Greece in the EuropeanUnion The Euro and

The Economic CrisisHow does Money Count?

Owner Mekita Coe 8/2/2012

Europe

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The

European

Union and

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The

Eurozone

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Europe is the second smallest continent in the world. The

mainland of Europe is actually a Peninsula similar to the Queens

area Rockaways, in New York City. The Peninsula of Europe however

is much more massive. A great portion of Europe is the portion of

the continent that extends off of the tip of Europe. The

countries of Spain, Germany, France, Italy, and Greece are found

on this great peninsula.

There are no clear cut geographical borders to the continent

however in respect Europe is flanked to the east by the Caucasus

Mountains, the Ural River and the Ural Mountains which separate

it from Asia. The Mediterranean Sea separates Europe from Africa.

The Atlantic Ocean separates Europe on her western sides.

The southernmost point is identified by The Straits of Gibraltar

in the European nation of Spain which is only stopped by Portugal

and then the Atlantic Ocean.

Central Europe, Eastern Europe, Northern Europe, Southern Europe

and Western Europe describe and comprise the entire continent.

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The British Isles are not included in the description of Europe.

The area of Europe covers 8,876,000 miles of the earth’s surface.

There are ten countries in Eastern Europe. There are fifteen

countries in Northern Europe. There are nine countries in Western

Europe, and seventeen countries in Southern Europe.

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European UnionFinlandSweden

Norway

Ukraine

Romania

Belarus

Estonia

Latvia

LithuaniaDenmark

Poland

CzechRepublic Slovak

Republic

HungaryAustria

Germany

Netherlands

Belgium

France

Italy

SpainPortugal

UnitedKingdom

Ireland

Iceland

Greece

Bulgaria

Luxembourg

SwitzerlandMoldova

Albania

Macedonia

Serbia

Montenegro

Bosniaand

Herzegovina

CroatiaSloveniaLiechtenstein

Cyprus

Turkey

There are twenty seven member countries in The European Union.

Those countries are France, Germany, Ireland, Bulgaria, Cyprus,

The Check Republic, Denmark, Estonia, Finland, Hungary, Italy,

Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland

Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, The United

Kingdom and Greece. These make up what is called the Euro Zone.

Of the twenty seven countries in the Euro Zone only seventeen use

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the Euro as currency. The United Kingdom, Denmark and Sweden have

opted out of using the Euro currency.

Yet non Eurozone countries such as Kosovo, San Marino,

Montenegro, Andorra and the Vatican City do use the Euro as

currency as well. Only 17 countries of the twenty seven member

nations of the European Union use the Euro as currency.

The euro is a form of money for 332 million Europeans, just like

the dollar is for the U.S. It is meant to be the currency that

unifies the 27-member European Union (EU). All members pledge to

adopt the Euro when they join the European Union. However, they

have to meet budget and other criteria, as set out by the

Maastricht Treaty, before they can join.

In 1949 The Council of Europe was formed in the after math of the

World War I and subsequently World War II.

In 1919 the Versailles Treaty was signed. The Versailles Treaty

greatly inhibited Germany’s ability to trade efficiently with

foreign European nations. Germany has always been a center of

trade in Europe. Yet, as an effect of the treaty (which had

political implications) it became nearly impossible for GermanyPage 7 of 34

to stabilize an exchange rate for foreign currencies (which was

an economic issue). Hitler’s original platform was to fight to

subdue overly competitive devaluations of the German currency

which had rocked Germany’s economy in the 1920’s and 1930’s. The

excessive devaluations came as an economic consequence of

misplaced German nationalism and insufficient European policy

coordination. The “free and flexible exchange rates in Europe

were among the main culprits for the economic and political

turmoil that occurred in Europe.

The exchange rate problems had brought Hitler to power.

(Collignon and Scharzer pg30).

Bretton Woods System 1944-1973

We all know too well what atrocities World War II entailed as

well as the wide spread destruction it caused. All of Europe was

crippled both physically and financially after World War II. It

was in 1944 that the Bretton Woods System went into effect. The

Bretton Woods System was an international monetary system which

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provided low exchange rates and created security and a greater

willingness to invest in productive exchange.

