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Collapse Of The European Union: Fractures Widening

Global_European_Union.svg (1)The European Union was founded with great fanfare back in 1993, with the signing of the Maastricht Treaty. There have been dramatic changes on the continent since this momentous event. Both economic and political forces have descended on Europe, that are now threatening to undo the unity that was achieved over two decades ago.

With the accession of Croatia in 2013, the number of nations within the bloc swelled has to 28. Investors have grown increasingly anxious about the direction that the European Union has embarked upon in recent years.  

In the face of mounting difficulties, many nations within the bloc are relying on national reflexes as the European Union (EU) seems unable to respond. One crisis follows another, as the bureaucracy within the coalition remains inadequate, in confronting the issues that threaten to unravel the cohesion of the past.

Stone memorial in front of the entry to the Limburg Province government building in Maastricht, Netherlands, commemorating the signing of the Maastricht Treaty.

Stone memorial in front of the entry to the Limburg Province government building in Maastricht, Netherlands, commemorating the signing of the Maastricht Treaty.

The same can be said of the more united Euro-zone, which consists of 19 out of the 28 members of the European Union. These countries have adopted a common currency known as the Euro. Although there have been enormous benefits in having monetary policy determined by one central bank, the vast divergence in the fiscal policies and debt levels of the various countries within the zone have created financial instability.

Economic growth remains dismal in the European Union and even worse inside the Euro-zone, at just 1.6% in 2015. Despite interest rates at record lows, endless quantitative easing and the buying of government bonds, the economy remains stalled. The European Central Bank (ECB) is now ready to start buying corporate bonds as well.

One of the first cracks was the ongoing debt crisis in Greece. The half measures and efforts undertaken so far, merely paper over the obvious. The economy of this periphery nation is bankrupt. Worse yet, the Greek electorate refuses to acknowledge the irresponsibility of previous governments, in bringing the present financial ruin upon the nation.

Collectively, the EU is the largest contributor of foreign aid in the world.

Collectively, the EU is the largest contributor of foreign aid in the world.

The voters of Greece turned on the Conservative government at the beginning of 2015. The reason was primarily that they had already tired of austerity. The financial constraint had been put in place during 2011, as the price for another bailout. The EU and the International Monetary Fund at the time refused further loans, unless the Greek government passed a series of measures that would bring national spending and debt under control.

The Greek Parliament acquiesced and proceeded to pass legislation that raised taxes, and provided for cuts in public spending. These reductions would be painful because there would be diminutions in payrolls at the government level, as well as decreases in benefits for retirees. The process of more privatization and reforms of the labor market was also begun.

Alexis Tsipras

Alexis Tsipras

After a deep recession, the domestic economy began to turn around in 2014. It did look like the country had weathered the worse, when angry voters decided to vote for the leftist Syriza party run by the attractive and charismatic Alex Tsipras. He sold the Greek populace a fantasy. That is, they would not have to pay for their past extravagance. As their leader, he would stand up to the European and IMF creditors and force them to be what he referred to, as more reasonable.

In the end, Greece was forced to return to austerity as the price for a third bailout. A second election in September of 2015, did little to change this reality either. Prime Minster Tsipras was voted back into office, but Greek creditors remained steadfast, that previous loans needed to be repaid. All that was really achieved, was a derailment in the Greek economic recovery, due to political uncertainty.

Demonstrators in the plaza in front of the Greek parliament.

Demonstrators in the plaza in front of the Greek parliament.

There were demonstrations of protest and anti-German propaganda, that blamed the country that had provided much of the financial assistance. Greek protesters blasted Germany for the economic woes of the country and even brought up the invasion of Greece, by the German army during World War II. They insisted that the government in Berlin, had a responsibility to cancel Greek liabilities as part of a reparations package.

