Monday, 1 October 2012

The Euro Crisis Explained, III. - How it all began

In the first post of our series on the Euro Crisis, we have argued that the growth of the financial crisis into a bigger, governmental debt crisis was triggered by two factors - the one being the ECB's 'failure' to act as a lender of last resort to countries in trouble, while the other being the formulation and bust of the European housing bubble. Today's post aims to explain the first factor - but to understand the totality of the causes which lead here, we have to go back to the founding of the European Union. Join us in our travel back in time below.

Source: Europejski Portal

The beginning of the beginning

Our story begins in 1946, not long after the end of the Second World War, which has cost millions of lives and devastated Europe the most. After such a devastating conflict shaking the continent for the second time, European leaders of the West seeked to find a solution which would prevent future military conflicts. Winston Churchill, the prime minister of the victorious United Kingdom, gave a famous speech in Zurich, where he stated:
"We must build a kind of United States of Europe. In this way only will hundreds of millions of toilers be able to regain the simple joys and hopes which make life worth living."
Churchill's statement was, however famous, one of the many calling for a form of deeper European integration, his vision was still quite different. He imagined the new 'USE' as a new superpower, equal with the USA, Soviet Russia and the British Commonwealth - integration of the other side of the Iron Curtain was nowhere near the agenda. Nonetheless, a seed was planted - and that seed began to blossom in only 6 years time.

A pact of coal and steel

In 1951, six European states - Italy, France, Germany, Luxembourg, Belgium and The Netherlands formed the European Coal and Steel Community to co-ordinate their trade in the two materials, by allowing steel mills and coal plants to get their resources from the nearest source, regardless of borders. This had two effects - firstly, it made the longtime enemies, France and Germany co-operate along their long-disputed Alsace-Lotharingian border (French steel mills relied on German coal, and vice versa), and it paved the way to a deeper form of integration. Soon, a whole new list of international European agreements started springing out of nowhere, laying the intricate groundwork for the future European Union.

The dark side of the dream

 Ideally, such an economic union's members would have included territories of approximately equal size and wealth, each carefully weighing the advantages and disadvantages of joining - just like the United Kingdom did, choosing to opt-out of both Schengen and the Euro. However, joining was alway more than an economic issue - it represented the progress of European democracy and capitalism itself. Countries like Spain, Portugal and Greece all got rid of their dictators in the 1980's, and consequently, they were rewarded a place in the ever-growing framework of the Union - while their economies, underperforming for both historical and administrational reasons, failed to catch up to Western European levels. 

The political game

While economic inequalities began to emerge quite early in the union, there was a clear solution - creating a federal government like that of the United States of America, with a transparent, unified regulation system and much of local economic power ceded to a to-be created central authority.
However, this solution was politically unacceptable. Already being vary of a 'superstate' interfering with local interests, both citizens and politicians of the Union maintained - officially, or by simply disregarding the rules - their independent economic agenda and regulation system. This helped maintaing financial inequalities.
In a financial boom cycle, the problem simply didn't emerge - everyone was experiencing growth, said politicians, why should we cede more power to a central authority if the system is working? However, as soon as the financial crisis struck, the Union found itself in the middle of an asymmetric shock - one which affected it's Southern and Eastern members way more than it's Western ones.

Unity prevails

Nonetheless, with the dream about total European integration finally coming to fruition, these concerns were generally not heard. Following the collapse of the Berlin Wall, the post-Communist countries' wishing for a swift transition to democracy all wished to become the member of the Union as soon as possible. This further added to the economic differences between member states - but on the other hand, the dream of full European integration seemed closer than ever. European leaders decided on pursuing integration even further, by creating a common currency, the euro - and this is where the second part of our story will continue.

In our next post of the series, we will explain how the economic differences paired by the characteristics of the new currency generated a housing bubble in the periphery of the Eurozone. Please, leave your comments and suggestions - and continue reading us.

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