Paper of European Economic Crisis 2008
PAPER
DYNAMIC OF ECONOMICS CRISIS IN EUROPE
European Study
Lecturer: Aswin Ariyanto Azis, S.IP., M.Devst
Group 3:
HI English Class 1-5
Arif Dwijatmiko
135120407121007
Muyassarotul Hasanah 135120407121027
Valiant Gandys Sukamto 135120407121045
Department of International Relations
Faculty of Social and Political Sciences
Brawijaya University
2015
A. Dynamic and History of Europe economic
1. World war 1
The dynamics of the modern European economy starts since the world war. Where in the
world war severe shocks that hit the European . First World War made the European should
replace their economic system on a large scale and after the second world war Europe find a
clarity about what changes they did and what they will get when it replace their economic
system. Although the future of Europe will have a major crisis. 1
World war seems bring about change in Europe. Particularly in the financial system and the
pattern of trade relations. World War. Especially the first world war seems bring benefits to
the United States. Economic Growth in the United States became very fast so it becomes the
center of the economic circulation across the Atlantic Ocean..2
Post-war problems experienced by Europe as the war that passed, the financial system is not
yet stable. And a debt that must be repaid, while the state budget are unable to sustain the
country's needs and pay off the domestic debt. But, in 1920, countries in Western Europe
prefer to do the stabilization of the financial system of governance. Until the year 1922-1924,
the countries of Europe are looking for an institution that is capable bail out their financial
needs to carry out the reconstruction of the economic system and development.3
2. World war 2
At the end of 1920, the United States expand their investments in Europe. But, the investment
made by the United States seems is not much help Europe. This is because the investment
made by the United States is not much profitable for Europe. This situation continued until
the end of 1930 and there was a large-scale crisis (the Great Depression).4 Which causes the
1
James, Harold. The history and dynamic of Europe economy. Source : T.C.W Blanning, The Oxford History of
Modern Europe, Oxford University Press, 2000, p 186 - 211.
2
Ibid.
3
Ibid.
4
Europe Great Depression. Source : http://www.historytoday.com/patricia-clavin/great-depression-europe1929-39. Accessed : 22 October 2015 ( 02 : 09 )
real economic sector disturbed with financial systems that are not accordance. It is
characterized by declining asset prices of banks in Europe and lead to bankruptcy.5
Various efforts were made so that this global crisis does not happen again. Until John
Maynard Keynes 6, a British economist convey ideas through books he wrote "national selfsufficiency". In his book, he said that, the cost of tariffs implemented in economy will make
the to minimize the occurrence of deflation.7 While those countries are also advised does not
need gold as an instrument to standardize the country's economy8. Until the year 1935 - 1936,
the countries of Europe do some economic policies, especially in the real sector.
In the second world war, the destruction of the whole infrastructure make European countries
should improve the economic system back in it .. moreover, the economic system that has
been stabilized damaged because of inflation during the war and lack of price control. To
anticipate continuous damage, the united states ever to invest in Europe re-invest in the UK
bilaterally. In the end, American issued a policy marshall plan to restore stability in the
construction of Europe.9
3. Cold war
Entering the period of the cold war, two great powers that the Soviet Union and the United
States compete to attract the attention of the international community by spreading ideology.
One of the United States attempts to draw the attention of the European community by
providing foreign aid. Foreign aid is known as the "Marshall plan". Marshal plan contained in
the program launched by the secretary of state of the United States that is George C.
Marshall.10 The program is held to reconstruct Europe devastated by war.
As long as time goes, the cooperation with economic development in Europe growing in
several specific fields. For the examples bellow :
5
Insolvent European bank. Source : http://www.spiegel.de/international/europe/the-germans-have-learnednothing-from-history-a-838429.html. Accessed : 22 October 2015 ( 02 : 17 )
6
John maynard Keynes. Source : http://www.britannica.com/biography/John-Maynard-Keynes. Accessed : 22
October 2015 ( 02 : 44 )
7
Tarrif to minimize deflation. Source : http://www.bankrate.com/finance/investing/5-ways-to-outlastdeflation-1.aspx. accessed : 22 October 2015 ( 03 : 01 ).
8
Key es reje ted gold sta dard. Sour e : Meltzer, alla H. Key es’s Mo etary Theory,a differe t i terpretatio
, Cambridge university press, 1990. p 48 – 49.
9
Marshall plan foreign aid. Source : https://history.state.gov/milestones/1945-1952/marshall-plan. Accessed :
22 October 2015 ( 03 : 24 )
10
Founded marshall plan. Source : http://marshallfoundation.org/marshall/the-marshall-plan/foreignassistance-act-1948/. Accessed : 22 October 2015 ( 03 : 40 )
1) ECSC ( European Coal and Steel Community )
The French Foreign Minister, Robert Schuman, in his famous declaration of 9th May
1950, proposed the establishment of the Common Market treaty Coal and Steel
Europe or the European Coal and Steel Community (ECSC) by the six countries,
including France, Germany, Netherlands, Belgium, Luxembourg, and Italy. Six
countries furthermore called The Six State. The success of ECSC encourage countries
The Six State form a common market that includes economic sectors.11
2) EEC ( European Economic Commmunity )
The European Economic Commmunity Treaty, also known as the Treaty of Rome,
was signed on 25th March 1957. The EU states brings together France, Germany, Italy
and the Benelux countries in a community whose aim is to achieve integration via
trade with a view to economic expansion.
12
In 1981 Greece joined the EEC which is
then followed by Spain and Portugal. Thus the EEC membership by 12 countries.
3) Euratom ( European Atomic Energy Community )
European Atomic Energy Community (Euratom), international organization
established by one of the Treaties of Rome in 1958 to form a common market for the
development of the peaceful uses of atomic energy. The original members were
Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands. It
subsequently came to include all members of the European Union. 13
Europe Great Depression
Great Depression that occurred in Europe was first attacked England very dependent on
exports after the first World War and as a first country which left the Gold Standard make
Britain freed of the Great Depression. France is a country that might receive the most
minimal effects of the Great Depression because of two reasons, namely their economic
independence and the payment by the German number of 31.4 million dollars to make the
11
Europe union cooperation 1. Source : http://www.gurusejarah.com/2015/01/masyarakat-ekonomi-eropamee-atau-uni.html. accessed : 22 October 2015 ( 17 : 13 )
12
Europe union cooperation 2. Source : http://www.cfr.org/eu/treaty-establishing-european-economiccommunity-treaty-rome/p19864. Accessed : 22 October 2015 ( 18 : 02 )
13
French economy from shock-resistant Great Depression but in 1931 France fell in the Great
Depression that lasted until World War 2. 14
John Maynard Keynes is an economist from the UK proved to be later known as
Keynesianism. Keynes argued that the government's role in a liberal economic system is
important to provide an economic model that can be predicted based on economic indicators
that could be used by policy makers.15 Keynes gave new thinking to deal with the crisis by
suggesting the central bank in order to develop financial reserves to give the bill so that the
customer confidence back and will spend money.
Signs of the crisis started to appear since 1928 when agricultural conditions experienced
declination and the countries of Asia and Europe is stuck in recession. Then the events of
'Wall Street Stock Market Crash' in 1929 became the gateway to one of the most significant
depression in history. The Dow Jones Industrial Average in 1928 worth 191 increased
drastically to 381.17 points in September 1929.16
In addition, profit American market in 1928 worth 900 million USD to decline to 86 million
USD in 1929-1931. The stock market collapse would lead to a kind of domino effect, both in
the US and in other countries. Banks have failed in the insurance, the results of industrial
production decreased quantity, as well as the enactment of 'Smooth-Hawley tariff'17 as a form
of policies to protect American companies in Europe are examples of major depressive
impact for the United States.