However without a stable means of valuation and monitoring of the

international exchange rates; chaos was always looming in the

darkness.

There was a feeling of “Euroclerosis”. Schmidt was a German

social democrat who shared his views on military strategy and

economics; in a 1967 Yale lecture, he is quoted saying “Strategy

as a social science is similar and comparable to economics, not

only because both disciplines are based on the economic principle

but because they share epistemological foundations. In both

disciplines we work with theoretical models, which then get

adapted, step by step, to the complex data of real situations…

securing peace [requires] international economic balance…The

Japanese have one currency for a market of 120 million people,

the Americans have one economy for 235 million. But we in Europe

have ten currencies for 275 million people” (Collignon and

Schwarzer pg.38).

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Schmidt’s belief of Verlasslichkeit or reliability in economic

behavior along with consistency could help solve political and

economic anarchy. He believed along with others that economic

conflicts and political unrest could be replaced with civil

order; when legitimate joint agreements managed by institutions

were put into place.

The one time French President Valery Giscard d’Estaing and

Chairman Hulmet Schmidt of Germany helped to bring the Current

European Union into existence. Giscard also believed that

monetary union could be achieved when all exchange rates were

permanently locked. Together they lobbied for the installation of

the Ecu or European currency unit. Europeans accepted the Ecu to

a large degree.

Bundesbank rejected the idea of the Ecu until the EMS; European

Exchange Mechanism was managed with a parity grid that kept

valuation exactly the same as valuation decided by the German

Bundesbank. Although contrary to all of these events currency

intervention still took place in US dollars not the Ecu. Schmidt

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and Giscard conceptualized the Euro as a plan to unify European

nations.

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Germany and

France

Conceive

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Eurozone

Nations

“Germany's history and geopolitical position was the key for

Schmidt's understanding of the country's interests and strategic

policy orientations. Over centuries, Germany had been the focus

for centripetal advances from neighboring peoples such as the

Romans, Vikings, Genghis Khan, Turks, Swedes, French, and

Russians. And it had been at the core of centrifugal attacks

against other people in Europe such as Italy, Turkey, the Middle

East, Baltic States, Poland, France, and most violently under

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Hitler against nearly all of Europe. Schmidt drew a far-reaching

conclusion: it was in Germany's (and Europe's) interest to avoid

coalitions that could turn against Germany and the only way to do

so was by tying her into a large EU (Schmidt 1990:260). Schmidt

was convinced that in the long run the Germans would only remain

closely bound to the West, if the French worked with them. This

required a joint 'Grand Strategy' for Europe (Schmidt 1985:56).”

(Collignon and Schwarzer pg. 41)

By forming a union with common interests all European nations

could be strengthened and protected as opposed to being

threatened. Many French intellectual wanted to reject the idea of

a unified Europe. They doubted the foundations of a free market

with unrestricted movements of capital and a ‘stable exchange

rate’.

Some French believed that monetary autonomy could lead to

volatile exchange rates which could distort relative prices in

independent markets producing goods and services. This was termed

an inconsistent quartet. Stability could only be gained by

pooling monetary sovereignty and fixing exchange rates. French

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politicians were concerned with maintaining financial liberation.

They thought that the control of inflation and the establishment

of equilibrium required more than an overdraft economy. Financing

domestic and external deficits seemed to be more of a need to

address. However as history would have it they were the most

willing to create a stabilized currency.

By the 1960’s U.S experienced expansionist, as well as monetary

and budgetary problems of their own. American involvement in the

Vietnam War made the dollar an inconsistent anchor currency for

the European economies. The United States borrowed 11.8 billion

dollars from European countries in the late nineteen sixties.

U.S.A inflation spread to Europe.

The USA repaid $9.6 billion in its loans by 1970. Monies went

directly to the Bundesbank, whom responded by lowering interest

rates.

