An Exploration on How Climatic Alteration Has Affected the Economy of the United States
The impact of climatic alteration varies considerably across the US due to the size of the nation, economies, different topographies, and ecosystems. The implications of the climatic alteration will likely put immense strains on public financial plans more especially the cost of maintaining road and rail networks and increasing replacements. Depending on the climatic alteration, economic losses translate into lost tax revenues, and federal officials have raised taxes in the United States to help sustain safety and sufficient provision of goods and services.
One of the most noteworthy impacts of climatic alterations in the US may be related to water supply (Inslee, 2016). The continued economic, as well as population growth, has exacerbated existing and future stresses placed on supplies. Substantially, the nature of climatic alterations all over the nation make the net effects of worldwide warming on the agricultural sectors doubtful. Financial impacts on the agricultural sector vary by region particularly areas where precipitation levels are likely to remain stable. Ideally, warmer temperatures result in augmented threats of severe drought by increasing the pace of evaporation.
This dissertation explores how climatic alteration has affected the economy of the United States and the impacts caused include water scarcity, wildfires, energy, and infrastructure stress, flooding, and Hurricane intensity. Moreover, the rise in sea levels, temperatures, the occurrence of extreme precipitation conditions alternated with periods of elongated droughts will also be the centerpiece of discussions in this context.
The study presents projections of climatic effects on the US, by means of information obtained from existing data and modeling exercises that fall into one of the two quantification designs. Policy makers are pursuing clarifications to help in avoiding the worst implications of climatic alteration while transitioning the country to a green energy compliance system. On the other hand, the U.S global change study program lately released a wide-ranging report describing some of the major impacts of climatic alteration.
To identify the economic effects of climatic alteration that occurs all over the country
To classify the economic impacts and how they are strewn across regions and within the economic landscape and society
To determine the adverse climatic alterations and the most affected sectors that supply crucial goods and services to society
To determine how Climatic alteration impacts will place vast strains on public sector budgets and how their occurrence dictates EPA’s priorities and financial situations.
1 – Introduction
Background information on the Study
Problem statement of the study
Purpose of the Study
Study questions and statement of hypothesis
Statement of hypothesis
Significance of the Study
Limitation of the study
2 – Review of the Literature
Introduction to literature review
Review of the principles and concepts
Anthropogenic worldwide warming theory (AGW)
The Bio-thermostat theory
Cloud formation and Albedo theory
Human-related forcing besides greenhouse gases
Planetary oscillation theory
Adam Smith and the invisible hand of capitalists
Karl Marx and the exploitation theory
The Keynesian concept of government intervention in the economy
Review of the empirical literature
Summary of the literature and the emerging issues
3 – Study Methodology
Introduction to study design and methodology
Areas of study
Targeted climatic zones
Targeted economic zones
sample areas of concern and sampling mechanisms
Data collection methods
Data collection procedure
Framework for data analysis and presentation
4 – General Overview
Scope of the results
Data analysis criteria
Overall economic findings
Alternative representation of data
5 – Results Interpretation, Recommendations and Conclusions
Interpretations of the results
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Title: Economic Circular Flow. Everyday expenditure is determined by the current treads on the economic status of a country. The prices of commodities has been influenced greatly by the prices treads of the energy generating fuels such the prices of the petroleum products. In addition the economic stability of a country is another key factors that determine the prices. For example in a country that is experiencing inflation, the prices of most commodities are relatively high, a fact that is contributed by poor performances in exchange rate earnings.
In most cases, the interest rates are mostly determined by the central bank. They are used as the main monetary tool that is used by policy makers and the economist to control the supply of money in the economy thus regulating the inflation rate in the economy. The central bank is there to issue loans to the commercial banks so that they can circulate the money to the citizens. In addition the commercial bank gives the commercial banks the directives on the minimum rate at which they are going to lend their customers. Therefore the federal system is the main determinant of the interest rate irrespective of the market forces on demand and supply of money.