Outside the United States, the economic crisis also hit other parts of the world. US aid to
Europe in the context of economic reconstruction after World War I hampered due to the
crisis, so that the European countries directly affected. The world unemployment rate
increased during 1929-1932 and even industrialized countries like Britain and France became
14
Great depression of Europe. Source : http://hafizabdillah-fisip11.web.unair.ac.id/artikel_detail-78132Ekonomi%20Politik%20InternasionalEra%20Great%20Depression:%20Kemunculan%20Keynesianisme%20dan
%20Fordisme.html. Accessed : 22 October 2015 ( 06 : 12 )
15
Balance economic system Keynes. Source :
http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm. Accessed : 22 October 2015 ( 06 : 37 )
16
Signs of great depression.
17
Smooth Hawley Tarrif. Source : http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html.
accessed : 22 October 2015 ( 18 : 32 )
the largest donor in the unemployment rate. We can see the increased data o unemployement
in this statistic data bellow 18:
Year
Population
Labor
Force
Unemployed
Percentage of
Labor Force
1929
88,010,000
49,440,000
1,550,000
3.14
1930
89,550,000
50,080,000
4,340,000
8.67
1931
90,710,000
50,680,000
8,020,000
15.82
1932
91,810,000
51,250,000
12,060,000
23.53
1933
92,950,000
51,840,000
12,830,000
24.75
1934
94,190,000
52,490,000
11,340,000
21.60
1935
95,460,000
53,140,000
10,610,000
19.97
1936
96,700,000
53,740,000
9,030,000
16.80
1937
97,870,000
54,320,000
7,700,000
14.18
1938
99,120,000
54,950,000
10,390,000
18.91
1939
100,360,000
55,600,000
9,480,000
17.05
1940
101,560,000
56,180,000
8,120,000
14.45
1941
102,700,000
57,530,000
5,560,000
9.66
Another case, cold war together happened with great depression. As the solution for this
uncertainity situation. US government cooperation together with UK encourage the holding
of the Bretton Woods conference in 1944. The purposes of Bretton woods conference are
1. Encourage the reduction of tariffs and other barriers to international trade.
2. Created a global economic framework to minimize the economic conflict between
state.
Inspiring from the Bretton woods conference, two financial world institutions has successful
creates are, IMF ( international Monetary Fund ) and World Bank. 19
18
Unemployment during great depression. Source : http://www.u-s-history.com/pages/h1528.html. accessed :
22 October 2015 ( 19 : 21 )
B. The Economic Crisis in Europe
The crisis in Europe in 2008, recalling the existence of an economic integration,
create an instrument of the economic interdependence finally interrupted. An integration that
are made, even seemed a domino effect for the countries of the European Union (EU) in
particular. Starting disruption Great Depression in 1930. Then, in the 2000's, the crisis hit
back in the EU, cause quite complex. The crisis was preceded by a long period of rapid credit
growth, low risk premiums, abundant availability of liquidity, strong leveraging, soaring asset
prices and the development of bubbles in the real estate sector20. And this is a form of post
1930's biggest drop.
In 2009, European Union real GDP is projected to shrink by some 4%21, it
experienced a significant reduction in the Eropean Union's history. Receivables that hit
Greece, caused the crisis spread to countries Ireland, then Portugal. Debt guaranteed by
Greece exceeds the GDP of the country, as well as the state spending deficit, and that's when
the crisis began payable by European countries began to open to the public. The integrated
system22, making the Eropean Union as the top circle constrained state budget deficit, and the
low ratio of GDP one country alone coating, can make other countries affected. This can be
caused due to the banking system of interlocking
The crisis led to a domino effect, because with the establishment of a standardization,
inevitably makes the EU countries must show that the best standards are considered to have
good capability among fellow members of the European Union. Domino effect is a chain of
problems that occur on an object that will ultimately cause the surroundings to feel the
impact23. Domino effect, just like a inflation, which, if one of the modes of goods rose, surely
others will follow up the price.
19
Bretton woods system. Source : http://www.vifcorps.com/trading-education/in-brief-literatures/1107bretton-woods-sebuah-sistem-perekonomian-dunia. Accessed : 22 October 2015 ( 20 : 12 )
20
Economic and Crisis in Europe: Causes, Consequeces and Responses. European Economy 7;2009. European
Commission, Economic and Financial Affairs. Luxemburg. Page. 1
21
Economic and Crisis in Europe: Causes, Consequeces and Responses. European Economy 7;2009. European
Commission, Economic and Financial Affairs. Luxemburg. Page. 1
22
Write on (Krisis Keuangan Eropa: Dampak terhadap perekonomian Indonesia). Tinjauan Perekonomian
Triwulan IV/2011. Kementrian Perencanaan Pembangunan Nasional. Jakarta. Page: Ringkasan Eksekutif.
23
http://www.cbsnews.com/news/eurozone-seeks-to-stop-debt-crisis-domino-effect/ accessed on 21 October
2015
a. Factors causing the European’s Economic Crisis in 2008
If viewed in general, the main cause is due to the integration itself, create self-awareness
of each country becomes less, and rely on the core countries in the EU, and there are several
internal and external factors. The part of the euro Began when EU leaders agreed to launch an
economic and monetary union (EMU), with a single currency (integrity), as part of the
Maastricht Treaty signed in 1992. After Several years of preparations, involving completing
the single market and establishing the European Central Bank24.
Sources: Washington Post, 2012
Picture: The Rank of European Debt in 2011
1. The existence of homogeneity currency (Euro) - Internal Factor
Integration implemented the EU since 1998, using the single currency Euro,
making the European Union as the best region in the world. Committee Chairman
named Jagland, who told Reuters on Friday (10/12/2012), said that this proves that the
integration of the European economy has grown, this makes the integration of the
24
Writen on Economic and Monetary Union and the Euro.2012. European Commission.Luxemburg. page 3
European Union won the Nobel for the success uniting the countries in the
continent25.
National interest remains a major obstacle in the process of integration.
Europe's economic crisis arose as a result of a lack of transparent accounts payable
reports EU countries, thus reveal the value of state expenditures on GDP makes this
crisis quickly spread to other countries. Euro, as the face of the economic success.
However, domestic sentiment people who already feel disappointed because of the
impact of an economic integration, affecting how the preventive policy that slow
walk. Delays in aid of strong economic countries of Europe, making the country
increasingly colapsed slumped26.
2. The Real Estate Crisis in the U.S - External Factor
From the data cited by Deutsche Welle (DW), seen from the side of Germany,
as the current state of the strongest economies before the crisis of 2008. The crisis of
Europe, starting with the German Development Bank (KfW), providing aid to the
investment bank Lehman Brothers, which went bankrupt due to crisis shares in the
United States, caused by price speculation mortgage (developer) in the United
States27. Granting and preventive efforts have made Germany, to avoid this crisis
flows to Germany, as a result of the cooperative relationship between the German
Development Bank, the Investment Bank residential mortgages in the United States.
And make the German finance minister, Peer Steinbruck, must intervene and provide
substantial funds to rescue the German Development Bank, around 500 Billion
Euro28.
3. Germany Mastered The Central Bank in The European Union - Internal Factor
25
http://europa.eu/about-eu/basic-information/eu-nobel/index_en.htm accessed on 21 October 2015
Writed on journal by Indra Kusumawardhana. 2013. European Union in Crisis : Menguatnya Pandangan
Berbasis Kedaulatan di dalam Krisis Ekonomi Uni Eropa. Jurnal Hubungan Internasional Universitas Airlangga.
Page. 4
27
http://www.dw.com/id/tahun-2008-tahun-sulit-bagi-perekonomian/a-3901915 accessed on 21 October
2015
28
http://www.nytimes.com/2008/09/18/business/worldbusiness/18iht-kfw.4.16285369.html?_r=0 accessed
on 21 October 2015
26
Preventive measures undertaken by the EU, i s to go down his government in
rescuing the economy. Protection was then carried out and to help give advice to the
troubled country. But the failure to rescue banks in Europe, which is a value erosion
of sovereignty over the economy, inability of a state entity to avoid and save the
economy respectively. This is less than the system integration of the Euro. Germany
as the strongest economy in Europe, and entered the ranks of the country's largest
exporter in the world, making the country's foreign exchange reserves large enough29.