Waves of speculative capital flowed into Germany.

The Americans refused to the devaluation of the dollar.

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Prices increased in Germany at a slower rate than they did in the

rest of Europe.

The Deutschmark was an undervalued currency as was the Franc.

Germany then fixed the DEM at 3.66 against the dollar. This

created an unheard of appreciation of 9.3 per cent.

Germany floated the DEM against the dollar without the union of

the other European nations.

An unexpected oil crisis crippled European currencies even more.

The United States then abandoned the ‘gold standard’ while still

paying off her debts to the nations of Europe. France, Denmark,

Ireland, and Norway floated their currencies…. Creating what has

been termed in economic history as the “Snake in the Tunnel”.

America agreed to stabilize her exchange rates to 2.25%. France

and Italy moved in and out of the currency float several times

causing yo-yo monetary valuation and uncertainty.

Weaker countries like Greece, found their currencies depleted as

a consequence of floating the currencies.

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Finally the United States of America refused to return to the

gold standard. The “Snake” was then “in the Lake”.

The United States of America refused to pay her debt obligations

in gold.

The Bretton Woods System finally failed in 1973, as a result.

Germany stepped in as the anchor currency in Europe. The CMUE(The

Committee of the Monetary Union in Europe), the AMUE(The

Association of the Monetary Union in Europe), the Giscard-Schmidt

Committee, The SEA and a host of other forums were held between

the 1970’s and the 1990’s. The right to monetary order, exchange

rate stabilization, and monetary integration; with institutional

backup, were the focus of all of these forums.

Opposition by certain nations included the belief that nations

whom had weak economies (i.e. Greece) would take advantage of

nations whom had stable and strong economies (i.e. Germany).

There was another unexpected oil crisis, and the Berlin Wall

fell. A unified currency would not be put into use until after

the signing of The Treaty of Maastricht on February 7, 1992. By

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1992 deregulation and supply side reform was in place. All non-

tariff barriers in Europe were abolished.

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The Treaty of

Maastricht

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The modern day European Union arose after the signing of The

Treaty of Maastricht on European Union.

The Council of Europe predates The European Union. Yet, the

European Union’s mission is to continue prosperity, freedom,

communication, and ease of travel and commerce for its citizens.

The five goals of the Treaty are:

1. To strengthen the democratic governing of participating

nations.

2. To improve the efficiency of nations

3. To establish an economic and financial unification

4. To develop the community social dimension and

5. To establish a security policy for involved nations.

The Treaty continues; to include issues of education, industry,

and youth. It established fiscal unification by activating the

use of the Euro, as a single and common currency. There have,

however; been amendments to the Maastricht Treaty such as the

Amsterdam, The Nice, and the Lisbon amendments. We see through

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these deliberate steps to maintain and protect national borders

and trade that the nations of Europe are committed to its

unification.

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Greece and

the Euro

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In the

European

Union

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The former currency of Greece is the Drachma. The Drachma emerged

around 670 B.C. It was outlawed by the Roman King Denarius, and

restored in 1833. The Drachma was sentenced to discontinuation,

again after the Treaty of Maastricht in 1997. The Drachma had

been in use for 2,671 years. Greece is characterized throughout

history as being composed of fiercely independent Polis or City

States whom all used a different currency, with representations

of rulers’ placed prominently on the surface of currency. The

Greek monetary system was characterized by 1 talent = 60 Mnas; 1

Mna = 100 Drachmas; 1 Drachma = 60 Obls ($40 US dollars today). 6

Obls could fit into the human hand; Therefore the term Drachma

means the “graspable”. This standard stood from 500 – 38 B.C.

After 160 B.C Greeks traded in the money of which ever nation

ruled them at the time. The Ottoman Empire had been the major

ruler for most of Greece’s history. In 1827 A.D the Modern Greek

nation was constructed. In 1868 Greece joined the Latin monetary

union, making the Drachma equal to 1 French Franc. Greece became

Bankrupt in 1893. Financial specialist in England, Europe helped

to continue the valuation of the Drachma. The Latin Monetary

Union became extinct in 1922 after WWI. The Grecian Monarchy was

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restored in 1935. Yet again, after WWII the Drachma was struck

with inflation. In 1941 1 British Pound was worth 1,200 Drachma.

