The European Union’s Doom

The European Union’s Doom

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Trading across the borders of nations with amiable relations and tensions or wars between belligerent countries has long been prevalent. In the 1940s (i.e post World War period), most of the European nations were mostly in wars with each other.  To pacify the continental relationships and to increase trade amongst the nations, European Coal and Steel Community was founded by six nations viz Belgium, France, Germany, Italy, Luxembourg and the Netherlands.  However there followed continued cold wars and protests between the Eastern and Western Europe. Hence Treaty of Rome was signed in 1957 to allow people and commodities to move throughout Europe. Many countries joined in and eventually a single market and a common currency were achieved amongst 27 member states which today comprise of the European Union.

It is important to understand that primarily there are five levels at which trade or economic integrations happen. First is the “Free Trade” whereby tariffs between member states are significantly reduced or abolished between the member states. Tariff is the tax imposed upon the imported goods and its reduction can boost economic efficiency greatly. Second is the “Custom Union” when not only “Free Trade” has been established but the member states or nations impose the same tariff to the non-member nation. Thus competitiveness amongst the union is decreased and a greater unification happens. Third is the “Common Market” when the factors of production are rendered mobility across the borders of the member states. Therefore a worker of a member country can freely work in any other state/country of the union. Fourth is the “Economic Union” when the monetary and fiscal policies are harmonised and also a monetary union via a single currency is seen. Fifth is the “Political Union” when a common government exists between the member states, thus reducing the sovereignty between the members.

Today European Union stands at the fourth level of economic union with a single currency, free trade and liberal mobility of labour and commodities across the member nations.  However after the subprime mortgage crisis when many US based financial institutions crashed due to loan payment delinquencies and the Greek debt crisis when suddenly the markets entitled the Greek bonds a “junk” status after news of exceptionally high Greek government debt reached the market, the very backbone of the Union was shaken. But the current news of its member state Cyprus’s financial failure has struck it really bad. Certainly there’s been a crash in Europe. They’ve so far avoided the depression part although not everywhere as Greece is under threat, Spain possibly along Portugal lined up for a non-cash economy. Clearly, there are more ways to get into a depression than just cascading bank failures but looking into Friedman’s explanation, we know that cascading bank failures can cause one. And the way not to have those is deposit insurance.

What have been done in Cyprus? They’ve removed deposit insurance. They’ve therefore removed one’s defence against bank failures by calling it a tax. The bailout to the economy through high tax levy on savings and funds in the banks was something unexpected and not even in the wildest dreams of the people who had entrusted their life-long savings to the banks with expectations of having them intact or incremented in future. If the citizenry believe that they don’t have deposit insurance any more then there shall be more mass withdrawals from banks leading to more bank failures. And cascading bank failures are exactly the thing that could tumble Europe into a new and probably a deeper depression.