The emergence of the European Union (EU) marked not only a milestone in all history but also as being an organization that has effectively attained supranational features. The genesis of the EU started through an agreement conceded by six neighbouring countries way back in 1951, but has later developed to the current state of being a large organization capable of accommodating 27 countries. The Maastricht Treaty signed in 1992 cleared the way for the creation of the EU. This particular agreement was to inform of cooperation across all the European countries in terms of monetary and economic union including a common currency known as Euro, internal and judicial affairs, as well as defence and foreign policies (Central Intelligence Agency, 2008). The EU's operations fall under the broader concept of multilateralism thus providing a substantial reason as to why the participation of member states is imperative. However, like any other economic trade bloc, the EU has not been without crisis. A closer examination how policies are enforced within the EU enforcement in addition to how it might respond to an economic crisis are presently some of the issues that require to be studied in order to see the complete potential of this exceptional international organization .
The exemplarily and unique characteristics of the European Union extends to as far possessing similar attributes for instance, each member nation having its own founding date, anthem and flag. Nevertheless, compared to other international trade organizations, the European Union is not only an intergovernmental cooperation but it operates as a governing body itself which is beyond that of the member states. This attribute of the EU is very beneficial particularly in this current time because the majority of the pressing problems and issues are naturally transnational. It is transnational in logic that it surpasses geographical borders for instance the dilemma surrounding terrorism and global warming. The thought of collaboration is very crucial to be able to deal with these transnational problems and the idea of EU's establishment has this specifically in mind. The existence of this supranational body is quite beneficial in coming with solutions to such problems as well as a means of propagating a long lasting peace and harmonious relationship in the whole of Europe.
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According to a report by Wissenbach (2007), the establishment of such a unique kind of international cooperation have helped the whole of the European continent by preventing a hegemonic state to rise up against the rest of the countries. This notion could be related from the past knowledge of some state such like German problem that was there some time back. Furthermore, Wissenbach also asserts that the experience the European Union have had with it complexities and diversity was so that it could attain in due course a harmonious rapport in a new global formation. The cooperation of the 27 European states constituting the EU has been successful in terms of the bigger role that it does stage in the global community. EU predominantly operates as a bloc in where decisions as well as participation in key issues are concerned. That becomes the dominant motive as to why they have a much stronger position especially when matters appertaining to international policy and agreement are concerned.
Most recently, the European economy has been in the epicentre of one of the deepest ever recorded recession since the 1930s, with the real Gross Domestic Product having been projected that it would shrink by 4% way back in 2009. This was recorded as being one of the sharpest contractions as far as the history of European Union is concerned. Although there have been recent incidences of improvement, the recovery of the EU from the current economic crisis remains fragile and uncertain. The EU has responded to the economic downturn with utmost swiftness and decisiveness. Such activities include the rolling out of the European Economic Recovery Plan (EERP), - initiated in December 2008 - in addition to restoring and reforming the banking sector. The primary aim and objective of the EERP was to foresee the restoration of confidence as well as bolstering demand through a series of well "coordinated sharpest injection of purchasing power into the economy complemented by strategic investments and measures to shore up business and labour markets". Currently, the aggregate fiscal stimulus and which includes the effect of the automated stabilisers, consists of 5% of Gross Domestic Product in the EU.
The economic crisis has had a persistent impact on the real economy of the EU. Consequently, this has caused unfavourable feedback effects on asset valuations, loan books and credit supply. But a number of EU countries have been more susceptible than others, therefore revealing inter alia variation in present account positions, presence of a large financial centre or the exposure to real estate bubbles. The massive economic crisis that hit EU not only affected actual economic activity but as well as the potential output level which is consistent with the full utilization of existing factors of production such as technology, capital and labour. This usually has major repercussion for the long-term growth prospect as well as the fiscal situation.
As reported by the Commission's analysis, except all the EU policies take up the novel challenges, the prospected GDP in the EU might drop to a permanent lower trajectory, caused by several factors. First of all the prolonged periods of unemployment in the workforce may cause permanent loss of skills. Secondly, the stock of infrastructure and equipment will diminish and become obsolete due to low investment and finally, innovation might be affected as spending on developments and research is among the first outlays to be cut back during a period of recession. Members of the EU have foreseen the implementation of a wide range of measures that boost investment in support companies and public infrastructure as well as providing support to labour markets.
To ensure that the a firm recovery as well as maintaining the potential growth of EU in the long run, the focus ought to be rapidly shifted from short-term demand management to the supply side oriented structural measures. The failure to do so might obstruct the restructuring process or craft detrimental distortions to the Internal Market. Moreover, while obviously indispensable, the bold economic stimulus comes at a cost. On the present course, public obligation in the euro area is anticipated to hit 100% of GDP by 2014. It therefore the objective of the Stability and Growth Pact to provide the flexibility for the required fiscal stimulus in this course of this severe downturn, but consolidation is unavoidable once the upturn takes hold and the threat of an economic reversion has diminished satisfactorily.
