The European Union is a political and economic union which was created in 1958 after the Second World War to form a single market which would enhance economic growth and political stability among the members. The 27 member countries have established rules and laws that have encouraged economic growth and the Union offers inter-regional trade blockades to facilitate a common external tariff against other countries. This ensures a common agricultural policy and enhances free movement of labor and capital. The European Union usually establishes common policy aimed at obtaining political, economic and monetary integration (Molle, 2001 p. 54). The union which brought together the member countries into a “European Economic Community” enjoyed trade within the region where quotas and custom duties were removed while at the same time sought to form a common external tariff for the member countries’ products. Since inception, the European Union has played a vital role in fostering trade and economic cooperation between the member countries. Some of the members of the European Union include United Kingdom, Germany, Italy, and Belgium among others (Loukas, 1997 p.112).
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One of the major achievements of European Union is that it possible for the members to have their own financial systems and at the same time operates with the same currency. The reason behind single currency was that it could make transaction easier since with the single currency, price comparison do not exist. These would result in less market segmentation (Farina, 2007 P 22).
One of the European Union’s goals is to enlarge European Economic Community to the rest of Europe. However, various policies advocated by the European Union bring about major discrepancies. This is mainly because it is hard for these policies to be widely operational in all European countries which have different national interests. By the year 2007, the members of this union were 27 in number (Egan, 201 p. 12). European Union has faced a major recession since 1930s and the GDP was projected to decline by 4% in 2009. This has created worries among European countries. Major issues are raised concerning the foundation of European Union. This paper seeks to address the issues which make many people question the foundation of European Union in the light of expansion of Europe (Arestis and Sawyer, 2001 p.12).
Macroeconomic issues that hinder expansion of Europe
The European Union enacts macroeconomic policies, mainly fiscal and monetary policies, which are to guide the economic sphere of the member countries (Wallace and Wallace, 2005 p.23). However, these policies have been widely criticized and cited as some of the major drawback to the expansion of Europe. Some of those macroeconomic issues that hinder economic expansion in Europe include the following:
For instance, the regulations of labor have made the process of economic integration very difficult. The laws have created a condition for the unemployment to thrive in the workforce. This in turn leads to a permanent loss of skills. With high unemployment, the European Union members such as Poland usually fear that there might be a flood of cheap labor and this would burden the welfare state. Therefore, the member countries from strong countries such as Germany and France have been hesitant to accept the weaker economies of the countries in the Eastern Europe (Wallace and Wallace, 2005 p. 123).
Labor mobility between the European Union member countries is very restricted. There are many cross-border impediments which affects labor mobility. This compromises development and expansion of Europe. Social and Economic Council Reviews SER (2010) has pointed out several defects in the European legislation which govern free movement of workers and their implementation (Baily and Kirkegaard, 2004 p. 167). Many of the defects which hinder free labor movements revolves around the rights of employees who are on short contract and those seeking jobs, exclusion of those from-non members of the European Union, access to some occupations due to lack of recognition of qualifications, provision of information regarding labor demand and supply in the European Union and the lack of proper coordination of pension schemes in Europe (O’Mahony, 2003 p. 23). Giving an example, the access of certain occupation is only allowed to the people from the member countries, for instance, Portugal has been hesitant in allowing medical practitioners from countries with low economies like Poland to access employments. This hinders those from non member countries from getting those positions. This means that expansion of European continent is hindered since there is low mobility of skills (Hannon, 2000 p. 152).
The union brought a condition whereby the member states no longer are restricted to adjust the exchange rate at their disposal. Completion of wage policy develops uniformly now. This means that the wage growth in European Union countries now corresponds to the total rate of inflation rate and level of productivity of the country. The disadvantage of this is that trade unions are weakened (Nelson and Winter, 1982 p.124). This has brought major worries among countries in Europe because only the rich countries benefit from such policies whereas the labor market in those weaker economies is greatly affected. This is more evident when macroeconomic problems such as inflation arise. If we look in greater length, it is very clear that the bargaining power levels of European Union members’ trading unions are very different. Countries such as Germany, France and Netherland have strong trading unions compared to countries such as Denmark and Luxembourg. This is the reason that makes many people argue that the Eurozone should enhance coordination of those wage policies so as to eliminate the distortions of competition as well as preventing major imbalances of trade between European countries (Claudio, 2010 p. 2).