Basically interest rate are use as incentive as well as disincentives to the people willing to take loans from any commercial banks. As an incentive, the commercial banks well give out loans at an affordable interest rate that will attract many business and other people willing to take a loan. This will increase the aggregate money supply in the economy. This is commonly used in case an economic stimulus is necessary. On the other had high interest rates discourages business taking loans.
The action leads to reduced business transactions and hence less amount of money circulation in the economy. The action is used during the period of inflation. When the interest rates are high, the prices of commodities are also relatively high, the consequence is high cost of financing the loans. For this reason people tend to purchase commodities that are of lower prices, this is always subject to quality. During my purchased the interest rate were lower therefore the price of my vehicle was relatively low. At the period the interest rate was about 14% compounded on reducing balance.
The price of gasoline was relatively lower compared to the previous prices. In every economy the prices of the petroleum products greatly influence the prices of other commodities. This is due to the transportation of commodities from the area of manufacturing to the market. Lower prices of gasoline in during the time of the purchase therefore ensured that the prices were lower and affordable. The prices for the crude oil and other related products were also low. Therefore even the maintenance of the vehicle was cheaper. When I made my purchase the prices of gasoline were dropping which was an implication that the future prices are going to be lower. This was just a prediction that is always necessary thing to do before buying any consumable good.
Securing a loan requires collateral and other securities. Most banks will. Always give loans to individual who after a careful appraisal shows the ability to pay the loan. In addition to this banks prefer giving loans to the people who are employed or business people who show to have a sustainable businesses that can be able to finance the acquired loan. I went for a loan after I was employed having considered all the above factors. These are the once that led to a successful loan application.
During the recession period the economy is characterized by high inflation rate meaning that the prices of most commodities are considerably high. During the purchase the interest rates were lower a probable recession times. The lower interest rates in the commercial banks were to encourage more people to take loans. This is a move that facilitates the increment in the supply of money circulation in the economy. In addition to this reduced interest rate facilitates more investors to borrow loans to set up more investments. This action is there to improve the production business cycle that improve the production of an economy.
During recession period there are chance of unemployment and therefore it’s risky to take a loan during the period. However when taking a loan it is important to reconsider other sources of income that can fund the loan once the source of income is suddenly withdrawn. Before making my decision on whether to take the loan or not I had considered other factors that will finance my loan in case of such uncertainty.
Due to the great recession of 2008 that the country realized its impact the government is still operating on with the fiscal expansionary policy measures despite of the deficit that the country was experiencing. Fiscal policies involved reduction on taxes and adjustments on government expenditures. The tax relieve lowered the prices of the vehicles greatly which gave me a good opportunity to purchase a good Car of my choice.
In addition the international monetary fund study had realized a possibility of positive multiplier effect on the expansionary fiscal policies that had been set. The effect was subjected unemployment and future output. More output and employment implied better future of the economy. These were encouragement to the foreign and local investors, consequently there were prospects of high future productivity. This gave me a prediction that there is a larger probability of retaining my source of income as well as creation of more sources that will cater for the maintenance and financing my loan.
The united state environmental protection agency has been trying over the years to fight the environmental pollution has been a problem in our cities and towns. One of their effort is to encourage the vehicles and other fuel users to purchase machines that are fuel saving and those that operate with complete combustion of fuel to minimize the release of carbon monoxide to the environment.
These efforts should not be ignored as the implication on pollution is both health and economic problems, a fact that a well productive economy is composed of healthy people. For this reason I had to choose a simple vehicle that has low fuel consumption capacity.
The emissions such as carbon dioxide causes acid rain that has adverse effects on metallic structures which most of our houses and other structures are made of. In addition there is adverse effect on agriculture which is one of the source of raw materials for our industries. The emissions also may cause diseases after inhaling these poisonous diseases. This consequently minimizes the production level of the nationals and hence lower GDP.
Basically the circular flow model is made up of two sectors which determine income output and expenditure. Equilibrium state is arrived at when the tendency of income levels, expenditure and output does not exist. This is an implication that income, output and expenditure are equal. The buyer expenditure in this case becomes the sellers’ income. The income gained from sale of their product is also spent to pay for other factors of production. During the processes, there is transfer of income to the owners of these factors. These expenditures consequently leads to the circular flow of payments.