Following the economic crisis faced by the European Union, both the employers' as well as households' expectations regarding the state of the labour market have been declining quickly, reaching exceptional level of pessimism by March 2009. Even though expectations have been on the road to recovery sometime recently due to improvements in both France and Germany, the worst fears of unemployment still remain tall. In addition, employers' intentions regarding hiring are way below threshold which is a sign of expansion. At first it is quite puzzling to comprehend that such pitiable expectations have not been so far reflected in an equal rise in unemployment. Taking into consideration the amount of output lost, the increase in the rates of unemployment have been quite extremely mild in many of the member countries. Exceptions to this are the Ireland and the Baltic states - with a massive increase in the rate of unemployment in response to substantial output loss - and on the other hand Spain, where, in opposition despite a relative small decline in GDP, mass unemployment.
To some degree, these results are policy induced. To curtail the menace of mass unemployment several countries have comprehensively used or launched government supported schemes offered to employers to increment wages of employees working for part-time employment or short working arrangements. These particular schemes have provide the firms with the prospect of plummeting their actions in case of a temporary fall in industrial orders or special circumstances, while at the same time letting employees to maintain their contractual rapport. So far, these plans have demonstrated effectiveness as far as containing wasteful labour shedding is concerned. Nevertheless, companies may turn out to be extremely overstaffed, thus to remain successful these short-time measures would require to be complemented by measures following the employability and the slackening of labour market transitions. Additionally, given the nature and depth of the crisis, it is very probable that substantial reorganization will be essential as the economy recuperates from the crisis. This advocates that there might well be an exchange between less unemployment today and additional redundancies at a later stage.
Recent studies carried out have suggested that the past incidences of financial distress have led to a substantial losses in output and that are never completely recovered. Estimates rising from econometric effort by the European Commission as well as simulations with its QUEST model set the probable output loss at up to 5%. Moreover, a turnaround of financial growth may wane the incentives for structural reorganization, thereby unfavourably affecting potential growth. But the past evidence has shown that even crises have provided favourable opportunities to undertake ground-breaking structural measures and therefore this opportunity ought not to be missed.
Even though the issue of job losses have so far been contained, eventually in the long run the swiftly rising unemployment will be felt. So far lesser levels of activity have been revealed essentially in shorter working hours, encouraged by employment support schemes that have restricted the rise in unemployment statistics headline. The comparatively muted unemployment reaction may partially be the consequence of past labour market alteration, but this is not consistently the case in all Member countries. Taking into consideration that the labour markets are still firm, the feeble unemployment response is almost certainly not sustainable and additional lay-offs are expected to be in the pipeline. This will entail several social hardships particularly for exceedingly obliged households previously hit by downturns in housing markets. This reveals that in almost all of the member states the labour market ought to be high on the reform agenda.
The way different states are affecting by the economic crisis is dependent on the primary conditions as well as the associated countries that came into the crisis with a housing bubble. In addition to a big net strange responsibility position face require to shift activity from construction to export-oriented activities and to diminish their dependency on external financing. Countries that had been operating on large current financial surpluses and had an related greater experience to noxious financial assets are required to reduce their export reliance as well as work off their balance sheet exertions.
Regulation is essential in both cases, but the strategy recipes may be relatively different. There are latent implications of the current crisis for the resolution of the global disproportion. The in progress correction of the current account shortfall of the EU Member states associated with the deleveraging of their economy is not likely to be coordinated by an equal amendment of the current account surpluses of the budding market economies. If that happens, then the euro area, comprising of over two-thirds of the EU economy, won't have a choice rather than to bear the brunt of the change. In this case the euro area would call for "indigenous" sources of growth, as well as through fostering dynamic services sectors.
The European Union economic crisis has demonstrated the significance of a harmonized crisis-management structure. It should encompass the following building blocks; a Crisis prevention which will act to prevent a repeat of a future economic crisis. This must be mapped onto a combined judgment as to what the primary causes of the predicament were and how transformation in macroeconomic, supervisory as well as regulatory policy frameworks may possibly help avert their repetition. Policies to improve potential competitiveness and growth would also reinforce the pliability to potential crises. In addition is the Crisis control and mitigation that will act to curtail the damage by putting off systemic defaults or by enclosing the output loss and lessening the social hardship shooting from downturn. The major objective of this policy is thus to make stable the financial economic activity and system in the short run. To smack the right sense of balance stuck between national concern and spill over effects touching other Member States, it must be synchronized across the European Union.
The crisis resolution policy will aim at bringing crises to a lasting end as well as ensuring that the close has been achieved at the lowest cost possible on the side of the tax-payer. This will in addition ensure a secured consumer protection and containing systematic risk. These necessitate reversing temporary hold up action and procedures to reinstate economies to sustainable fiscal and growth paths. This encompasses policies to restructure the banking sector, restoring banks' balance sheets as well as a systematic policy "exit", as well as from expansionary macroeconomic plans.
