The European Union is currently experiencing one of its worst financial crises since the formation of the regional body in December 1991. So far, three countries namely Greece, Ireland as well as Portugal have admitted facing huge national debts while Spain and Italy are facing the danger of slumping into serious debt crises. European leaders have been putting efforts together since the onset of the crisis in a bid to control it and prevent from exploding into a global crisis. One of the proposals suggested for remedying the situation is the adoption of a fiscal union, a decision that has received objection from other member states such as Britain. This report analyzes how effective the decision to move towards a fiscal union would be in solving the debt crisis.
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The forging of a fiscal union
European leaders passed a resolution in December 2011 that would force member states to be forwarding their budgets so as they can be reviewed centrally by the European Commission before being given the nod for execution. The reason for this decision is to cap deficits that have been witnessed and sighted as the cause of the current problem. However, this decision was not unanimously consented to. Britain objected it while three other member states said they were open to it although they did not agree directly.
Countries will strictly be required to balance their budgets. The maximum limits of budget deficits have been set at 0.5% of their gross domestic product. This rule is only exceptional for special cases while those who fail to adhere to the rule would be punished by a correction mechanism that functions automatically. Countries pushing for Europe’s fiscal union, mainly Germany and France are sighting several advantages that would benefit member states and by extension the entire Euro zone (Melvin para 3).
Benefits of forming a fiscal union
Adopting a common currency unit will bring to an end currency instability within the member states. This will be achieved by fixing currency exchange rates irrevocably. The Euro will withstand speculation as compared to individual currencies by virtue of its enhanced credibility owing to its wider use within the currency zone. Exporters will be more advantaged as they will be in a position to look into the future and project the markets with certainty due to reduced instability of the external currency. This is in itself a potential for growth.
Red tapes will be minimized considerably during the transfer of huge sums of money in and out of different countries within the Euro zone. There will be no reason for consumers travelling outside boarders to change money and that will encourage cross-boarder trading. In the absence of a fiscal union, larger percentages of money value are lost in transaction charges. In the end business will be highly discouraged.
A fiscal union will effectively eliminate hedging costs which are incurred as insurance against currency fluctuations. International businesses will be saved from the burden of paying administrative costs to account for currency exchange and lost time. Small companies are the worst hit with estimates indicating that their currency cost incurred during exports is 10 times more than what multinationals are paying.
Germany’s pursuant of its monetary credibility will result into interest rates remaining low. This is because other countries will lock into this policy. The euro’s credibility in the international arena is greatly enhanced by the Dublin agreement back in 1996. This agreement is referred to as the stability pact, which was essentially a fiscal responsibility agreement. The direct benefit accruing from this is improved investment as well as creation of more job opportunities and affordable mortgages. Eventually, the EU economy will definitely be boosted.
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Limitations of a fiscal union
Although countries proposing for a fiscal unification of Europe have given valid reasons that could help in stemming current and future debt crises from hitting the region, other members have expressed doubts over the ability of such unification and have enumerated a number of reasons to back their stand (Emmanouilidis & Zuleeg 2).
One potential disadvantage for Europe in achieving maximum benefit from a fiscal unification is the lack of a common language spoken across the entire region. The United States, which is often sighted as exemplary in as far as fiscal union is concerned, uses a common language and also benefits from a mobile labor market. In contrast, Europe’s labor force immobility is largely attributed to language barrier. Cohesion funds have been set up to address this issue but the economic disparity across Euro zone is too big to be simply wished away.
Individual states are also apprehensive of the possibility of loosing their national sovereignty. This is already an ensuing difficulty. Economically stable countries are pointing at the prospect of co-operating with weaker countries in terms of economic policy and fear the latter’s more probable inclination to higher inflation. This is obviously expected since no country would be willing to lose its economic sovereignty for her neighbor.
Some countries also fear for their inability to control recession if at all they were to relax their fiscal policies as is stipulated in the Maastricht criteria. Countries will face the difficulty of devaluing as a strategy of encouraging exports, reducing taxes and creating more jobs by borrowing. The main barricade here is the existing public deficit criterion.
The differing cycles in which EU member states are at any given point is a factor that has often been raised as a threat to fiscal unity. The Eastern region is less developed as compared to their Western counterparts. The UK for instance has had an economic cycle closely similar to that of the US than it is in EU. A common central bank will not succeed in setting inflation for every member state at the right level (BBC News para 3).
Although a move towards fiscal union is set to emancipate the Euro zone from its current debt crisis, it is highly improbable that it will successfully address the issue. The huge economic disparity between Europe’s regions is the main underlying factor behind this inability. Large economies like France and Germany have remained adamant in bailing out other small countries like Portugal and Ireland out of their financial quadroon for fear of their economic recovery to full potential. The advanced economies feel they could easily be dragged into the financial crisis through over reliance by the economically weak states. The other hindrance to this objective is the lack of a common language that unifies all Europeans. Expatriates who would be instrumental in resuscitating the region’s economy have largely been confined within their states while other regions continue to languish in dire need of such services.
BBC News. Special report: pros and cons. 1997, Web.
Emmanouilidis, A. Janis and Zuleeg, Fabian. “Thinking beyond a fiscal union.” European Policy Centre. 2011. Web.
Melvin, Don. “Europe forges debt union to end debt crisis.” Mail & Guardian Online. 2011. Web.