Bundesbank, also The European Central Bank was held in Germany, thus making the
country has influence in the movement of the economy. The process of forming an
integrated bank started in 1994 to 1998 from, the European Monetary Institute (EMI),
EMI itself aims to strengthen cooperation among banks in Europe, as well as a
forerunner to the creation of EMU (Economic and Monetary Union) of Europe30,
EMU as the goals of integration prospect itself, depend how it belong.
b. Advantages and Disadvantages of Economics Crisis in Europe
Advantages
1. Economic Reformation
Economic reforms in Greece. The economic crisis that convolute the
country, making the prime minister, Alexis Tsipras, create a policy for the
holding of a national referendum31. For the sake of determining whether
the country continue to receive emergency funding from the European
Central Bank, but with a variety of binding rules, or not to accept, but with
the risk borne by the state itself, as well as the escape of the single
currency Euro.
2. Strengthening economic policy rules
29
Germany country overview http://www.bbc.com/news/world-europe-17299607 accessed on 21 October
2015
30
http://www.bbc.com/news/business-18868704 accessed on 21 October 2015.
31
http://www.bbc.com/indonesia/dunia/2015/06/150628_dunia_yunani_referendum_hutang accessed on 21
October 2015
The European Union made a post-crisis policies, by creating a new
financial fence, called, the European Stability Mechanism (ESM)32.
Namely to provide assistance to countries of the European Union which
are considered to the crisis, these funds aim to maintain the stability of the
euro currency in the market. Remains conditional aid, which must ratify
the treaty for economic coordination.
Disadvantages
1. Economic Gaps
EU countries seem indeed uneven economic circumstances, but on the
other hand they are also there are gaps. Countries such as France and
Germany seem superior, because their economies are big and strong.
While countries in the eastern region, which is actually a new state, still
has not been able to compensate for the economic situation as France and
Germany33. Differences in economic interests that caused the gap. Western
Europe dominated by economic cooperation on banking liquidity, while
central and eastern Europe, is still in the stage of completion eradication of
poverty and unemployment.
2. Slow Recovery of Crisis
EU action is slow to resolve the crisis, is one proof that the integration is
not always good for the region. Because of homogeneity is not forever
lasting. Political interests of each country is still different34. The countries
affected by the crisis, keeping in view that help keep their hope because
the country has a bond with the regulations to implement the Economic
and Monetary Union (EMU) in the EU. But the countries of the European
Union saw that the countries affected by the crisis is not an independent
country, and has poor credibility in the country's financial planning, as
well as domestic spending.
32
http://ec.europa.eu/economy_finance/explained/the_financial_and_economic_crisis/responding_to_the_deb
t_crisis/index_en.htm accessed on 21 October 2015
33
http://europa.eu/rapid/press-release_SPEECH-14-722_en.htm accessed on 21 October 2015
34
http://www.wsj.com/articles/SB10001424127887323838204578654341905240144 accessed on 21 October
2015
C. Case Study
1. Crisis in Portugal
Portugal is a country in the southwestern edge of Europe, located in the Iberian Peninsula.
Population in Portugal in 2011 amounted to 10.7 million. Portugal is a major exporter of
clothing, wood products, and electrical equipment. Portugal uses the Euro as the main
currency of the country.
Source: http://news.bbc.co.uk/2/hi/europe/country_profiles/994099.stm
Picture: Portugal at a Glance
Unlike Greece and Ireland, where the economy has sustained high growth before the crisis,
Portugal experienced a low growth since 2001. In 2003, Portugal went into recession (-0.9
per cent), together with Germany (-0, 2 percent), they are countries with negative growth. In
the same year, the Greek economy increased up to 5.9 percent and Ireland up to 4.4 percent.
Portugal ended the 2009 with budget deficit equal to 9.3 percent of GDP. The deficit
increased when compared to 2008, which amounted to 6.6 percent of GDP. While for 2010,
Portugal's budget deficit is expected to reach 8.6 percent of GDP. Far beyond the EU limit of
three percent of GDP. This makes the two rating agencies, namely Moody's and Fitch gives
negative outlook on Portugal. That outlook failed to improved after Portugal deemed
incapable of fulfill promises to reduce the deficit. Portuguese government promises able to
narrow its budget deficit to below three percent of GDP in 2013, but the rating agencies
assess Portugal's budget deficit in 2013 still on 3.8 percent of GDP. Negatif rating also make
undermining confidence in the Portuguese economy.
In March, Portugal began to make austerity budget. The Government announced a
package of austerity measures, including cuts in public spending and tax increases. All steps
were taken to reduce the budget deficit Portugal. Worsening of financial crisis in Portugal
forced the government to request financial assistance to the European Central Bank and the
International Monetary Fund (IMF). On May 2, 2010, the IMF finally approved a bailout
package of € 78 billion for Portugal. IMF aid was immediately used to cover the state deficit.
Victor Gaspar, who served as finance minister said that if in 2013, Portual will raise the
income tax from 9.8% to 13.2%. Moreover, Portugal make efforts to cut the state budget.
Not only Portugal, Greece and Ireland also suffered debt crisis in 2010. Together the
debt crisis of the three countries marked the start of Europe's debt crisis.
2. Crisis in Ireland
Ireland is a modern small country. Ireland has a designation called Celtic Tiger35,
which means the most shining light in Europe. Designation was obtained to Ireland since
successfully established an advanced economy. The golden years the Irish economy started
from the participation of Ireland to join the European Union. Ireland officially join the EU on
1 January 1973.36 At the beginning of joining the European Union, Ireland faced a series of
systems that are not ready yet.
35
How Ireland Became the Celtic Tiger, www.heritage.org/research/reports/2006/06/how-ireland-becamethe-celtic-tiger accessed on 20 October 2015
36
Ireland in the EU - Joining the European Community,
ec.europa.eu/ireland/ireland_in_the_eu/index1_en.html accessed on 20 October 2015
However, the golden age was changed when the economic crisis hit Europe. In 2007
Ireland enjoy relatively high economic growth in the scale of Europe, which is about 6.5%. 37
But, Irish economic crisis began to be felt in 2008. Ireland has a debt which is larger than its
GDP. The debt ratio reached 148 billion euros in 2011. Ireland was faced with decreasing of
revenues and large budget deficits as a result of the eurozone debt crisis. Here is a table
showing the economic growth rate of Ireland from 2006 until 2012:
No
Year
Percentage
1
2006
5,3%
2
2007
5,2%
3
2008
-3,0%
4
2009
-7,0%
5
2010
-0,4%
6
2011
0,4%
7
2012
1,5%
Table of Irish Economic Growth (2006-2012)38
To overcome this serious crisis, Ireland a decision to reducing the minimum wage and
reducing the social welfare budget up to 2.8 billion euros. 39 Not only that, the deficit was
reduced through a reduction up to 25,000 civil servants and pensioners pay cuts. But austerity
is not enough. Finally, Ireland asked for help to the IMF and the European Union. The EU so
far has helped Ireland by provide a bailout. Ireland has received a bailout from the EU and
the IMF as much as 85 billion euros, equivalent to $ 111 billion in November 2010.40 Bailout
program has several preconditions were quite heavy. The Irish government should run budget
savings program by raising taxes within four years and run the spending cuts program.