The early stages of such frameworks are rising, building on already recognized institutions and legislation, synchronized by new initiatives. as you would have thought, most EU policy labours to date have purposed on alleviation and legislation. EU policymakers became extremely conscious that monetary support by states to their financial institutions and autonomous extensions of deposit pledges require large and potentially wearisome spillovers. This led to vital situation summit of the European Council at the Heads of State Level in the autumn of 2008 to orchestrate these moves. The Commission's mission was to help make sure that financial rescues realize their objectives with minimum rivalry distortions and pessimistic spillovers. Fiscal incentive also has cross-border spillover effect, through financial and trade market and markets. The European Economic Recovery Programme (EERP, European Commission 2008) adopted in November 2008 was stimulated by the acknowledgment of these spillovers.
The crisis has hit Eastern Europe hard. Four of the six eastern partners have received IMF bailouts and before the end of the year more will be forced to seek emergency assistance. Ukraine's GDP in January this year was down 20 per cent compared with a year earlier and economists warn of a possible default. Belarus, too, is in trouble. Much of the economy is driven by exports of machinery to Russia but demand in the Russian market has collapsed. Armenia is equally badly affected by the downturn in Russia. Moldova's economy relies heavily on remittances from abroad, but they dropped by a third year-on-year in January 2009, because Moldovans in Romania, Ukraine and Russia are earning less than they used to. The mood across the region is changing quickly. Unemployment has risen sharply, and so has popular unrest. The survival of several governments in Eastern Europe is at stake. This is not just due to the economic crisis; other factors are at play. The Ukrainian government, for example, is deeply unpopular at home because of infighting between the president and the prime minister (Baldwin and Evenett 54).
The fiscal costs of the financial crisis will be enormous. A sharp deterioration in public finances is now taking place. The decline in potential growth due to the crisis may add further pressure on public finances, and contingent liabilities related to financial rescues and interventions in other areas add further sustainability risk. Part of the improvement of fiscal positions in recent years was associated inter alia with growth of tax rich activity in housing and construction markets. The unwinding of these windfalls in the wake of the crisis, along with the fiscal stimulus adopted by EU governments as part of the EU strategy for coordinated action, is likely to weigh heavily on the fiscal challenges even before the budgetary cost of ageing kicks in (which will act as a source of fiscal stress in its own right).
Against this backdrop, this chapter takes stock of the short-run fiscal developments and analyses the forces that have shaped them. It also looks at the implications for interest rate differentials. Persistent 'global imbalances' are seen as one of the culprits of the financial and economic crisis. The persistent and large current account surpluses in the emerging Asian and oil producing economies have served to finance the US current account deficit at favourable terms, which, coupled with quasi-fixed exchange rate against the dollar, further added to lax financial conditions (Belke, Orth and Setzer 16).
The emerging economies in Asia - in particular China - and oil exporters are disposed to assume their role as US creditor owing to their large national saving surpluses - with the open and deep financial markets in the United States attracting large capital inflows. These easy financial conditions have spilled over to the EU economy via arbitrage-driven capital flows. An important issue is if the financial and economic Crisis in turn has helped to ease the global imbalances. This is important because, if global imbalances do not correct - even if partially - in response to the crisis, the Damocles sword of a disorderly unwinding of these imbalances remains (Aizenman and Sun 23).
A major concern is that a sharp drop in the US dollar exchange rate would take down the currencies in emerging Asia - China in particular - in its wake since these are pegged to the US dollar. This would leave the euro area with an overvalued single currency and an associated loss in its competitiveness. Another concern is that a possible increase in US interest rates spills over to the EU economy. Monetary conditions could thus end up being very tight and a relapse into recession could ensue. But even disregarding these disorderly unwinding scenarios, a more gradual unwinding of global imbalances may also have detrimental effects on Europe if a reduction in the US current account deficit is not matched by a concomitant reduction in the Chinese trade surplus. Against this backdrop, this chapter discusses the links between the implications of the global financial crisis and the global imbalances, including the implications if the crisis for the unwinding, and raises a number of associated policy issues for the European Union in the medium term (Adalid and Detken 732).
The structure for financial crisis preclusion that was in place proceeding to the crisis proved underdeveloped - if not the crisis most probable would not have happened. But first steps have also been engaged to remodel financial supervision and regulation - both in Europe and elsewhere - with crisis impediment in mind. Most lately, the European Commission has adopted draft legislation to generate a new European Systemic Risk Board to distinguish risks to the fiscal system. It will also set up a European System of Financial Supervisors, consisting of national supervisors in addition to three new European Supervisory Authorities for banking, insurance, and securities occupational pensions. The devise of crisis resolution policies is now fetching a main task - not least for the reason that it must underpin the success of crisis control policies via its confidence and impact. Any hasty pulling out of policy stimulus should be evaded, but exit strategies ought to be ready for execution when the recuperation is firm, and they should be entrenched in a broader policy framework that also necessitates growth-enhancing structural reforms.