The Greek demonstrations angered the German public and forced the government to stiffen its resolve, that Greece would not be permitted to abandon debt obligations. Although the IMF has recommended that much of the Greek debt be forgiven, as the cost for increased participation,most of the creditors in Europe oppose this request. Greek debt to GDP (Gross Domestic Product) ratio went from 103.1% in 2007 to a peak of 180.1% in 2014.

If Greece was not part of the European Union and Euro-zone, or if the country decided to leave the bloc, the first result would be a default on its debts, to both the IMF and European creditors. The former currency the drachma, would return. A devaluation would soon follow. This would make Greek exports more competitive and vacations in Greece, far more affordable for tourists.

World map showing real GDP growth rates for 2009 (countries in brown were in recession.)

World map showing real GDP growth rates for 2009 (countries in brown were in recession.)

The printing of money to cover government spending would cause inflation and make imports far more expensive. There would be a re-balancing. Although painful, with the savings of many Greek citizens being wiped out, the economy would then begin to recover.

The sovereign debt crisis that followed the Great Recession of 2008 and 2009, was not limited to Greece alone. The nations of Italy and Portugal both had their turn in dealing with public expenditures, that were no longer sustainable in a recessionary environment. The excessive borrowing by irresponsible and ill advised governments over the preceding years, permitted the debt to GDP ratio to expand enormously.

Italy the 3rd largest economy in the Euro-zone, saw government debt jump from 99.7% in 2007 to over 123% in 2012. As of last year, it has increased even further to 132.7%. The economy which continued to contract through 2013 and 2014 is finally starting to grow again, but at a lethargic rate of just 1%.

A view of Parque das Nações, in Lisbon, Portugal's capital and largest city with an urban area with 2.8 million inhabitants.

A view of Parque das Nações, in Lisbon, Portugal’s capital and largest city with an urban area with 2.8 million inhabitants.

Portugal nearly doubled the rate of public debt in just seven years. The amount went from 68.4% in 2007, to peak at 130.2% in 2014. The economy has finally returned to growth, but the rate remains below 1% annually. The meager expansion is being fueled by household consumption, not through exports or further investment.

Even France is having difficulty staying within the agreed upon 3% budget deficit of GDP, with entitlement spending surging in a slowing economy. All member nations of the Euro-zone had agreed upon this goal, as a way to combat the rapid rise in debt. Growth in France remains at sluggish rate of just 1.3%. The public debt to GDP ratio, already exceeds 96% and is expanding.

Unemployment across Europe quickly reached double digit levels, following the arrival of the Great Recession. Youthful joblessness ratcheted up to levels unseen before, since the Great Depression of the 1930s. This statistic outside of Germany, remains stubbornly high across most of Europe.

As the economy worsened, Greece, Ireland and Portugal each ended up needing a bailout of their banking system. They would later be followed by Spain. The banking sector remains wobbly in a number of European countries.

Dublin, capital of Ireland.

Dublin, capital of Ireland.

Ireland also experienced a dramatic increase in government debt to GDP, exploding from a total of 23.9% in 2007 to 120% by 2012. Since then, it has begun to drop again and was listed for 93.8% last year.

Growth in Ireland unlike most of Europe, has returned strongly, with an expansion of 7.8% in 2015. It lead the European Union, as the fastest expanding economy in 2014 as well. Much of this stellar growth is the result of foreign investment, particularly that from the United States. There was a 28.2% jump in investment spending, in 2015 alone.

An overheated and the subsequent crash of the real estate market in Spain, forced the country to become the 4th Euro-zone country to require a infusion of cash, to prevent a collapse of the banking sector. The Euro-zone provided 100 billion Euros, the equivalent of $125 billion USD (United States Dollar) to the Spanish financial market alone.

Spanish Prime Minister Mariano Rajoy.

Spanish Prime Minister Mariano Rajoy.

Housing prices in Spain has risen 44%, from 2004 to 2008. Since then they have fallen by a third and are only now, slowly recovering. The economy which had grown an average of 3.7% during the period from 1999 to 2007, starting shrinking 1% a year until the middle of 2013. That is when growth finally returned.