The Circular Flow Model
For many years the position of the circular flow economy has greatly influenced the prices. This is due to the monetary and fiscal policies that an economy takes either to control inflation or to correct a recession. Introduction of injections and stimulus of the economy also influence the expenditure. When the interest rate are high the money in circulation is reduced thus most consumers will have little money to consume. In addition due to uncertainty people will tend to hold money due to fears of the deflation and recession. Uncertainty about future tend to influence people to either hold money or use money in making future investment.
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Economics models are false and so government should ignore their predictions. Explain, discuss and evaluate the accuracy of this statement.
Price Elasticity – Economics models are the tools which economists use to predict future economic developments by measuring past relationships among variables such as household income, consumer spending, employment, interest rates, tax rates etc. and forecasting how changes in some of these variables will affect other variables. An economic model is said to be complete if it can accurately forecast many of the variables future course, however, no economic model can be complete in true sense. There are several forces outside the model that affect the calculation and forecasting of variables. There are two ways by which these outside factors affect the forecasting and economic predictions. The input errors are concerned with inaccurate assumption of outside variables and model errors which explains the deviation of the equation of economic model from the assumption to the actual. Hence, it can be said that economic models are subjective approximations of reality and are designed to explain the observation. Therefore, the model’s predictions should be moderated so that it can accommodate the effect of random data variables (Deming, 2000).
Many researchers believe that economic theories and models simply provide ways to look at systems and determine how changes in variables affect the overall outcome. It also explains advantages and disadvantages of various economic models and systems. However, predictions and subsequent policy decisions are made after following value judgement of policymakers or the government. Therefore, the government should view at economic model only as a framework which provide insight of a contextual theory. More empirical evidence and real life economic parameters should be considered while making policy decisions based on economic predictions (Godley & Lavoie, 2006).
No economic model can perfectly predict the real future. A good example of the economic model’s failure is to predict the reasons for the global financial crisis of 2008. The prevailing economic model was deficient to provide sufficient attention towards the relationship between demands, wealth, and excessive financial risk taking. There were considerable research which had been conducted to uncover the same and also a new behavioural equation was added to the existing economic models. The true test of the new model will happen when it will effectively flag financial risk levels that would need a precautionary policy change. This is an ongoing process which consist of constructing, testing, and revising models and outside forces so that economists and policymakers can predict the future course of economy (Taylor, 2009).
Government neither can overlook economic models’ forecasts nor make predictions completely based on them. It has also been seen that economists seem to put aside political factors outside their equation. Politics among other outside factors is the most important factor that helps to determine the outcome of economic policy. In view of these analysis, it is suggested to use structural models which makes several “what if” economic analysis on several input combinations. In this way, the policymakers would have substantial information on various numerical variables and the forecast can be recalculated whenever required (Diermeier, Eraslan & Merlo, 2003).
Identify estimates of the price elasticity of demand for at least three different products
The “law of demand” suggests that the higher the price of a good, the lesser demand from consumers. This is the fundamental law of all economic models to predict the economic forecasts. In order to predict consumer behaviour in more details, economists use several techniques which evaluate the sensitivity of consumers’ demands with respect to changes in price. The most commonly used technique is known as “price elasticity of demand”. In simple terms, it is the proportionate change in demand given a change in price. For example, if a one unit decline in the price of a product produces a one unit increase in demand for that product, the price elasticity of demand is said to be one (Green, Malpezzi & Mayo, 2005).
Numerous studies suggest that the majority of consumer goods and services falls in the price elasticity of between .5 and 1.5. Essential products to everyday living, which have fewer substitutes, typically have lower elasticity for example, staple foods. Since, staples such as cereals are necessities in the diet, and are usually cheaper so that people safeguard their income for spending on such essentials when prices increase. Furthermore, lower income households tend to have higher price elasticity for food items than high income households. As food products occupies a large share of total income in these households, price changes have a substantial impact on the allocation of budget. On the other hand, magnitude of the elasticity for animal source foods such as fish, meat and dairy are higher than staple cereals as these are considered as luxury food items and there are always many substitutes available for consumption of these food choices (Andreyeva, Long & Brownell, 2010).