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Various macroeconomic policies enacted have affected the level of investment. Policies that put hefty tariffs to the non member countries have greatly affected mobility of capital between Eastern and central European countries (Agell, Calmfors, and Jonsson, 1996 p.1413). Therefore, the stock of equipment and the infrastructure continues to decrease. European Union economic policies also fail to create a condition for more private and public investments in research, education, stocks of equipments and the infrastructure. This questions the foundation of European Union (Intergovernmentalist Approach, 1994 p.61).
The European Union members peg their transactions on euro. In the event of inflation, this creates major discrepancies especially when monetary measures are tightened to correct inflation, some countries benefit more than others (Nelson and Winter, 1982 p.11). European Economic and monetary Union usually monetary check operate through a common central bank, that is, European Central Bank (El-Agraa, 2007 p. 39). It also consists of common convergence criteria which are meant to prevent the member nation from formulating their own monetary policies. The major reason behind such formation was that, there would be creation of strong currency, the rates of interest would be low and the prices of the commodities go down. This would bring about an increase in economic growth (Williamson, 1985 p. 63). However, due to absence of national monetary policy, the country can only remain competitive by lowering the cost of labor and increasing productivity. This makes it very difficult for the expansion of trade in Europe (Farina and Tamborini 132). Some monetary policies advocated by the Union presents major effects in some countries, take for instance the in 2007, European central Bank advocated cut-down on interest rates. These greatly affected Ireland which experienced high inflation (Sapir et al, 2003 p.1).
Application of common fiscal polices among the member state is usually tricky and often brings major problems. The aspect of moral hazard makes many people question the application of these policies (Tsoukalis 34). A country can engage in a certain act with knowledge that it would not suffer the full consequence since it under the umbrella of the union. For instance, a member country can choose to run a high budget shortfall and further build up debt with expectations that it wouldn’t suffer the full cost of such actions because the European Monetary Union members would bear some of the costs (Neill 56). This is what Greece did in 2004 whereby it hiked the interest rate. What followed later was a great inflation and the spill over effects were greatly shared by other members of the union (Nugent, 2006 p.172).Another major issues that arises includes the fact that there is no mechanisms put in place to ensure effective control of member states’ budget policies which would comply with the maastricht treaty debt criteria.
There is an asymmetry between monetary and fiscal policy in the European Monetary Union that prevents the union from attaining an effective policy mix in order to coordinate monetary and budget policy too (Pelkmans, 2006 p.154, Sapir et al, 2003 p 1).
The way economic policies are managed by the European Union Communities raises major questions (Nugent, 2006 p.174). Policy decisions and implementation made by the EU are defective since the decision making process is imperfectly coherent across nations. Economic policies made by the EU fail to address the full scope of their effects across union and non members. This has made management of these economic policies a difficult task (Egan, 2001 p.212). So far there has been a problem of putting effective framework that would check deviation in behaviors when it comes to fiscal and macroeconomic management at the countries level. Another thing that affects the management of the union’s economic policies is the lack of institutions to manage the crises when they arise. This probably is because, to put in place such institutions, it would require sufficient capital to enhance their operations. European Union also fails to provide variety of economic policies. This makes many people question its effectiveness. To expand European economies, a number of policies would be required tackling major issues in Euro area zone. These would include policies that check on labor markets, dynamics and cohesion of the people in the region, diverse fiscal policy as well as taxation policies. When we keenly examine the economic trends of Monetary Union recently we begin to understand that the economic achievement and how the current issues are analyzed by the people in charge of policy enactment in the Union and this clearly shows us that something needs to be done to enhance economic performance (Dyson, 2000 p. 123).
European Union economic policies have in a great way made tremendous contributions in enhancing economic union among the member countries. However, it has been a main hindrance in the expansion of Europe. Some of the economic policies it enacts seem to hinder rather than create conditions favorable for the expansion of trade in Europe. Various macroeconomic policies clearly reflect the reason behind sluggish expansion of Europe. These policies have created situations such as low mobility of labor, low capital mobility, low investments and difficulties in their implementations and management. The weakness of the structure of economic policy has been evident especially in the Euro zone. These questions raised by the majority of people concerning European union foundation revolve mainly around economic policy which has brought further reaching effects in the social and political spheres in the whole of Europe. For there to be expansion in Europe, the European Union can only enhance its economic terms to allow many countries to join. However, this seems impossible. To enhance trade and remove many macroeconomic problems when they arise, a mix of both monetary and fiscal policy is needed in the Eurozone and the rest of the Europe.
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