint economic transparency and growth was okay, it could have been the course of the crunch of confidence among European businesses and economies referred to as the Euro crisis. By breaking down the crisis, this paper evaluates the article, “Six Lessons from the Euro Crisis” (Kregel 2012).

The primary concerns are the impacts of the euro crisis on wages, policy convergences, sovereign growth rates and internal adjustments by the member countries.
Main Arguments
According to Kregel, the Euro crisis “is not a crisis or the Euro; it is a crisis of the member states’ ability to meet the minimum conditions for the refinancing or retiring debt through fiscal policy.” This means that the countries are at a self-induced risk for failing to meet the strategies postulated in the SGP (Stability and Growth Pact). Engaging in such debts was the sole aim of the EU for them to be able to control the economies within these states. The EU boasts of increased integration of the member states via the economic and political liabilities owed. They can thus be able to control the interests, markets and political wave throughout the member states. However, the current trend as described in the article indicates that the union is losing its steak. The surplus of funds credited to these countries has not only wiped the growth of the entire region but also veers off prospective members from making the same move (Glassner & Galgoczi, n.d.). This way, the union is stagnating in the gross economic developments. Some ways this has come to pass has been stipulated in the article.
First, the move by the ‘structuralists’ and economists to consolidate the EEC into a single economic zone was indeterminate. Their aim being to introduce a common currency and an agricultural policy with fixed rates for distributing agricultural support, they failed to consider that sovereign states have internal strategies and objectives. As such, standard policies are not easier to adopt as they may enhance or edge a country’s competitiveness in the EU market. It is arguable that the members did not fully adapt to the proposed changes and this has resulted in their downfall. According to Friedman, when a country assumes the rules of unionization and adapts them, then they directly jump into the ‘golden straightjacket.’ Adhering to the policies with time becomes difficult and turns to be barriers to freer international trading and investments (Thomas L, 1999). These are the roots for weak economic growth in the member states.
Formation of the currency zones only increases wage imbalances. The attempt to form the Eurozone that brought on board a dollar-deutschemark-yen dominant zone produced an instability and internal stagnation in countries like Japan. Such an imbalance is predictable due to the changing currency rates and inability to maintain a fixed exchange rate. As a result, the stability of the countries credit rating changes, and this drives off investors due to the high risk and tax rates from stagnating or collapsing economies. An example is the Greece law that has seen the statutory framework weaken with time. According to Blundell (2012), the regulatory framework of Greece, despite being an active member of the EU, has a burdensome structure with poorly enforced property rights. There are also many tariff barriers that raise the expense of trading and investments. Due to the increased debts to EU and borrowings to the private lenders, the tax rates have continued to escalate at a rate that raises concerns over transparency and efficiency of the process.
The ERM (exchange rate mechanism) devised to alleviate the difficulties caused by the speculative capital flows resulting to the increasing inflation performance variations among major European countries was a fail. It only produced a compromise between domestic demand and the policy convergence. Further, the bid to resolve the conflict through the introduction of an ECU (European Currency Unit) could only have dwindled the policy flexibility. This could not have happened since the restrictive policies the EU was imposing on France were against the conditions for merit at the domestic stage. It is clear that adopting a common currency necessitate the need for internal adjustments (Vranceanu, 2012.). However, this is not easy for sovereign states as it would call for ramification of wage rates, productivity and performance divergences hence creating internal misalignments.
Conclusion
The European crisis puts the economy in the midst of a deep recession. While the possibilities of upturn may have appeared recently, recovery remains uncertain. The current situation requires a swift and decisive intervention to reform both the policies and banking sector and stabilize the lending interests. To ensure that the resurgence takes root and that EU’s long-term growth is met, the focus must be shifted from the short term appeals management to proactive supply structural measures. Further, stability and growth pact that offers the flexibility with appropriate fiscal stimulus in the critical relapse must be formulated. Although consolidation may be inevitable, recovery shall take hold fast, and economic downturn shall diminish with time. I concur with Kregel that a “monetary and political union” would partly help solve the problem of creditworthiness. With a solid political interrelationship among the sovereigns, it is easier to push for economic flexibility. Such would see the states adopt individual policies but with little authorization from the EU. The introduction of the ironclad requirements in monetary debts by the ECB is respectable as it will bar more borrowing. Although the states will be required to refinance their debts, it will trigger internal changes that will see to it the countries grow their economies. As such domestic demands will be lowered, better internal policies formulated and investors encouraged. These are the only changes that can help the states bail themselves out of the debts.
References
Bibow, J. The Euro Debt Crisis and Germany’s Euro Trilemma. SSRN Electronic Journal. http: //dx.doi.org/10.2139/ssrn.2060325
Blundell, J. (2012). Freedom in the 50 States: An Index of Personal and Economic Freedom – By William P. Ruger and Jason Sorens. Economic Affairs, 32(1), 85-85. http://dx.doi.Org/ 10.1111/j.1468-0270.2011.02140_3.x
Glassner, V. & Galgoczi, B. Plant-Level Responses to the Economic Crisis in Europe. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2264230
Vranceanu, R (2012). The Euro Sovereign Debt Crisis and the Built-In Instability of the Euro. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2253823
BIBLIOGRAPHY l 1033 Kregel, J. (2012). Six Lessons From The Euro CrisiS. Policy Note, 1-4.
Friendman L, T. (1999). The Golden Straitjacket. In F. Thomas L, The Lexus, and Olive Tree (pp. 85-88). New York: Farrar Straus Giroux.