An Analysis of the major difficulties faced by the Eurozone and the effects it has on the US Economy.
The European Union is an economic and political partnership between 28 European countries that cover most of the European continent. The Eurozone is a monetary union created in 2002 encompassing 19 countries within the EU that use the Euro as their currency. More than 337 million people across 19 nations use the Euro (1). Through this paper, I will discuss the issues faced by the Eurozone and why the United States of America should be concerned with the EU.
Challenges Facing the Eurozone
Separation of monetary and fiscal policy.
With the establishment of the Eurozone, all of the Eurozone courtiers Monterey policy was set forth by the ECB (European central bank), even though the fiscal policy was set by individual countries. With larger, stronger, stable economies such as Germany, in the Eurozone, economically weaker countries with bad fiscal policy and deficit spending now had lower interest rates, less risk and access to credit. Due to this mismatch in countries fiscal policy and monetary policy, in 2008 with the collapse of the housing market in the US and the credit crises throughout the world, borrowing came to a hold and created the Eurozone debt crisis. With this unified system, this was not only a problem for the countries with deficit spending and increased debt but Eurozone as a whole.
In the period of 2010–12, it was evident that out of the 19 Eurozone member nations four (Greece, Ireland, Portugal, and Cyprus), were facing persistent negative growth prospects, they were having difficulty or inability to repay or refinance their government debt, and needed to be bailed out. But as of July 2014, only Ireland and Portugal had completed and exited their bailout programs successfully. This crisis had significant adverse economic and labor market effects for the worst-hit countries, with unemployment rates in Greece and Spain hitting 27%. (2) Popular unrest and the pressure on the people of some of the harder hit countries bought out by tough austerity measures lead to the toppling of governments, with Greece being the latest to hand over power to the anti-austerity Syriza party. With the newly elected Greek government’s refusal to continue with the policies set forth for the bailout an the possibility for a Greek exit from the Eurozone, and Brittan’s exit from the EU combined with economic stagnation, hesitant reforms, and rising nationalism across Europe, It has once again called into question the sustainability of a single monetary union.
Instability – Euroscepticism
Unlike in the United States, the European Union as mentioned earlier adopts a single Monterey policy while each country has their own fiscal policy, and added to this difference is lack of a national or European economic policy. With countries from different cultures and backgrounds with vast differences (Germany retirement age 67, Greece’s 58) and Europe’s own resistance to immigration and movement of labor, enacting a single unified policy has been a challenge in the recent past for the Eurozone. This has led to rioting and unpopularity for the Eurozone and the EU referred to as Euroscepticism.
This conflict between regional integration and national sovereignty has led to cycles of protests and changes in governments that have tried enacting Eurozone policies. This constant cycle of power shifts in governments that are supportive toward the Eurozone and régimes that are distrustful and retaliatory toward it will continue to set a precedence of instability in the EU.
How these difficulties affect the US Economy.
Europe’s debt crisis and recession have been felt around the world, and the United States has not been spared. The economies of all nineteen Eurozone countries comprised 17 percent of the world economy in 2012, generating $12.2 trillion in GDP (close to the $15.7 trillion U.S. economy) (3). Germany’s economy alone is the fourth largest in the world. Strong trade, investment, and financial ties with the United States ensure that shocks in one region affect the other.
US banks as creditors to the Eurozone.
The US has not directly loaned out to the worse effected courtiers of the debt crisis, But U.S. banks have about $700 billion in outstanding loans in Great Britain, about $300 billion each in France and Germany, the leaders of the Eurozone(6). And they have about $50 billion each in Italy and Spain these countries are the once that are supporting the weaker economies of the Eurozone, countries that could be dragged into default if the crisis escalates.
The threat to US exports to Europe and imports from Europe.
In 2014 alone the US exports to Europe was 276,698.4 million dollars with imports being in 417,836.7 million dollars (4). More than 20% of all U.S. exports go to Europe, making it the nation’s largest trading partner. About 14% go to the 17 Eurozone countries, behind only Canada and Mexico (4). The real worry for U.S. businesses is that financial panic might cause a broad recession throughout the Eurozone, reducing the appetites of French and German consumers and businesses for U.S. products.
The Dollar Vs. The Euro
The appreciation of the dollar is the second conduit through which the euro crisis affects the United States. The dollar has appreciated as much as 15 percent against the euro, as well as other currencies during the debt crisis, as investors flee to safer US Treasury securities. While that means the American dollar will be worth more, it also makes US exports less competitive in global markets. Political Impact.
The NATO and a stable EU is a political stabilizer for most post-soviet eastern European countries as well as being a stable coalition partner to the US in its war against terror. Unstable EU economy distracts these countries from their commitment, the wave of regime changes that took place after the debt crisis in Europe is evidence of this effect.
The Eurozone is relatively young, it’s a goal of integration and economic stability is a noble one, but it has yet to fine-tune its policies and overcome the long-term challenges mentioned above to be a unifying effective structure. Once it is a stable economic and political force it will bring stability to Europe, and become a strong global partner to the US.
- Trichet, Jean-Claude. “The Euro and the Monetary Union.” Atlantic Economic Journal 30.3 (2002): 225-35. Nov. 2014. Web. “Eurozone in Crisis Graphics: Deficit.” BBC News. N.p., n.d. Web. 16 Feb. 2015.
- Stuck in Recession for a Sixth Consecutive Year. “Greek Jobs Crisis Deepens.” CNNMoney. Cable News Network, n.d. Web. 24 Feb. 2015.
- Council on Foreign Relations. Council on Foreign Relations, n.d. Web. 14 Feb. 2015.
- “United States Census Bureau.” Foreign Trade. N.p., n.d. Web. 21 Feb. 2015.
- “You’re Key to European Statistics.” Home. N.p., n.d. Web. 21 Feb. 2015
- “Five Ways the European Debt Crisis Could Affect the U.S.” USA Today. N.p., n.d. Web.