The Spanish economy is now expanding at an annual rate of 3.4%, but it has not made much difference in the punishingly high unemployment rate which is at 21%. It remains the highest in the European Union. Youthful joblessness after peaking at 55.90% in 2013, has only dipped to 45% in 2016.

It is this reality, that is fueling the breakdown of the two party system in Spain and is the reason why there has only been a caretaker government, since last December. The king has called for new elections on June 26th, to attempt to break the impasse.

As aforementioned, there are growing numbers of voters in individual countries that have indicated that leaving the Euro-zone and even the European Union might be a better way forward, to deal with the crushing sovereign debt and the resulting austerity.

Syrian and Iraqi immigrants getting off a boat from Turkey on the Greek island of Lesbos.

Syrian and Iraqi immigrants getting off a boat from Turkey on the Greek island of Lesbos.

The common response of Europe to foreign policy issues has been tepid at best, whether it concerns the rise of ISIS (Islamic State of Iraq and Syria) for example, or the resurgence of Russian military prowess. Since it is difficult for all 28 nations in the European Union to agree on a unified strategy to deal with a crisis, most plans of action are watered down and rather unenthusiastic.

The refugee crisis arrived in Europe like a tidal wave. One of the features of the European Union has been the Schengen Agreement. Signed in 1985, it mostly abolished border check and controls between member nations. The free movement of goods, ideas and people did not survive the arrival of close to 2 million refugees from the Middle East and Africa in 2014 and 2015. The deluge although somewhat abated, has continued into this year.

Asylum applications in EU and EFTA states between 1 January and 30 June 2015 according to Eurostat data.

Asylum applications in EU and EFTA states between 1 January and 30 June 2015 according to Eurostat data.

Although by far, the majority are true refugees escaping violence and war in Syria, Iraq and Afghanistan, there are many economic migrants as well. These are mostly arriving from Albania, Eritrea, Iran, Kosovo, Nigeria, Pakistan and Ukraine. However, in many cases it is hard to determine immediately, in that there is oppression and abuse of civil rights in a number of these countries.

It is only in Albania and Kosovo both in Southeastern Europe, where it is quite clear that the motivation for moving north and west is primarily economic. These migrants are likely to be returned to their country of origin, after processing and consideration of their claims to asylum.

The largest portion of refugees over a million to date, have come to Germany because of several reasons. The first would be that it is the leading economy and wealthiest nation in the EU. The second rational, is that it has one of the lowest unemployment rates in the bloc at 4.2%. Another factor was the welcome that was extended perhaps naively, by German Chancellor Angela Merkel. In 2015 alone, more than 476,000 applied for asylum there.

What followed was border closings in several locations. Hungary which took in the second highest asylum seekers at 177,100, closed its border with Croatia as of October 2015, in an attempt to stem the flow. Later Croatia, Macedonia and Slovenia would in turn close their frontiers. This has now blocked the route through the Balkans, trapping many refugees in Greece.

 The Schengen Area European Union is in blue; members legally obliged to join Schengen at a future date are in yellow.

The Schengen Area of the
European Union is in blue; members legally obliged to join Schengen at a future date are in yellow.

Tensions have been rising in Europe, especially in those countries that are on the front lines in receiving the migrants. Those would be Greece, Hungary and Italy. Plans to relocate some of the arrivals, have been only partly successful. There are a rising number of EU states that have refused to absorb additional refugees and are becoming more selective, in which ones they will admit. For example in Poland, the government has announced they will accept only Christian families for resettlement.

The EU and Turkey are trying to move forward, with the agreement to return the refugees from Greece to Turkish soil. Greece is spending a great deal of the money given by European creditors, to provide for the huge number of migrants that are in the country, with more still coming. Chancellor Merkel traveled to Turkey in April of this year, in an attempt to solidify an understanding with the Turkish government.