The conditions of bailout proposed by the European Union is responded by Prime Minister
Enda Kenny with save 6 billion euros which earned from spending cuts, tax increases, and others
ways so that the deficit can be dropped off at the level of 7.0%. This optimism was forwarded with
37
Ireland Economy. https://www.cia.gov/library/publications/the-world-factbook/geos/ei.html accessed on 19
October 2015
38
http://databank.worldbank.org/data/reports.aspx?source=2&country=IRL&series=&period accessed on 19
October 2015
39
Welfare to e ut y € .8 illio , www.irishtimes.com/news/welfare-to-be-cut-by-2-8-billion-1.867822
accessed on 21 October 2015
40
Irela d to re ei e €85 illio ailout at 5.8% i terest rate,
.irishti es. o / e s/irela d-to-receive-85billion-bailout-at-5-8-interest-rate-1.868001, accessed on 20 October 2015
deficit target in 2014 up to 2.8%.41 The Irish government's efforts to bring his country out from the
economic crisis seems to produce results. Although not yet fully recovered, with economy grew up
to 1.6%, is not wrong if Ireland is placed as the first rank of euro zone countries which able to
recover from pain of the debt crisis.
3. Crisis in Greece
The economic crisis in Greece in 2008 began when Greece was unable to pay a debt
of 4 billion euros to the US, Germany, Britain, France, Portugal, and Italy. A lot of Debt to be
paid by Greece due to the poor performance of the Greek bureaucracy such as a lot of
corruption, poor tax administration, and waste of budget funds. It made Greece must go into
debt to cover the needs of state spending. At the beginning, Greece's membership in the
European Union and the euro zone is not easily accepted. There are several requirements that
must be fulfilled by Greece to become members of the European Union. The The requirement
such as stable political conditions and have the economic capacity so it will not disturb the
stability of the European Union. Although Greece does not have a stable economy, but
Greece still trying to join the European Union.
At the time of going to join the euro zone, Greece does not meet the requirements
specified in the Maastricht treaty. Maastricht Treaty contains the criteria for member
countries of the European Union to enter the third stage of European Economic and Monetary
Union (EMU) and adopt the euro as its currency.42 Greece is not fulfill these criteria because
of inflation, budget deficits, debt, and interest rates which high and it is feared would
destabilize the euro zone. However, in January 2002 Greece officially became a member of
the euro zone because they meet the requirements.43
In 2000 until 2007, Greece recorded a growth of economic up to 4.2% per year and it
is the highest rate in the euro zone.44 The economic growth in Greece is the result of a lot of
foreign investment into the country. However, the situation turned around when the post2008 global crisis where other countries began rise from the recession. The main economic
41
Irish economic forecasts: recovery to gather pace this year,
https://www.davy.ie/research/public/printPdf.htm?id=econforecast20140812_11082014.htm , accessed on
19 october 2015
42
Maatricht Treaty, http://europa.eu/eu-law/decisionmaking/treaties/pdf/treaty_on_european_union/treaty_on_european_union_en.pdf accessed on 18 October
2015
43
Greece and the euro, ec.europa.eu/economy_finance/euro/countries/greece_en.htm
44
Ersi Athanassiou, Fiscal Policy and the Recession: The Case of Greece, page 1
sectors of Greece, which is sectors of tourism and shipping recorded a decline in revenue up
to 15%.45 Then in May 2010, Greece has caught a deficit of up to 13.6%.46 One of the main
causes of the deficit is the number of tax evasion cases, which is detrimental to the country up
to US $ 20 billion per year.
After a long time joined the European Union, Greece has been fudging their debt. The
EU finally know the information because of the suspicion on the growth of Greek economy.
Counterfeiting Greek report which has succeed in fooling the European Union for years make
the international community doubted to the credibility of European Union. European Central
Bank as policy makers in the euro zone faced with two difficult choices. The first option is to
let Greece go bankrupt or default and excluded from the euro zone.
In May 2010, when the Greek crisis increasingly precarious, consular of Germany
said that EU need help from the IMF to overcome the crisis. With the involvement of the
IMF, it can be said EU has been deadlocked and did not have any other solution to solve the
Greek crisis. They agreed to provide a bailout for Greece to calm down the global investors
and businessmen which have investments in other euro zone. To get the bailout, Greece must
carry out its obligations as a consequence of the bailout. Greece must do the budget cuts,
wage reductions and delays pension fund for three years, and a tax increase to overcome
fiscal and debt problems of Greece and restore the Greek economy.47
The bailout was responded with major protests, including a major strike of civil
servants accompanied by huge protests in the streets of Greece.48 Two main Greek unions
also preparing a strike. Greece increasingly chaotic economic conditions when the social
crisis occurred, increased unemployment, public protests, and also the Greek political
situation heats up. Prime Minister of Greece, George Papandreou that comes from the
Socialist Party suffered a lot of pressure from the cabinet so that on 11 November 2011, he
chose to resign.49 Since that time the Greek economy becomes very fragile and weak. Greece
45
A Different Solution For The Greek Tragedy, deutsche-wirtschafts-nachrichten.de/2015/07/08/a-differentsolution-for-the-greek-tragedy/
46
Gree e’s So ereig Debt Crisis: Retrospect and Prospect, eprints.lse.ac.uk/42848/1/GreeSE%20No54.pdf
47
Europe a d IMF Agree €
Billio Fi a i g Pla With Gree e,
www.imf.org/external/pubs/ft/survey/so/2010/car050210a.htm accessed on 18 October 2015
48
Nationwide Strike Follows Latest Round of Greek Cuts,
www.wsj.com/articles/SB10001424052970203388804576612261343333114 accessed on 17 October 2015
49
Eurozone crisis: Greek PM George Papandreou to resign,
www.theguardian.com/world/2011/nov/06/greece-george-papandreou accessed on 18 October 2015
continuously acted by debt to other countries and ask a lot of assistance from advanced
countries.
D. Conclusion
The crisis in various European countries turned out for this is due to the same thing.
The cause is before the crisis occurred in the United States in 2007 was named House
Bubble. The bankruptcy of Lehman Brothers that creditors come from countries in Europe to
make impact to Europe. In addition, the amount of debt compared to income European
countries make it a crisis occurs. The EU does not just sit crisis that occurred in the countries
of its members. The European Union crisis management similar to the countries in Europe.
Handling it as suggesting a strict policy by raising taxes to do a budget saving. The EU has
also invited the IMF to provide bailouts to European countries affected by the crisis.
Although European countries get the same treatment, but the results achieved are
different. Ireland managed to restore its economy slumped. However Portugal and Greece is
still struggling to deal with the crisis until today. This shows that every country requires
different handling of the crisis based on the circumstances that happened. In addition, the
European Union must act decisively to impose sanctions on countries that do not fit standard
Maastrich treaty. This is because of the same coin has its advantages and disadvantages. In
this case, the single European currency a domino effect which states that the crisis could
spread to other countries.
BIBLIOGRAPHY
Harold, James. The history and dynamic of Europe economy. Source : T.C.W Blanning, The
Oxford History of Modern Europe, Oxford University Press
Meltzer, allan H. Keynes’s Monetary Theory,a different interpretation , Cambridge university
press
Journal of Economic and Crisis in Europe: Causes, Consequeces and Responses. European
Economy 7;2009. European Commission, Economic and Financial Affairs. Luxemburg
Journal by Indra Kusumawardhana. 2013. European Union in Crisis : Menguatnya
Pandangan Berbasis Kedaulatan di dalam Krisis Ekonomi Uni Eropa . Jurnal Hubungan
Internasional Universitas Airlangga
http://www.historytoday.com/patricia-clavin/great-depression-europe-1929-39 Accessed : 22
October 2015 ( 02 : 09 )
http://www.spiegel.de/international/europe/the-germans-have-learned-nothing-from-historya-838429.html . Accessed : 22 October 2015 ( 02 : 17 )
http://www.britannica.com/biography/John-Maynard-Keynes . Accessed : 22 October 2015 (
02 : 44 )
http://www.bankrate.com/finance/investing/5-ways-to-outlast-deflation-1.aspx . accessed : 22
October 2015 ( 03 : 01 ).
http://marshallfoundation.org/marshall/the-marshall-plan/foreign-assistance-act-1948/ .