Goods with many substitutes, or are considered luxuries as are not essential, or whose purchase can be easily postponed, have higher elasticity. For example, the demand of automobile is considered as elastic as there are three kind of substitution takes place. In response of a unit price change, consumer of a new car can delay the purchase, or can choose to purchase another category of car or chose not to buy a new car and use another mode of transport. Furthermore, in case of buying a particular model of car, it would be highly elastic demand as there will be a lot of substitutes. On the other hand, demand for cars in rural areas would be inelastic over the longer run. Because there are very few alternative mode of transports available (Parry, Walls & Harrington, 2007).
Another example can be taken from health care services, where the demand for health care expenditure is found to be price inelastic. A range of price elasticity estimates it to be -0.17, which means that a one unit increase in the price of health care will lead to a 0.17 unit reduction in health care expenditures. Moreover, the demand for health care is also found to be income inelastic as it is in the range of 0 to 0.2. The positive sign of the elasticity suggests that there will be increase for health care demand as income increases, however the low magnitude of the elasticity indicates that the demand response would be relatively very small (Duarte, 2012).
Andreyeva, T., Long, M. W., & Brownell, K. D. (2010). The impact of food prices on consumption: a systematic review of research on the price elasticity of demand for food. American journal of public health, 100(2), 216-222.
Deming, W. E. (2000). The new economics: for industry, government, education. MIT press.
Diermeier, D., Eraslan, H., & Merlo, A. (2003). A structural model of government formation. Econometrica, 71(1), 27-70.
Duarte, F. (2012). Price elasticity of expenditure across health care services. Journal of health economics, 31(6), 824-841.
Godley, W., & Lavoie, M. (2006). Monetary economics: an integrated approach to credit, money, income, production and wealth. Springer.
Green, R. K., Malpezzi, S., & Mayo, S. K. (2005). Metropolitan-specific estimates of the price elasticity of supply of housing, and their sources. The American Economic Review, 95(2), 334-339.
Parry, I. W., Walls, M., & Harrington, W. (2007). Automobile externalities and policies. Journal of economic literature, 45(2), 373-399.
Taylor, J. B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong (No. w14631). National Bureau of Economic Research.
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Title: The Economic Environment. The firms in this model are the businesses while the households are the consumers. The firm is responsible for the production function while the households are responsible for consumption. In his book Waste to wealth: The Circular Economy, Lacy Peter states that households in the circular flow model provide labor in exchange for payment and offer this payment in exchange for the goods and services produced. The circular flow model entails the government, consumer and business elements. The firm produces goods and services to meet the consumer demand. Households purchase these products and pay to the firms. Additionally, households also provide the labor necessary to produce the goods and services. Therefore, one cannot exist without the other. This is key to any economic environment.
The financial sector such as banks and micro finances are important to the Circular Flow Model of the economy in many aspects despite being greatly ignored. This sector is responsible for ensuring that money flows across the firms, households and the government. The financial sector allows households to save money gained from working in the firms.
This money is also used for investment purposes in factors such as the fixed assets used by the firms to produce goods and services. When the government and the households save, the money is directed towards the financial market. In order to ensure the continuance of the economy, financial sectors invest this money by lending it to the households, firms and the government hence making the flow continuous (Chand, 2016). This is critical to the economic environment. Furthermore, the financial sector determines the amount of money in the market hence the inflation rate at any one moment. The circular flow model of the economy would be incomplete without the financial sector.
Gross Domestic Product (GDP)
The GDP of a nation is the total market value of goods and services produced in the nation. GDP is effectively measured through market prices. During different times, prices tend to change especially because of inflation. Therefore, comparing the nominal GDP over different times may not be helpful as comparing the real GDP of New Zealand’s economy. Instead, real GDP, also known as the GDP in constant prices may be used to compare the market value of goods and services. Real GDP helps compare the GDP during different periods at the same set of prices. While the nominal GDP is equal on both the production and expenditure sides, the real GDP differs on the production and the expenditure mainly due to changes in relative prices between imports and exports.