A key element of the deal, is to allow visa free travel for Turkish citizens throughout the European Union. There is also the promise to fast track the application of admittance of Turkey into the EU. The country originally applied for membership back in 1987. In exchange, Turkey has agreed to take many of the refugees back.

President Recep Tayyip Erdoğan

President Recep Tayyip Erdoğan

The Europeans have also promised billions in financial aid as well. The full deal may still be derailed as Turkish President Erdogan has escalated his demands and is becoming increasingly authoritarian, inside his own country. In addition, the 72 conditions laid out by the EU for Turkish admission, seems improbable at this point. A modification in Turkey’s controversial anti-terror laws also seems unlikely.

Considering that Erdogan’s main priority is securing his power domestically, internal security is far more important to him at this juncture, than visa free travel in Europe of Turkish citizens. The large Kurdish minority in the southeastern part of the country, remains troublesome to President Erdogan’s  consolidation of power .

The rise in terrorism in Europe particularly recent incidences in Belgium and France, have put additional pressure on open frontiers and travel for citizens and migrants residing in the EU. More countries are now considering reconstituting checks at major crossings, in response to terrorist threats and refugee movements.

Belgium reintroduced border controls with France, in February of this year. This was a response to the issue of migrants that may come from French refugee camps. One such camp in Calais, of those migrants who wish to go to the United Kingdom, is of a particular concern for Belgian authorities.

The Eurozone (blue) represents 338 million people. The euro is the second largest reserve currency in the world.

The Euro-zone (blue) represents 338 million people. The euro is the second largest reserve currency in the world.

Macedonia applied for membership in the European Union back in 2004. Montenegro would follow in 2008. Albania, Iceland and Serbia would submit an application in 2009. Bosnia-Herzegovina and Kosovo have also shown interest in becoming members. After a major expansion in the first decade of the 21st century, there are many leaders within the bloc, who now question if further expansion makes sense any longer.

The costs and liabilities involved in enlarging the European Union are discussed often in European capitals. Many officials are in agreement that a number of nations in Eastern Europe, particularly Bulgaria and Romania for example,were not really ready when they were admitted in 2007. Widespread corruption remains an issue in both countries.

The anxiety about more migrant workers and the large developmental costs have lead to a sort of enlargement fatigue, among many European authorities. It is yet another sign that the EU is in trouble. The energy that previously existed for further expansion and progress, has largely dissipated.

This leads to another crisis for the European Union. How to keep the present membership intact? The upcoming Brexit vote, that is whether the United Kingdom will remain part of the bloc, is now crucial. Apart from the economic and political costs, the consequences of leaving the EU in a yes vote, would be disastrous for the future of the European Union as a whole.

The London Stock Exchange in the City of London, the most international stock exchange and the largest in Europe.

The London Stock Exchange in the City of London, the most international stock exchange and the largest in Europe.

The United Kingdom is the 5th largest national economy in the world and the 2nd largest in the European Union. The country has the fastest growing economy among the G7, that is the seven largest advanced economies in the world. Growth in the 1st quarter of 2016 was at 2.1%. As of 2014, the United Kingdom was the 9th largest exporter globally and the 5th largest importer.

The United Kingdom possesses the 2nd largest of inward foreign direct investment and the 2nd largest stock of outward foreign investment. This gives the country one of the most internationalized economies in the world. The loss of this influence and power to the European Union through a Brexit, cannot be understated.

If the United Kingdom does withdraw from the European Union in pursuit of its own sovereignty, the demand for similar referendums in other nations within the bloc is inevitable. The special relationship that the country already had with the larger Union, is already going to be demanded elsewhere. There also will be the beginning of a movement for renegotiation, as nations that wish to remain within the European Union, need to recast that kinship. Others will proceed with the process of economic and political retraction, that will eventually lead to a further disunity and breakup of the larger European Union.

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