Accessed : 22 October 2015 ( 03 : 40 )
http://europa.eu/about-eu/basic-information/eu-nobel/index_en.html accessed on 21 October
2015
http://www.bbc.com/news/business-18868704 accessed on 21 October 2015.
www.heritage.org/research/reports/2006/06/how-ireland-became-the-celtic-tiger accessed on
20 October 2015
https://www.cia.gov/library/publications/the-world-factbook/geos/ei.html accessed on 19
October 2015
http://databank.worldbank.org/data/reports.aspx?source=2&country=IRL&series=&period
accessed on 19 October 2015
www.irishtimes.com/news/welfare-to-be-cut-by-2-8-billion-1.867822 accessed on 21
October 2015
http://europa.eu/eu-law/decisionmaking/treaties/pdf/treaty_on_european_union/treaty_on_european_union_en.pdf
accessed on 18 October 2015
www.imf.org/external/pubs/ft/survey/so/2010/car050210a.htm accessed on 18 October 2015
www.theguardian.com/world/2011/nov/06/greece-george-papandreou accessed on 18
October 2015
DYNAMIC OF ECONOMICS CRISIS IN EUROPE
European Study
Lecturer: Aswin Ariyanto Azis, S.IP., M.Devst
Group 3:
HI English Class 1-5
Arif Dwijatmiko
135120407121007
Muyassarotul Hasanah 135120407121027
Valiant Gandys Sukamto 135120407121045
Department of International Relations
Faculty of Social and Political Sciences
Brawijaya University
2015
A. Dynamic and History of Europe economic
1. World war 1
The dynamics of the modern European economy starts since the world war. Where in the
world war severe shocks that hit the European . First World War made the European should
replace their economic system on a large scale and after the second world war Europe find a
clarity about what changes they did and what they will get when it replace their economic
system. Although the future of Europe will have a major crisis. 1
World war seems bring about change in Europe. Particularly in the financial system and the
pattern of trade relations. World War. Especially the first world war seems bring benefits to
the United States. Economic Growth in the United States became very fast so it becomes the
center of the economic circulation across the Atlantic Ocean..2
Post-war problems experienced by Europe as the war that passed, the financial system is not
yet stable. And a debt that must be repaid, while the state budget are unable to sustain the
country's needs and pay off the domestic debt. But, in 1920, countries in Western Europe
prefer to do the stabilization of the financial system of governance. Until the year 1922-1924,
the countries of Europe are looking for an institution that is capable bail out their financial
needs to carry out the reconstruction of the economic system and development.3
2. World war 2
At the end of 1920, the United States expand their investments in Europe. But, the investment
made by the United States seems is not much help Europe. This is because the investment
made by the United States is not much profitable for Europe. This situation continued until
the end of 1930 and there was a large-scale crisis (the Great Depression).4 Which causes the
1
James, Harold. The history and dynamic of Europe economy. Source : T.C.W Blanning, The Oxford History of
Modern Europe, Oxford University Press, 2000, p 186 - 211.
2
Ibid.
3
Ibid.
4
Europe Great Depression. Source : http://www.historytoday.com/patricia-clavin/great-depression-europe1929-39. Accessed : 22 October 2015 ( 02 : 09 )
real economic sector disturbed with financial systems that are not accordance. It is
characterized by declining asset prices of banks in Europe and lead to bankruptcy.5
Various efforts were made so that this global crisis does not happen again. Until John
Maynard Keynes 6, a British economist convey ideas through books he wrote "national selfsufficiency". In his book, he said that, the cost of tariffs implemented in economy will make
the to minimize the occurrence of deflation.7 While those countries are also advised does not
need gold as an instrument to standardize the country's economy8. Until the year 1935 - 1936,
the countries of Europe do some economic policies, especially in the real sector.
In the second world war, the destruction of the whole infrastructure make European countries
should improve the economic system back in it .. moreover, the economic system that has
been stabilized damaged because of inflation during the war and lack of price control. To
anticipate continuous damage, the united states ever to invest in Europe re-invest in the UK
bilaterally. In the end, American issued a policy marshall plan to restore stability in the
construction of Europe.9
3. Cold war
Entering the period of the cold war, two great powers that the Soviet Union and the United
States compete to attract the attention of the international community by spreading ideology.
One of the United States attempts to draw the attention of the European community by
providing foreign aid. Foreign aid is known as the "Marshall plan". Marshal plan contained in
the program launched by the secretary of state of the United States that is George C.
Marshall.10 The program is held to reconstruct Europe devastated by war.
As long as time goes, the cooperation with economic development in Europe growing in
several specific fields. For the examples bellow :
5
Insolvent European bank. Source : http://www.spiegel.de/international/europe/the-germans-have-learnednothing-from-history-a-838429.html. Accessed : 22 October 2015 ( 02 : 17 )
6
John maynard Keynes. Source : http://www.britannica.com/biography/John-Maynard-Keynes. Accessed : 22
October 2015 ( 02 : 44 )
7
Tarrif to minimize deflation. Source : http://www.bankrate.com/finance/investing/5-ways-to-outlastdeflation-1.aspx. accessed : 22 October 2015 ( 03 : 01 ).
8
Key es reje ted gold sta dard. Sour e : Meltzer, alla H. Key es’s Mo etary Theory,a differe t i terpretatio
, Cambridge university press, 1990. p 48 – 49.
9
Marshall plan foreign aid. Source : https://history.state.gov/milestones/1945-1952/marshall-plan. Accessed :
22 October 2015 ( 03 : 24 )
10
Founded marshall plan. Source : http://marshallfoundation.org/marshall/the-marshall-plan/foreignassistance-act-1948/. Accessed : 22 October 2015 ( 03 : 40 )
1) ECSC ( European Coal and Steel Community )
The French Foreign Minister, Robert Schuman, in his famous declaration of 9th May
1950, proposed the establishment of the Common Market treaty Coal and Steel
Europe or the European Coal and Steel Community (ECSC) by the six countries,
including France, Germany, Netherlands, Belgium, Luxembourg, and Italy. Six
countries furthermore called The Six State. The success of ECSC encourage countries
The Six State form a common market that includes economic sectors.11
2) EEC ( European Economic Commmunity )
The European Economic Commmunity Treaty, also known as the Treaty of Rome,
was signed on 25th March 1957. The EU states brings together France, Germany, Italy
and the Benelux countries in a community whose aim is to achieve integration via
trade with a view to economic expansion.
12
In 1981 Greece joined the EEC which is
then followed by Spain and Portugal. Thus the EEC membership by 12 countries.
3) Euratom ( European Atomic Energy Community )
European Atomic Energy Community (Euratom), international organization
established by one of the Treaties of Rome in 1958 to form a common market for the
development of the peaceful uses of atomic energy. The original members were
Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands. It
subsequently came to include all members of the European Union. 13
Europe Great Depression
Great Depression that occurred in Europe was first attacked England very dependent on
exports after the first World War and as a first country which left the Gold Standard make
Britain freed of the Great Depression. France is a country that might receive the most
minimal effects of the Great Depression because of two reasons, namely their economic
independence and the payment by the German number of 31.4 million dollars to make the
11
Europe union cooperation 1. Source : http://www.gurusejarah.com/2015/01/masyarakat-ekonomi-eropamee-atau-uni.html. accessed : 22 October 2015 ( 17 : 13 )
12
Europe union cooperation 2. Source : http://www.cfr.org/eu/treaty-establishing-european-economiccommunity-treaty-rome/p19864. Accessed : 22 October 2015 ( 18 : 02 )
13
French economy from shock-resistant Great Depression but in 1931 France fell in the Great
Depression that lasted until World War 2. 14
John Maynard Keynes is an economist from the UK proved to be later known as
Keynesianism. Keynes argued that the government's role in a liberal economic system is
important to provide an economic model that can be predicted based on economic indicators
that could be used by policy makers.15 Keynes gave new thinking to deal with the crisis by
suggesting the central bank in order to develop financial reserves to give the bill so that the
customer confidence back and will spend money.
