Thomas Estrada GEWORLD_Y13

11910569 Reflection Paper # 2

History of EU

Before the European Union in 1993, there was a lot of war (specifically World War 2) and chaos
that happened before that made trading, business, and other social, economic, and political
matters difficult to conduct between countries. Specifically, on the financial aspect, it was hard to
conduct business with other European countries given that you have to exchange your local
currency for other foreign European countries which the transaction itself has a cost, and then
another transaction cost that these firms faced is the tariff costs that make transactions even more
difficult to conduct given these barriers. This in effect pushed for more European countries to
seek closer economic, social, and political ties that will achieve greater economic prosperity and
growth and military security in order to promote peace between European countries. This led to
the formation of the Maastricht Treaty on February 7, 1992. This Treaty/criterion was established
in order to be part of the European Union, this states that a member state must fulfill a set of
criteria in order to be deemed respected once entered the Eurozone and be secured that the
Stability and Growth pact is fulfilled in order to avoid the “free rider” issue in monetary zones.
Included in the set of criteria are fiscal spending that should be lower than 103% of the national
budget, debt to GDP less than 60%, low-interest rates, and low rates of inflation.

The Eurozone

On January 1, 1999, the Euro currency was introduced and EU member states and countries
started to adopt the currency and discontinued their own currency in effect. The turn to the Euro
currency made countries and member states relinquishing their control of monetary policies and
withdraw all monetary policies in their respective state, in turn, they have given their control to
the newly formed European Central Bank which unified all the countries and member states into
having one unified monetary policy but still letting member states and countries kept their
control on fiscal policies.

Financial Crisis of Greece, Ireland, and Spain

With the entrance of 19 (now 27) member states in the European Union it seems like everything
could go uphill right? That wasn't the case when Greece started to spend and borrow more. From
the beginning, Greece’s economy was not a lively economy, had low taxing rates and bad
government management in the 1970’s before joining the EU. So given that Greece was under
the EU, Greece saw the opportunity to borrow more funds from neighboring member states and
revitalize their economy. This was under the impression that investors look at Greece with
countries such as France and Germany which have a strong economy and that if Greece could
not pay back their interest in full then Germany or any other member state would repay back the
interest given that all of the member states have the same currency of Greece. So given this
condition, it potentially allowed every member state of the EU to borrow money from each other,
which started the borrowing fiasco Greece started in order to revitalize their economy through
borrowing more which gave them more money to create more jobs and give early pensions to
their citizens. This in effect would rack up the debt that Greece would have to pay back, but the
thing is how would they even pay it back? By even borrowing even more money! Meanwhile,
due to cheap credit being available in the economy, Ireland and Spain also borrowed more
money which contributed to the rising housing prices in the economy, similarly to what
happened in the US. This led to member states borrowing money from each other leading to a
scenario where all member states are tightly intertwined with each other. And when the US
market collapsed and investors started to lose faith in their investments, investors started to
backout on their investments meaning that there was no more funds for Greece’s government to
borrow which pressured them given the amount of loans they have made, this caused problems
because in the process, wages and jobs have to be cut, pensions have to be retrieved, and loans
are needed to pay which caused a massive imbalance in the payments. Greece could have
depreciated the value of their currency given that if they have monetary policy in their disposal
but given that Greece was part of the Eurozone and was under a unified monetary policy it
couldn't adjust to fix the problem at hand. With Greece’s issue, more member states started to
default on their payments given that some member states couldn't pay the debt in the first place,
this caused EU member states to panic and try to turn to the one member state that could pay for
all of this mess, Germany which is the strongest economy in Europe. Though Germany’s
condition if they are gonna pay up all the loans of the EU, was austerity measures. These
austerity measures were to cut government expenditure and more on payback the loans each
member state racked up. This however was not well accepted for many member states given that
it is hard to put people out of jobs, or to reduce government pension or projects or it would create
more tension and riots in the people in their respective member states .

How was it resolved?

How it was resolved, was that the International Monetary Fund made a modest bailout to
Eurozone member states and moving forward each eurozone leader state would agree on a rescue
package if another situation like this would ever occur again. Ultimately, member states that
would receive those bailout funds had to undergo austerity measures that would later start
protests in those member states because of this. Moving forward, the European Central Bank not
only kept monetary policies in check but also kept fiscal policies in check also with potential
solutions for the future would be Eurobonds, Rescue Package, European Stabilization Program
and a lot more measures to keep the situation from ever happening again.
Implication to ASEAN

Reading about the situation of the EU and ASEAN region, they are similar in a way that they are
created and founded to find peace and prosperity for their respective regions. Both want to create
a single large stable market platform and both wanna find economic prosperity through their
unification. But if ASEAN does want to consider unifying their market similar to the EU, there
are a lot of obstacles and hurdles that the region must overcome in order to integrate their
markets together. Specifically, Political, Social, Economical, Lingual, Religion, and
Geographical issues arise when considering a single market. Though hypothetically they do form
a single market, it would be the largest and strongest market that can compete with China, U.S.
and other major and large economic markets in the world.

Grading of Presenters

I would grade the presenters 65% given that I was confused with their topic and outline flow and
had to read a lot more of related articles to the topic.