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Does the European Union Still Have a Purpose in Today’s Falling Economy?

This is a guest article by Alfonso.  If you are interested in contributing to Debt RoundUp, please follow our guidelines.

A Brief History of the European Union

The impetus for the creation of the European Union (EU) started in the 1950’s as an effort to avoid a third World War by establishing a united, peaceful, and economically thriving Europe. At the time the Cold War raged and half the European continent was under the domination of the Soviet Union.

The fall of the Berlin Wall in November 1989 was a turning point, leading to initiatives for a unified Europe. The four freedoms declared a goal of free movement of goods, services, people, and money throughout the EU. The EU embraced environmental initiatives, defense and security matters. Currently, 27 countries belong to the EU.

Europe Debt Crisis Word CloudThe 21st Century and Financial Crisis

The 21st century ushered in the age of one currency, the euro, currently used by 17 countries. The EU confronted its worst problem during the financial crisis of 2008. During this time, several countries—including Greece, Portugal, and Ireland—came close to defaulting. The EU agreed to loan these countries funds to avoid default and the collapse of their economies.

Subsequent Controversy

The EU is not allowed to bail out member countries. The rationale behind the rule was to prevent countries from mismanaging finances, anticipating an EU rescue if necessary. The justification for loans was that the money was not an open-ended bail out. The ruling included a $140 billion bailout to Greece. The European Central Bank has had to defend its position to provide unlimited funds to support the euro by providing unlimited funds to countries in distress.

Further complicating matters, jobs are slowly migrating from high-paying Western European countries to low-wage Eastern European countries, creating ill will between member states. Subsidies to certain activities have put members against each other and stalled budget talks. The animosities, combined with the struggling euro, threaten the future of the EU.

Critics Speak out about the Future of the EU

Critics argue weak, poorly managed countries such as Greece should never have been allowed in the EU without proper due diligence. One step, then, towards restoring EU viability is stricter economic guidelines before accepting future countries into the group and consider the option of removing the membership to countries who violate the agreements.

Some opponents call for the demise of the EU and euro, believing they should be abandoned, and a new union started. The problem is the European banking system, trade, and government financing are all closely intertwined and have come a long way towards integration to abandon its efforts.

Still, others argue that the fall of the euro would probably lead to bank failures and other financial crises. Profound differences in culture, religion, and language remain an impediment to close intercontinental ties. The failure of the EU could precipitate another era of solving problems through conflict rather than peaceful means.

The Future of the EU

There have been ideas that would help the EU return to the economic success of the early 2000s. Proposals include the formation of a European Monetary Fund to assist financially strapped countries. The European Central Bank (ECB) could issue bonds to stabilize the situation and newly granted European financial system powers should avoid future wrongdoings.

Ultimately, the European Union retains somewhat of a grasp on trade (they remain the world’s second largest exporter of goods to United States); however, their ultimate success may depend on their ability to bounce back from the European Debt Crisis and avoiding Greece’s recent economic slump to turn into a contagion affecting the region. The International Monetary Fund recently emphasized that the EU has made progress in addressing the crisis, but stressed that member-state dedication to “following through on commitments” remains the key to success.

In a world drawn closer together by modern transportation and communications – including modern innovations in financial trading – an EU with a stable political and economic structure, free trade within its borders, progressive global trading initiatives, and one currency, builds a more secure world and can eventually help its citizens thrive and prosper.

Author Bio: Alfonso has been covering the forex market for more than 10 years, working at trading desks and global research and analysis teams. He works regularly as a market specialist in business dailies and online portals. You can read more of Alfonso’s work at http://forexblog.oanda.com.

Photo via Vectorportal

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21 comments
AverageJoe says January 15

I find it interesting that the EU, which was heralded as such a great idea, is now a noose around some member nation’s necks. It seems like a little forward-thinking instead of current thinking could have solved some big problems we’re seeing now.

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    Grayson says January 15

    Yeah, the EU is having some problems and I am sure that Germany is getting tired of having to prop up so many members.

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Christopher @ This that and the MBA says January 15

Do you think this is similar to states? Some states in the US are better off than others, but just because they are in the red they are not allowed to leave the USA. All the time they look to the fed for the crutch….the EU having a monetary policy in the Euro now could be construed similar to the US….ahh I dont think exactly like the US but within the EU they are trying to have more free movement of trade and people by abolishing the passport controls and went with the Euro in 99…and they did receive the nobel peace prize in 2012….so they are doing something right….sorry for the rambling… 🙂

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    Grayson says January 15

    While I do think it is somewhat similar, there are many different regulations that each country can control, whereas the individual states still have a lot controlled by the federal government. There are some similarities, but very many differences in the two.

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John S @ Frugal Rules says January 15

To answer the headline, I think it still serves a purpose as it’s such a massive economy. I know they have more than their share of issues, and hopefully they’re able to turn some of them around. In today’s global economy it’s to our benefit that they turn it around.

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    Grayson says January 15

    I agree John, but they need to work on getting their act together. Many countries depend on the strength of the EU.

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The Happy Homeowner says January 15

I agree with John–there are benefits of maintaining the EU’s structure, but there needs to be better management of the countries in the Union and stricter financial controls

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    Grayson says January 15

    They need a lot better management in order to keep them from coming apart at the seams.

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DC @ Young Adult Money says January 15

I think the EU is in a tough spot because there isn’t much incentive for some members (ie Greece) to be fiscally responsible when they are simply going to be bailed out when they hit tough times. As a European Country I would have rather kept independence so that I have full control over my currency and fiscal policy.

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    Grayson says January 15

    I agree with you DC. It is the same issue that we have with welfare in the US. If you don’t force people to get off welfare, then why would they want to?

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Savvy Scot says January 15

We (in the UK) made a very good decision not to join the Euro… the EU economy is a MESS!!

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Money Bulldog says January 15

We’re too confident in the UK. It doesn’t take much for a country to tip over the edge and with all the retail and factory closures we’ve had over the past few weeks we may well be staring over the cliff! We’re currently surviving on an economy based on low interest rates which is by no means guaranteed for the future. I think 2013 will be a crucial year in the UK.

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Alex says January 15

I don’t know what the end result will be, but I think the next year or two will be very interesting to watch in the EU.

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Money Beagle says January 16

I think it is a great concept from a macro level, but when you start trying to involve so many different countries, all with their own agenda, their own political system, their own economy and economic drivers, and all the rest, it becomes exponentially difficult to manage and sustain. It will be interesting to see how it all works out, but even if they do work out the current crisis, there is always going to be tension as a result of so much in play.

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    Grayson says January 16

    I completely agree Beagle. Great concept, poor execution.

    Reply
Gus Dahleh says January 22

Many of the economies today are interconnected through all sorts of markets. Hopefully we see the EU markets start to grow and that way I feel like we could expect some success all around! Great article, thanks

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Andrew @ Listen Money Matters says January 28

You know, as bureaucratic and ridiculous as the EU is, I think it does serve a good purpose. Any good government should grease the wheels of capitalism while at the same time protect the consumer and “standard business practices”. As it turns out, I think the EU is worlds ahead of the US in consumer protection. I think consumer protection is important to any healthy economy so while they can definitely reduce some of the drama, I think they are moving in the right direction.

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    Grayson says January 29

    I do believe that the EU has great consumer protections. I do not think that they are doing a great job and are really just having a few large countries prop up the weak and corrupt. This is not how you create a unified economy, but it seems that everyone wants to do it. What gives the poor performing countries any kick in the pants as long as bigger economies like Germany have to go and bail them out?

    Reply
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