Signs of the crisis started to appear since 1928 when agricultural conditions experienced
declination and the countries of Asia and Europe is stuck in recession. Then the events of
'Wall Street Stock Market Crash' in 1929 became the gateway to one of the most significant
depression in history. The Dow Jones Industrial Average in 1928 worth 191 increased
drastically to 381.17 points in September 1929.16
In addition, profit American market in 1928 worth 900 million USD to decline to 86 million
USD in 1929-1931. The stock market collapse would lead to a kind of domino effect, both in
the US and in other countries. Banks have failed in the insurance, the results of industrial
production decreased quantity, as well as the enactment of 'Smooth-Hawley tariff'17 as a form
of policies to protect American companies in Europe are examples of major depressive
impact for the United States.
Outside the United States, the economic crisis also hit other parts of the world. US aid to
Europe in the context of economic reconstruction after World War I hampered due to the
crisis, so that the European countries directly affected. The world unemployment rate
increased during 1929-1932 and even industrialized countries like Britain and France became
14
Great depression of Europe. Source : http://hafizabdillah-fisip11.web.unair.ac.id/artikel_detail-78132Ekonomi%20Politik%20InternasionalEra%20Great%20Depression:%20Kemunculan%20Keynesianisme%20dan
%20Fordisme.html. Accessed : 22 October 2015 ( 06 : 12 )
15
Balance economic system Keynes. Source :
http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm. Accessed : 22 October 2015 ( 06 : 37 )
16
Signs of great depression.
17
Smooth Hawley Tarrif. Source : http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html.
accessed : 22 October 2015 ( 18 : 32 )
the largest donor in the unemployment rate. We can see the increased data o unemployement
in this statistic data bellow 18:
Year
Population
Labor
Force
Unemployed
Percentage of
Labor Force
1929
88,010,000
49,440,000
1,550,000
3.14
1930
89,550,000
50,080,000
4,340,000
8.67
1931
90,710,000
50,680,000
8,020,000
15.82
1932
91,810,000
51,250,000
12,060,000
23.53
1933
92,950,000
51,840,000
12,830,000
24.75
1934
94,190,000
52,490,000
11,340,000
21.60
1935
95,460,000
53,140,000
10,610,000
19.97
1936
96,700,000
53,740,000
9,030,000
16.80
1937
97,870,000
54,320,000
7,700,000
14.18
1938
99,120,000
54,950,000
10,390,000
18.91
1939
100,360,000
55,600,000
9,480,000
17.05
1940
101,560,000
56,180,000
8,120,000
14.45
1941
102,700,000
57,530,000
5,560,000
9.66
Another case, cold war together happened with great depression. As the solution for this
uncertainity situation. US government cooperation together with UK encourage the holding
of the Bretton Woods conference in 1944. The purposes of Bretton woods conference are
1. Encourage the reduction of tariffs and other barriers to international trade.
2. Created a global economic framework to minimize the economic conflict between
state.
Inspiring from the Bretton woods conference, two financial world institutions has successful
creates are, IMF ( international Monetary Fund ) and World Bank. 19
18
Unemployment during great depression. Source : http://www.u-s-history.com/pages/h1528.html. accessed :
22 October 2015 ( 19 : 21 )
B. The Economic Crisis in Europe
The crisis in Europe in 2008, recalling the existence of an economic integration,
create an instrument of the economic interdependence finally interrupted. An integration that
are made, even seemed a domino effect for the countries of the European Union (EU) in
particular. Starting disruption Great Depression in 1930. Then, in the 2000's, the crisis hit
back in the EU, cause quite complex. The crisis was preceded by a long period of rapid credit
growth, low risk premiums, abundant availability of liquidity, strong leveraging, soaring asset
prices and the development of bubbles in the real estate sector20. And this is a form of post
1930's biggest drop.
In 2009, European Union real GDP is projected to shrink by some 4%21, it
experienced a significant reduction in the Eropean Union's history. Receivables that hit
Greece, caused the crisis spread to countries Ireland, then Portugal. Debt guaranteed by
Greece exceeds the GDP of the country, as well as the state spending deficit, and that's when
the crisis began payable by European countries began to open to the public. The integrated
system22, making the Eropean Union as the top circle constrained state budget deficit, and the
low ratio of GDP one country alone coating, can make other countries affected. This can be
caused due to the banking system of interlocking
The crisis led to a domino effect, because with the establishment of a standardization,
inevitably makes the EU countries must show that the best standards are considered to have
good capability among fellow members of the European Union. Domino effect is a chain of
problems that occur on an object that will ultimately cause the surroundings to feel the
impact23. Domino effect, just like a inflation, which, if one of the modes of goods rose, surely
others will follow up the price.
19
Bretton woods system. Source : http://www.vifcorps.com/trading-education/in-brief-literatures/1107bretton-woods-sebuah-sistem-perekonomian-dunia. Accessed : 22 October 2015 ( 20 : 12 )
20
Economic and Crisis in Europe: Causes, Consequeces and Responses. European Economy 7;2009. European
Commission, Economic and Financial Affairs. Luxemburg. Page. 1
21
Economic and Crisis in Europe: Causes, Consequeces and Responses. European Economy 7;2009. European
Commission, Economic and Financial Affairs. Luxemburg. Page. 1
22
Write on (Krisis Keuangan Eropa: Dampak terhadap perekonomian Indonesia). Tinjauan Perekonomian
Triwulan IV/2011. Kementrian Perencanaan Pembangunan Nasional. Jakarta. Page: Ringkasan Eksekutif.
23
http://www.cbsnews.com/news/eurozone-seeks-to-stop-debt-crisis-domino-effect/ accessed on 21 October
2015
a. Factors causing the European’s Economic Crisis in 2008
If viewed in general, the main cause is due to the integration itself, create self-awareness
of each country becomes less, and rely on the core countries in the EU, and there are several
internal and external factors. The part of the euro Began when EU leaders agreed to launch an
economic and monetary union (EMU), with a single currency (integrity), as part of the
Maastricht Treaty signed in 1992. After Several years of preparations, involving completing
the single market and establishing the European Central Bank24.
Sources: Washington Post, 2012
Picture: The Rank of European Debt in 2011
1. The existence of homogeneity currency (Euro) - Internal Factor
Integration implemented the EU since 1998, using the single currency Euro,
making the European Union as the best region in the world. Committee Chairman
named Jagland, who told Reuters on Friday (10/12/2012), said that this proves that the
integration of the European economy has grown, this makes the integration of the
24
Writen on Economic and Monetary Union and the Euro.2012. European Commission.Luxemburg. page 3
European Union won the Nobel for the success uniting the countries in the
continent25.
National interest remains a major obstacle in the process of integration.
Europe's economic crisis arose as a result of a lack of transparent accounts payable
reports EU countries, thus reveal the value of state expenditures on GDP makes this
crisis quickly spread to other countries. Euro, as the face of the economic success.
However, domestic sentiment people who already feel disappointed because of the
impact of an economic integration, affecting how the preventive policy that slow
walk. Delays in aid of strong economic countries of Europe, making the country
increasingly colapsed slumped26.
2. The Real Estate Crisis in the U.S - External Factor
From the data cited by Deutsche Welle (DW), seen from the side of Germany,
as the current state of the strongest economies before the crisis of 2008. The crisis of
Europe, starting with the German Development Bank (KfW), providing aid to the
investment bank Lehman Brothers, which went bankrupt due to crisis shares in the
United States, caused by price speculation mortgage (developer) in the United
States27. Granting and preventive efforts have made Germany, to avoid this crisis
flows to Germany, as a result of the cooperative relationship between the German
Development Bank, the Investment Bank residential mortgages in the United States.
