European Finances Pt. 1
The European Union will not survive the decade. Let's find out why. We will get to the collapse in the next part, but for now, we’ll go over a primer on how we got to where we are. To begin, a quick refresher on European geography. Continental Europe can be divided into two main zones: the Northern European Plain and Southern Europe. The Northern European plain is a fantastic geographic zone for development, and it stretches from the Atlantic Ocean and the Pyrenees on the West to the Urals in Russia to the East and is bounded by the Alps to the south and the North/Baltic seas to the north (National Geographic Society). It's a lot of flat land in a, mostly, temperate climate with a lot of navigable river access (National Geographic Society). It is very easy for a state to get very rich in Northern Europe (John Gallup et. All.). Think of Germany, France, and the Netherlands. But none of the major rivers connect with each other, which leads to different nations forming along their river (Allouche). Lots of different people with lots of capital and no barriers between them due to flat land does not exactly lend itself to stability. Northern Europe is a thunderdome of war and destruction because there are so many different people so close together with the capital ability to fight each other and no geographic barriers stopping them. The same cannot be said for Southern Europe. Southern Europe has very few navigable rivers, lots of mountains, and sometimes drops into an arid zone instead of a temperate zone (Pap). Think of Spain, Greece, or Southern Italy. So we have two separate geographic regions with radically different geographies and financial opportunities; but what happens if they become economically unified?
Before we get too ahead of ourselves, a brief history of the EU (which is not nearly as boring as you might think). So, after World War II the French looked around Europe and found a mostly empty room. The British were done with continental affairs after the war and had to deal with a collapsing empire, so they left the French to do what they wanted (McLean). Spain was languishing under its own dictatorship and had no interest, or ability, to dictate European affairs. The Lowlands were completely destroyed by the war and could not challenge the French. The Germans and Italians were conquered and occupied peoples that could not resist French demands. And the Soviets dropped a wall blocking the entire eastern half of the content. The French saw the vacuum and decided to fill it. Thus in 1952 the French pioneered the European Coal and Steel Community that joined French, West German, Italian, and Benelux coal and steel production with the hopes that this would make another war impossible (McLean). And so began what would become the EU. Over the next four decades new countries would join and new powers, responsibilities, and names would be given to this supranational entity. In 1957 the Treaty of Rome created a single customs union between all member states, and in 1973 the EU expanded into multiple countries, the most notable of which was the UK. In 1985 the Schengen Agreement removed limitations of movement across most member states, in 1992 the European Union as we know it was created to regulate interstate issues, and finally in 2002 a single monetary union was established with the Euro… (McLean).
The arrogance of Europeans in creating the Euro reaches a peak only surpassed by Icarus himself. The Euro was supposed to make trade easier between the member states while increasing trade, which it did. But by creating a single monetary union (a single currency used throughout a system) without creating a single fiscal union means that if, hypothetically, an international financial collapse occurs, there would be limited options that the ECB could take to help (Jespersen). To clarify, in the United States should there be a problem with the economy, the Federal Bank can utalize open market operations to bail out dysfunctional banks, like the ECB can, but in the US the Federal government takes more tax revenue from wealthier states and gives it to poorer states so that the national economy can all head in the same direction (Feldstein). In Europe the lack of a fiscal union means that the EU can’t just spend more money in a member state that needs it to bail it out and this forces the ECB to choose between raising intrest rates, hurting economies in ressesion, or lowering intrest rates, harming growing economies, in the event of economic crisis (Feldstein). But I’m getting ahead of myself.
In 2002 Europe created the Euro to increase trade between member states. And this was a game changer for Southern Europe. The Northern European plain was always privy to low interest loans since the geography made capitol really easy to generate, but the exact inverse was true in Southern Europe where the geography made interest rates that were typically much higher (Feldstein). But with the Euro, Spain, Italy, Portugal, and others, including Greece all got access to low interest German loans. So all these historically less wealthy nations gained access to interests rates they had never seen before and took loans out en masse. Like so many loans that people should have noticed. But people kept lending because these were first world economies with a young demography who were ready to consume, and it was always assumed that these countries could pay back their loans. Let me give a quick anecdote from this time to contextualize. I am Greek, and when I was 5 years old, so 2006, relatives came to stay with my Grandma for a bit. My family went to visit my Grandma on Saturday, as usual, but I got out of the car faster than the rest of my family so I walked up ahead and knocked on my Grandmother’s door. A man, who I had never seen before but later found out to be a cousin, opened the door and asked if I was David. I said yes, and he then handed me a hundred dollars. He was in no position to be giving out that much money to random children. That was German money.
And this is the part of the story people are familiar with. In 2008 the U.S. housing market crashed starting an international chain reaction that caused and will continue to cause a major shock in every single country in the world. And Europe was hit the hardest. People really started to question if the historically poor country of Greece could handle debt a couple hundred percent higher than GDP (Arghyrou and Tsoukalas). Then they questioned Spain and Italy and Portugal, Ireland, Belgium, Croatia, and then the entire European financial system. And, due to the larger collapse, now it is mathematically impossible for the Greeks to pay off their debt in Euros in this half of the century (Espiner and Walker).
In the direct aftermath the Germans called everyone together and weighed their options. The Germans threw debt forgiveness out the window day one because if they forgave Greece then Italy would be next, then why shouldn’t they do the same for Spain, and so on and so on(as well as the fact that there is a ‘no bailout clause in the Maastricht Treaty) (Mink and Haan). We are talking about trillions of Euros, and while the Germans are rich, they are not that rich. So debt forgiveness is off the table. Then they thought about just letting everyone default on their loans, but most of Germany’s exports are to EU member states so if they default then Germany can’t export to them and there goes German prosperity (Lucarelli). So the only ““solution”” they came up with was to just kick the can down the fiscal road and see what happens. Germany would systematically bail out in debt countries to keep them out of default and impose harsh austerity to try and get some kind of balanced budget out of participating countries (Matthijs). The Germans have been doing this for a decade, and they are quickly losing the ability to continue to do it (but more about that in part 2).
When ideology comes before basic economics, disaster can strike despite the best intentions. The Euro was an ambitious attempt to bring prosperity and unity to Europe, but all it did was doom it. Fiscal policy is not a suggestion that can be easily twisted or manipulated to suit your fantastical ideals. The European Union was just the latest to succumb to this error, but they have not yet suffered the worst that is in store for them. For more see Part 2.
Bibliography:
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