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Methods of Development | The European Union: The Ideal Economic Model?

September 14, 2011

In recent years, and especially with the recession in the U.S., the European Union’s success seems like the ideal model for economic unity and financial security. So ideal that South America and Africa are considering similar models. However, with European banks struggling to repay sovereign debt, the unified euro zone model has come under scrutiny.

Last week, The Heritage Foundation hosted a talk titled “The Euro on the Brink: What’s Happening in Europe and Why It Matters for America.” Moderator Theodore Bromund and speakers Ambassador Terry Miller, Dr. J.D. Foster, and Dr. Desmond Lachman discussed how lack of financial foresight led to the decline of the euro and the current banking crisis, most acutely felt by Greece, Ireland, Portugal, Italy, and Spain. While they pointed to issues of budget deficits (as a result of not following criteria in the Maastricht Treaty), bailout fatigue, price and wage inflation, solvency and liquidity crises, the speakers suggested ways in which European governments could adjust policies in order to curb the effects of the crisis. The most common response to debt crises lies in austerity programs and budget cuts, which for the hard hit countries in the EU, could take years to reach their previous levels of economic activity. 

Eurozone Budget Deficits, 2009 | Source: The Economist

In Latin America and Africa, economic unions are also on the rise. With groups such as the African Union (AU) and the Bolivarian Alliance for the Americas (ALBA), countries are seeking alliances and treaties to increase trade and economic growth. However, if we consider the EU as a model for development, we must also recognize its faults and how such a model would impact developing nations. Developing countries in the global South may not be able to cope with such financial crises as the EU countries, and certainly do not have enough resources to go through more rounds of austerity measures.

One Euro Coin | Source: Getty Images

The loss of respective currencies in the EU, and those being tied to fixed exchange rates with the euro, has brought further difficulties to the countries facing bank defaults. Remaining within the euro zone allows the deficit-ridden countries to seek assistance from the European Central Bank and other strong economies (such as Germany and France, assuming they remain afloat), while leaving the euro zone provides each country with the ability to generate more currency to avoid default and cope with some of the austerity measures (though it will increase inflation). Without an exit strategy that allows for a happy medium, Greece, Ireland, Portugal, Italy, and Spain may destabilize other economies in the process of debt repayment. For example, Lachman noted that the euro could unravel either from the top, with Germany refusing to continue financing the peripheral governments, or from the bottom, with Greece, Portugal, and Ireland unable to continue austerity measures without halting their economies completely.

While some argue that the euro zone could disassemble, others bring up a different point. Has the recent wave of crises just shown that the European Union needs to become more connected? Could political and economic alignment of EU country policies help with adherence to EU treaties and financial regulations? Ambassador Miller noted that divergent political and economic views of EU leaders create discontinuities with how each country aims to remedy a crisis such as this.

German Chancellor Angela Merkel and French President Nicolas Sarkozy | Source: BBC News Europe - Reuters

As a result of varying political and economic perspectives within the EU, Germany and France jointly suggested a “competitiveness pact,” which aims for a higher level of integration between EU countries. While this suggestion has received opposition from several EU countries, creating higher standards within banking and education would allow for more convergence between each economy. According to Merkel and Sarkozy, convergence would maintain the EU’s competitiveness in world markets. Efforts such as this may strengthen the economic goals of the EU, but first they must withstand resistance from countries reluctant to adhere to higher standards.

Venezuelan President Hugo Chávez | Source: Latin American Herald Tribune

For both Africa and Latin America, economic unions and common markets intend to decrease their dependency on developed nations for aid and serve as development programs to increase their own economic activity and competitiveness on a global scale. Africa’s attempt at a cohesive union may be hindered by corrupt governments and political/military instability. Nevertheless, Africa has been able to target specific areas for improvement and lower income countries could benefit from the oil-rich countries in the NorthAfrica and Latin America are each on their way to creating single currency zones in order to promote trade and capital flows between countries. Led by Chávez, Latin America’s model for development, ALBA, was created as an anti-imperialist/anti-U.S. option for development. Designed to integrate the countries of Latin America in economic and monetary unions, ALBA also encourages the flow of medical and educational services between countries.

However, while Africa and Latin America consolidate development initiatives and organizations into the larger frameworks of the AU and ALBA, the success and failures of the EU linger. While we cannot know whether there is a tipping point of too much or too little integration to yield the ideal amount of economic growth, security, and prosperity, the AU and ALBA should consider the failures of the EU system when creating both entry and exit strategies for their respective unions.

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