And make the German finance minister, Peer Steinbruck, must intervene and provide
substantial funds to rescue the German Development Bank, around 500 Billion
Euro28.
3. Germany Mastered The Central Bank in The European Union - Internal Factor
25
http://europa.eu/about-eu/basic-information/eu-nobel/index_en.htm accessed on 21 October 2015
Writed on journal by Indra Kusumawardhana. 2013. European Union in Crisis : Menguatnya Pandangan
Berbasis Kedaulatan di dalam Krisis Ekonomi Uni Eropa. Jurnal Hubungan Internasional Universitas Airlangga.
Page. 4
27
http://www.dw.com/id/tahun-2008-tahun-sulit-bagi-perekonomian/a-3901915 accessed on 21 October
2015
28
http://www.nytimes.com/2008/09/18/business/worldbusiness/18iht-kfw.4.16285369.html?_r=0 accessed
on 21 October 2015
26
Preventive measures undertaken by the EU, i s to go down his government in
rescuing the economy. Protection was then carried out and to help give advice to the
troubled country. But the failure to rescue banks in Europe, which is a value erosion
of sovereignty over the economy, inability of a state entity to avoid and save the
economy respectively. This is less than the system integration of the Euro. Germany
as the strongest economy in Europe, and entered the ranks of the country's largest
exporter in the world, making the country's foreign exchange reserves large enough29.
Bundesbank, also The European Central Bank was held in Germany, thus making the
country has influence in the movement of the economy. The process of forming an
integrated bank started in 1994 to 1998 from, the European Monetary Institute (EMI),
EMI itself aims to strengthen cooperation among banks in Europe, as well as a
forerunner to the creation of EMU (Economic and Monetary Union) of Europe30,
EMU as the goals of integration prospect itself, depend how it belong.
b. Advantages and Disadvantages of Economics Crisis in Europe
Advantages
1. Economic Reformation
Economic reforms in Greece. The economic crisis that convolute the
country, making the prime minister, Alexis Tsipras, create a policy for the
holding of a national referendum31. For the sake of determining whether
the country continue to receive emergency funding from the European
Central Bank, but with a variety of binding rules, or not to accept, but with
the risk borne by the state itself, as well as the escape of the single
currency Euro.
2. Strengthening economic policy rules
29
Germany country overview http://www.bbc.com/news/world-europe-17299607 accessed on 21 October
2015
30
http://www.bbc.com/news/business-18868704 accessed on 21 October 2015.
31
http://www.bbc.com/indonesia/dunia/2015/06/150628_dunia_yunani_referendum_hutang accessed on 21
October 2015
The European Union made a post-crisis policies, by creating a new
financial fence, called, the European Stability Mechanism (ESM)32.
Namely to provide assistance to countries of the European Union which
are considered to the crisis, these funds aim to maintain the stability of the
euro currency in the market. Remains conditional aid, which must ratify
the treaty for economic coordination.
Disadvantages
1. Economic Gaps
EU countries seem indeed uneven economic circumstances, but on the
other hand they are also there are gaps. Countries such as France and
Germany seem superior, because their economies are big and strong.
While countries in the eastern region, which is actually a new state, still
has not been able to compensate for the economic situation as France and
Germany33. Differences in economic interests that caused the gap. Western
Europe dominated by economic cooperation on banking liquidity, while
central and eastern Europe, is still in the stage of completion eradication of
poverty and unemployment.
2. Slow Recovery of Crisis
EU action is slow to resolve the crisis, is one proof that the integration is
not always good for the region. Because of homogeneity is not forever
lasting. Political interests of each country is still different34. The countries
affected by the crisis, keeping in view that help keep their hope because
the country has a bond with the regulations to implement the Economic
and Monetary Union (EMU) in the EU. But the countries of the European
Union saw that the countries affected by the crisis is not an independent
country, and has poor credibility in the country's financial planning, as
well as domestic spending.
32
http://ec.europa.eu/economy_finance/explained/the_financial_and_economic_crisis/responding_to_the_deb
t_crisis/index_en.htm accessed on 21 October 2015
33
http://europa.eu/rapid/press-release_SPEECH-14-722_en.htm accessed on 21 October 2015
34
http://www.wsj.com/articles/SB10001424127887323838204578654341905240144 accessed on 21 October
2015
C. Case Study
1. Crisis in Portugal
Portugal is a country in the southwestern edge of Europe, located in the Iberian Peninsula.
Population in Portugal in 2011 amounted to 10.7 million. Portugal is a major exporter of
clothing, wood products, and electrical equipment. Portugal uses the Euro as the main
currency of the country.
Source: http://news.bbc.co.uk/2/hi/europe/country_profiles/994099.stm
Picture: Portugal at a Glance
Unlike Greece and Ireland, where the economy has sustained high growth before the crisis,
Portugal experienced a low growth since 2001. In 2003, Portugal went into recession (-0.9
per cent), together with Germany (-0, 2 percent), they are countries with negative growth. In
the same year, the Greek economy increased up to 5.9 percent and Ireland up to 4.4 percent.
Portugal ended the 2009 with budget deficit equal to 9.3 percent of GDP. The deficit
increased when compared to 2008, which amounted to 6.6 percent of GDP. While for 2010,
Portugal's budget deficit is expected to reach 8.6 percent of GDP. Far beyond the EU limit of
three percent of GDP. This makes the two rating agencies, namely Moody's and Fitch gives
negative outlook on Portugal. That outlook failed to improved after Portugal deemed
incapable of fulfill promises to reduce the deficit. Portuguese government promises able to
narrow its budget deficit to below three percent of GDP in 2013, but the rating agencies
assess Portugal's budget deficit in 2013 still on 3.8 percent of GDP. Negatif rating also make
undermining confidence in the Portuguese economy.
In March, Portugal began to make austerity budget. The Government announced a
package of austerity measures, including cuts in public spending and tax increases. All steps
were taken to reduce the budget deficit Portugal. Worsening of financial crisis in Portugal
forced the government to request financial assistance to the European Central Bank and the
International Monetary Fund (IMF). On May 2, 2010, the IMF finally approved a bailout
package of € 78 billion for Portugal. IMF aid was immediately used to cover the state deficit.
Victor Gaspar, who served as finance minister said that if in 2013, Portual will raise the
income tax from 9.8% to 13.2%. Moreover, Portugal make efforts to cut the state budget.
Not only Portugal, Greece and Ireland also suffered debt crisis in 2010. Together the
debt crisis of the three countries marked the start of Europe's debt crisis.
2. Crisis in Ireland
Ireland is a modern small country. Ireland has a designation called Celtic Tiger35,
which means the most shining light in Europe. Designation was obtained to Ireland since
successfully established an advanced economy. The golden years the Irish economy started
from the participation of Ireland to join the European Union. Ireland officially join the EU on
1 January 1973.36 At the beginning of joining the European Union, Ireland faced a series of
systems that are not ready yet.