Currency and financial scholars helped to introduce a more

valuable Drachma. However inflation still consumed Greece. Greece

then joined the Bretton Woods System in 1953 to stave off its

currencies inflation. 30 Drachma then = $US 1. Under Bretton

Woods in the 60’s and the 70’s; Greece was inflation free. The

Bretton Woods System fell in 1973. The Greek Drachma’s official

exchange rate plummeted, with 400 Drachma = $US 1.

Greece suffered continuous inflation until 1997. Having entered

the European Union in 1985, Greece adapted use of the Euro in

2002.

Greece has a population of 11.6 million people. The nation is

located in south east Europe, and forms the southern extremity of

the Balkan Peninsula. The nation consists of 2,000 islands in the

Ionian and Aegean Seas. Greece is considered by most the cradle

of European civilization. Grecian scholars made prominent

advancements in medicine, philosophy, art and the sciences. They

were pioneers in structuring democratic government.

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“Modern day Greece has a republican structure based on a 1975

constitution. There is a single chamber parliament with 300

members. The country is divided into 13 administrative regions.

Half of all Greek industry is located in the capital city of

Athens” (European Commission). The main economic contributors are

agriculture, tourism, construction, and shipping. Greece has of

course experienced inflation in its past. The main problem in

Greece today is her chronic inability to compete on the world’s

open market. Greece adapted to the use of the Euro in 2001. It

is still an unknown fact in regards to rather or not, the country

will continue using the Euro. Skeptics predict that Greece may

resort back to her own monetary standard. Greece has been in an

economic recession for five years at this point. By November of

2011 Greek banking system had “lost” a quarter of all of its

deposits, which had been secured two years earlier. The banks

then borrowed 43 million Euros from the Greek Central Bank. They

then borrowed another 73 billion Euros worth of secured loans

from the European Central Bank. It has become difficult for

Greece to borrow any more money from banks outside of Greece.

Banks have cut loans to the country and raised borrowing cost.

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Foreign suppliers demand cash payment upfront when doing business

with businesses native to the nation. Some of those businesses

have relocated their physical location and bank affiliations to

Great Britain in an effort to avoid the negative connotation of

being a Greek company. They use instead the Bank of London to

complete transactions.

Investors are avoiding the nation and the stock market in Greece

has fallen. Capital spending is down more than half since four

years ago. Construction and home building has fallen by 2/3rds.

The Gross Domestic Product fell by 6% in 2011 alone. There is

again a shortage of liquidity. Unemployment and joblessness has

risen to 18%. Greece has had two devaluations since joining the

European Union. Those devaluations were not of much help to the

nation. Inflation has over taken the nation, as it has done,

again and again in the nation’s history. The International

Monetary Fund has not made a decision on Greek finances and the

modern world waits to see the outcome of the current financial

devastation facing the nation of Greece. The hope is that private

sector creditors will accept a bond exchange deal. The European

Central bank has purchased 40 billion euro worth of GrecianPage 27 of 34

bonds, at a discount to their face value. This is a part of the

ECB’s plan to stabilize bond markets.

Greece's economic problems

The Greek government has raised VAT or taxes from 11% to 23%.

Business owners, however seem to be avoiding the tax increases

altogether. They will not charge or pay, higher tax. When the

government instituted a car tax citizens of the nation, handed in

their licenses plates.

Often nations with weak or unstable balance sheets, borrow

internationally in their own currency. This may lead them into

debt and financial crisis.

