The ongoing EU’s economic predicament has elicited a distressing debate regarding the handling of the sovereign debt crisis which became conspicuous after the international financial slump of 2008 which sent ripples of economic shock waves throughout the world thereby causing a prolonged economic downturn. The Greek financial woes have now become a persistent ordeal for the European Union and its public debts now seem like a stumbling block to the European monetary union and have raised questions regarding the one-size-fits-all monetary policy of the European Union.
Following the Second World War, the European countries lead by Jean Monet reasoned to integrate the countries of the region into an economic union which would be instrumental to overcome the intra-continental feuds. The formation of the Economic Coal and Steel Community marked the foundation of this integration plan which reached its zenith after the conclusion of the Maastricht Treaty in 1992 so formally establishing the European Union. Euro was introduced as a single currency of the European Union in 2002 hence instituting world’s largest trade block.
Precisely to be in the monetary union, it was imperative for the states to demonstrate economic wellbeing with an inflation rate below 1.5 percent and a budget deficit below 3 percent of the GDP, standards which were not consistently met thus paving the way for the future complications. It was either the slipshod attitude or chronic myopia on the part of the EU officials to have overlooked these caveats in an attempt to develop the Eurozone.
With the establishment of the single currency, the European Central Bank took control of the monetary policy of the Eurozone states to set interest rates for all the member states. Some of the core countries particularly Germany at that time exhibited weak economic growth owing to which ECB set low interest rate. The convergence of the borrowing cost upon the creation of the Eurozone, declining productivity, increased competitiveness and trade imbalances among states put the peripheral states at a position badly off vis-à-vis the core states within EU hence increasing the government debt primarily in countries like Greece, Portugal, Ireland and Spain.
The onset of the global financial crisis in 2008 took its toll on the European Union. The already economically fragile countries were badly hit particularly Greece. Even at the time of creation of Eurozone, Greece’s economy was weak to the extent that the government was directed to implement austerity measures. The situation became all the more worse after the 2008 global financial crisis. The public debt of Greece became the highest in EU in 2009, almost four times higher than required by EU’s Stability and Growth Pact. Being a member of a single monetary union meant that Greece could not initiate those measures to respond to the crisis which the countries outside Eurozone might have done to regain competitiveness such as devaluing the currency. The coming in of the troika (International Monetary Fund, European Central Bank and the European Commission) to save Greece from the verge of bankruptcy in 2010 initiated a vicious cycle of debt servicing and austere bailout plans.
Several economic commentators are of the view that the Eurozone in many ways did not correspond to the theory of Optimal Currency Area which is instrumental to describe the adoption of a single currency among various countries, owing to their much diverse economic and fiscal policies and therefore existing crisis was probable. A free market is bound to experience boom and busts. When the prices increase, states undertake necessary measures to harmonize it with the trading partners mostly through currency devaluation. For a monetary union, high degree of economic integration, labor motility and wage and price flexibility are essentially paramount for the single currency to work effectively and to ensure better market adjustments at the time of temporary disequilibria. In case of EU, while the criterion of economic integration was fulfilled, thanks to the free market economy, the necessity of fiscal union remains largely unsatisfied. Significant blips include differing exchange and interest rates. Although Europeans are legally permitted to move to and fro for economic purposes, the prevailing cultural and linguistic barriers encumber labor motility. The political economy of EU is also dominated by the North-South debate as the northern European elites continue to oppose transfer of money to the southern ones except for limited European Union’s regional allowances. While these dynamics and convergence criteria have fostered economic growth of some countries like Germany, they have proved to be equally harmful for others especially Greece which already suffered from the burden of debt and inflation.
Since 2010, Greece has received nearly $245 billion in the bailouts but the economic problems of Greece have not mitigated yet. This is so because a huge part of money goes toward repaying Greece’s international loans while the enormous debt still persists. On the other hand, the austerity measures which Athens has to embark on have become increasingly unpopular at home, even paving the way for the left-wing anti-austerity party Syrzia to the government in a historic win in parliamentary elections of January 2015. The unemployment rate in Greece has reached to nearly 28% along with tough austerity measures including 40% decrease in pensions, 30% increase in prices as well as new taxes. Many commentators speculated a possible Grexit from EU owing to the economic downturn of Greece following the stalled talks with the creditors. The saga of the Greek debt crisis broke the headlines again when in an over-whelming majority Greeks affirmed ‘no’ to the belt-tightening bailout plans proposed by the troika on 5th of July just to revert to another bailout package on 13th of July thus putting an end to all the speculations regarding Greece’s exit from the Union. Rationally, neither EU nor Greece can meet the expense of a Grexit. For EU it implies a disruption in Euro’s stability along with a domino effect. For Greece it entails a surge in recession, loss of competitiveness due to narrow export base, inflation and rise in social tensions.
As the economic difficulties within the Eurozone linger so remain the doubts regarding the future of the currency union. This particularly highlights the structural flaws in the European monetary union as more of a political than a coherent economic construct. Till date compromise and political will have proved to be instrumental in sustaining the historic project but talks proceed with uncertain outcomes. If the economic gap would continue to widen among the European countries along with the increasing divergence amongst the Euro-countries, the challenge to the European integration will remain up and about especially amid the rise of anti-euro parties in countries like Spain, France and Italy.