35
How Ireland Became the Celtic Tiger, www.heritage.org/research/reports/2006/06/how-ireland-becamethe-celtic-tiger accessed on 20 October 2015
36
Ireland in the EU - Joining the European Community,
ec.europa.eu/ireland/ireland_in_the_eu/index1_en.html accessed on 20 October 2015
However, the golden age was changed when the economic crisis hit Europe. In 2007
Ireland enjoy relatively high economic growth in the scale of Europe, which is about 6.5%. 37
But, Irish economic crisis began to be felt in 2008. Ireland has a debt which is larger than its
GDP. The debt ratio reached 148 billion euros in 2011. Ireland was faced with decreasing of
revenues and large budget deficits as a result of the eurozone debt crisis. Here is a table
showing the economic growth rate of Ireland from 2006 until 2012:
No
Year
Percentage
1
2006
5,3%
2
2007
5,2%
3
2008
-3,0%
4
2009
-7,0%
5
2010
-0,4%
6
2011
0,4%
7
2012
1,5%
Table of Irish Economic Growth (2006-2012)38
To overcome this serious crisis, Ireland a decision to reducing the minimum wage and
reducing the social welfare budget up to 2.8 billion euros. 39 Not only that, the deficit was
reduced through a reduction up to 25,000 civil servants and pensioners pay cuts. But austerity
is not enough. Finally, Ireland asked for help to the IMF and the European Union. The EU so
far has helped Ireland by provide a bailout. Ireland has received a bailout from the EU and
the IMF as much as 85 billion euros, equivalent to $ 111 billion in November 2010.40 Bailout
program has several preconditions were quite heavy. The Irish government should run budget
savings program by raising taxes within four years and run the spending cuts program.
The conditions of bailout proposed by the European Union is responded by Prime Minister
Enda Kenny with save 6 billion euros which earned from spending cuts, tax increases, and others
ways so that the deficit can be dropped off at the level of 7.0%. This optimism was forwarded with
37
Ireland Economy. https://www.cia.gov/library/publications/the-world-factbook/geos/ei.html accessed on 19
October 2015
38
http://databank.worldbank.org/data/reports.aspx?source=2&country=IRL&series=&period accessed on 19
October 2015
39
Welfare to e ut y € .8 illio , www.irishtimes.com/news/welfare-to-be-cut-by-2-8-billion-1.867822
accessed on 21 October 2015
40
Irela d to re ei e €85 illio ailout at 5.8% i terest rate,
.irishti es. o / e s/irela d-to-receive-85billion-bailout-at-5-8-interest-rate-1.868001, accessed on 20 October 2015
deficit target in 2014 up to 2.8%.41 The Irish government's efforts to bring his country out from the
economic crisis seems to produce results. Although not yet fully recovered, with economy grew up
to 1.6%, is not wrong if Ireland is placed as the first rank of euro zone countries which able to
recover from pain of the debt crisis.
3. Crisis in Greece
The economic crisis in Greece in 2008 began when Greece was unable to pay a debt
of 4 billion euros to the US, Germany, Britain, France, Portugal, and Italy. A lot of Debt to be
paid by Greece due to the poor performance of the Greek bureaucracy such as a lot of
corruption, poor tax administration, and waste of budget funds. It made Greece must go into
debt to cover the needs of state spending. At the beginning, Greece's membership in the
European Union and the euro zone is not easily accepted. There are several requirements that
must be fulfilled by Greece to become members of the European Union. The The requirement
such as stable political conditions and have the economic capacity so it will not disturb the
stability of the European Union. Although Greece does not have a stable economy, but
Greece still trying to join the European Union.
At the time of going to join the euro zone, Greece does not meet the requirements
specified in the Maastricht treaty. Maastricht Treaty contains the criteria for member
countries of the European Union to enter the third stage of European Economic and Monetary
Union (EMU) and adopt the euro as its currency.42 Greece is not fulfill these criteria because
of inflation, budget deficits, debt, and interest rates which high and it is feared would
destabilize the euro zone. However, in January 2002 Greece officially became a member of
the euro zone because they meet the requirements.43
In 2000 until 2007, Greece recorded a growth of economic up to 4.2% per year and it
is the highest rate in the euro zone.44 The economic growth in Greece is the result of a lot of
foreign investment into the country. However, the situation turned around when the post2008 global crisis where other countries began rise from the recession. The main economic
41
Irish economic forecasts: recovery to gather pace this year,
https://www.davy.ie/research/public/printPdf.htm?id=econforecast20140812_11082014.htm , accessed on
19 october 2015
42
Maatricht Treaty, http://europa.eu/eu-law/decisionmaking/treaties/pdf/treaty_on_european_union/treaty_on_european_union_en.pdf accessed on 18 October
2015
43
Greece and the euro, ec.europa.eu/economy_finance/euro/countries/greece_en.htm
44
Ersi Athanassiou, Fiscal Policy and the Recession: The Case of Greece, page 1
sectors of Greece, which is sectors of tourism and shipping recorded a decline in revenue up
to 15%.45 Then in May 2010, Greece has caught a deficit of up to 13.6%.46 One of the main
causes of the deficit is the number of tax evasion cases, which is detrimental to the country up
to US $ 20 billion per year.
After a long time joined the European Union, Greece has been fudging their debt. The
EU finally know the information because of the suspicion on the growth of Greek economy.
Counterfeiting Greek report which has succeed in fooling the European Union for years make
the international community doubted to the credibility of European Union. European Central
Bank as policy makers in the euro zone faced with two difficult choices. The first option is to
let Greece go bankrupt or default and excluded from the euro zone.
In May 2010, when the Greek crisis increasingly precarious, consular of Germany
said that EU need help from the IMF to overcome the crisis. With the involvement of the
IMF, it can be said EU has been deadlocked and did not have any other solution to solve the
Greek crisis. They agreed to provide a bailout for Greece to calm down the global investors
and businessmen which have investments in other euro zone. To get the bailout, Greece must
carry out its obligations as a consequence of the bailout. Greece must do the budget cuts,
wage reductions and delays pension fund for three years, and a tax increase to overcome
fiscal and debt problems of Greece and restore the Greek economy.47
The bailout was responded with major protests, including a major strike of civil
servants accompanied by huge protests in the streets of Greece.48 Two main Greek unions
also preparing a strike. Greece increasingly chaotic economic conditions when the social
crisis occurred, increased unemployment, public protests, and also the Greek political
situation heats up. Prime Minister of Greece, George Papandreou that comes from the
Socialist Party suffered a lot of pressure from the cabinet so that on 11 November 2011, he
chose to resign.49 Since that time the Greek economy becomes very fragile and weak. Greece
45
A Different Solution For The Greek Tragedy, deutsche-wirtschafts-nachrichten.de/2015/07/08/a-differentsolution-for-the-greek-tragedy/
46
Gree e’s So ereig Debt Crisis: Retrospect and Prospect, eprints.lse.ac.uk/42848/1/GreeSE%20No54.pdf
47
Europe a d IMF Agree €
Billio Fi a i g Pla With Gree e,
www.imf.org/external/pubs/ft/survey/so/2010/car050210a.htm accessed on 18 October 2015
48
Nationwide Strike Follows Latest Round of Greek Cuts,
www.wsj.com/articles/SB10001424052970203388804576612261343333114 accessed on 17 October 2015
49
Eurozone crisis: Greek PM George Papandreou to resign,
www.theguardian.com/world/2011/nov/06/greece-george-papandreou accessed on 18 October 2015
continuously acted by debt to other countries and ask a lot of assistance from advanced
countries.
D. Conclusion
The crisis in various European countries turned out for this is due to the same thing.
The cause is before the crisis occurred in the United States in 2007 was named House
Bubble. The bankruptcy of Lehman Brothers that creditors come from countries in Europe to
make impact to Europe. In addition, the amount of debt compared to income European
countries make it a crisis occurs. The EU does not just sit crisis that occurred in the countries
of its members. The European Union crisis management similar to the countries in Europe.
Handling it as suggesting a strict policy by raising taxes to do a budget saving. The EU has
also invited the IMF to provide bailouts to European countries affected by the crisis.
Although European countries get the same treatment, but the results achieved are
different. Ireland managed to restore its economy slumped. However Portugal and Greece is
still struggling to deal with the crisis until today. This shows that every country requires
different handling of the crisis based on the circumstances that happened. In addition, the
European Union must act decisively to impose sanctions on countries that do not fit standard
Maastrich treaty. This is because of the same coin has its advantages and disadvantages. In
this case, the single European currency a domino effect which states that the crisis could
spread to other countries.
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