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Factors that lead to financial crisis are the Imbalances in

National balance sheets. Mismatches in maturity, currency, and

capital structure are other contributing factors. Those mismatch

in currency, capital status and maturity, places extraordinary

emphasis on a nation’s capital accounts. “Large external

financing gaps emerge due to unparalleled reversals of capital”

(Chu and Gai)

When capital value is reversed foreign investors, decide to

withdraw funding from these financially weak nations. “When many

or all foreign investors withdraw their funding from a nation;

within the same time frame, it is much like a run by depositors

on a bank. Once other investors hear that foreign investors are

pulling capital out of a nation they also pull their investment

capital out of that nation. At this point a nation realizes that

most of its debt is in the form of public liabilities, or private

sector liabilities guaranteed by governments. Banking sector

problems are therefore created and sustained”(Quang vol. 42).

Exchange rate issues which arose as a consequence of capital

reversals become sovereign debt. Domestic policy adjustment on

behalf of the nation which experiences debt may reduce theirPage 29 of 34

current account deficit. This is a counterpart to private capital

outflows. The IMF could help by financing to reduce outstanding

debt. Yet, the integration of international capital markets has

diminished the ability of the IMF to address many effects of

financial crisis. There is always a limit to the power of an

indebted nation to attract, investment attention even after

making adjustments to their national policies. Private financers

want insurance on their lending and cannot collect upon debts

when, the debt is owed by a sovereign foreign nation. Private

investors may choose to reduce payments suspend payment on the

debts owed. By suspending or canceling debts owed private

investors are contributing to a nation’s inclination to develop

more debt. Nations who are freed from debt obligations may down

play the accumulation of future debt. The suspension of debt may

also reduce the need of the indebted nation to make any further

adjustments in their public policies. The creditor, in this case

experiences, discomfort; they have loaned monies which they will

not be paid back. Reform on the International Financial

Architecture is being discussed on national levels. A more

rational solution to address sovereign debt is needed. The United

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States of America has bankruptcy court. The European Union hasn’t

implemented any such program into their system as of yet. An

insolvency clause must be implemented as an amendment to The

Treaty of Maastricht. The amendment could include an automatic

restructuring of loans for nations whom have unresolved debt.

Some intellectuals believe that an officially sanctioned

temporary suspension on debt could be used to stop the need to

borrow. Greece is the issue today. Grecians are enduring massive

financial and policy instabilities. Citizens are rioting in the

streets offended by restrictions on long standing policies. Many

citizens are leaving to find work in other nations. We may notice

as a consequence Greek citizens, living more and more in other

European nations. Greeks future may become that of a desert

island which is only utilized during seasons of tourism. If it

lacked its beauty and holiday appeal we may have expected to see

tumble weed blowing through the deserted streets as they are

stripped of industry, commerce and human resources. However, the

unification of Europe has been long awaited. Americans of

European descent watch; engulfed in hope. Often the child desires

the unification of its parents. This European Union can work.

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This type of discomfort and economical shifting was always

expected. Therefor the Eurozone members are prepared to sustain

their commitment to unification; though the pains of growth may

be uncomfortable they are yet, for good cause; bearable.

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Bibliography

European Commission>Economic and Financial Affairs>The EU as a Borrower>Greek Loan Facility http://ec.europa.eu/economy_finance/eu_borrower/greek_loan

Economist the; Greece and the Euro: an economy crumbles Uncertainty about rather Greece will remain in the Euro is crippling its prospectswww.economist.com

Amadeo, Kimberly; what is the European Union? www.useconomy.com

Collignon Stephan, and Schwarzer Daniela 2002 Routedge Press; Private Sector Involvement in the Euro: The Power of Ideas www.questia.com

Chui Michael and Gai Prasanna; Oxford Press 2005, Private Sector Involvement and International Financial Crises an Analytical Perspective www.questia.com

Feinstein, Charles H; Banking Currency and Finance in Europe between the Wars; www.questia.com

Kitty, Ussher; 2012 New Statesman; why would the Greeks Leave the Euro? No one can make them www.questia.com

Greek Currency History of Drachma www.Fluer-de-coin.com

Quang, Minh; The Impact of Investment Climate Indicators on Gross Capital Formation in Developing Countries; The Journal of Developing Areas www.questia.com

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