One statistic that should be considered when making an international investment or expansion is the Foreign Direct Investment (FDI) rate. By understanding the level of FDI in a foreign country, it is possible to establish how competitive the market in the foreign country is. One may also use the inflation rate of the country as well as the unemployment rate to determine how suitable the new market is for the expansion. The inflation rate determines how strong or weak the local currency is hence affecting the amount of money required for the initial investment. Additionally, constant changes in the rate of inflation may be an indication of an unstable economy. On the other hand, the rate of unemployment can help predict the potential demand and supply for the goods or services. The inflation rate may also help project the cost of labor for the new branch internationally.
The Business Cycles and Business The Environment
New Zealand’s recent annual GDP was 173.75 billion US dollars while the value stood at 0.28% of the global GDP. The GDP growth rate is at 2.50%. The inflation rate has been at a steady of 4.75% since 1918 to 2016. On the other hand, the unemployment has been at an average of 6.13% since 1985 to 2016. However, the rate of unemployment fell to 5.1% during the second quarter of 2016. Although the New Zealand economy has past the peak phase, it is expected to continue growing at a healthy rate while creating new jobs.
A housing bubble occurs when an increase in demand leads to a significant increase in the house prices (Roberts, 2008). Unlike most goods and services, replenishing the supply of houses takes time hence creating a bubble with soaring house prices. Eventually, the bubble bursts due to the increase in supply and a decrease in demand. Such an event would cause the New Zealand economy to slow down significantly.
When an economic recession occurs, the number or frequency of economic environment activities decline significantly (Roubini, 2011). Some businesses are able to continue operating as long as they are able to cover their fixed cost. However, other businesses not able to cover the variable cost including labor have to shut down rather than operate at zero profit. Scarcity of supply due to high production cost leads to high prices, meaning that consumers are unable to purchase goods and services. Firms selling second hand goods, companies dealing with bankruptcies or debt problem benefit during recession. The market is also more efficient and consumers get the best value in the market.
Chand, S. (2016). The Economic Environment and Circular Flow of Income in a Four Sector Economy.
Lacey, P. (2015). Waste to wealth: The Circular Economy and Economic Environment. Palgrave MacMillan.
Roberts, L. (2008). The Great Housing Bubble: Why did House Prices Fall? Monterey Cypress, LLC.
Roubini, N. (2011). Crisis Economics: A Crash Course in the Future of Finance. Penguin Books.
This paper examines the European Union economic model as an example of a regional integration for economic prospects in the world. Since 1972, twelve nations of Europe namely, Austria, Belgium, Britain, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain co-operated economically under the treaty of European Economic Commission, EEC (Bartolini). However, the Union under examination in this paper came into effect on July 1987 when the single European Act came into force, thereby amending the founding treaties to cope with the transition into a single market. For a longer time, the European Union (EU) remains the most developed model in the regional integration examples. However, lately, severe economic crisis continue to shake the very foundation upon which the union stands. From debt crisis to refugee crisis, the challenges seem so great for some of the nation members to bear. Consequently, this now puts into question the economic benefits that accrue from the integration process (Hix and Høyland).
The lack of logical solutions to the EU’s frequent crisis ideally calls into question the very steadfastness of the union. The recent financial crisis that threatened Greece to decamp from the European Union reveals the institutional and structural cracks within the Eurozone. Two other countries of the union namely, Spain and Italy, now appear posed to go the Greece way. The economic decline of the EU comes in the wake of a new global economic order. Under this dispensation, there is now economic decline of the two world’s economic powerhouses, the United States of America (USA), and the European Union, but the rise in Asian and African economies. These economic realignments already threaten the social cohesion, and both the economic and political stability of the Eurozone (Kelegama 110-131). In the wake of these crises, the European Union’s status as the viable model of regional economics now is subject to threat. In the event that the European Union recovers from the crises that are threatening to tear it apart, it will emerge even stronger, and continue its role as the global leading model of regional integration.
The European Union Model Insights
The genesis of EU’s integration has its roots in the economic hardships of the early 1950s, following the conclusion of World War II. The success of the European Union as an economic and political conglomerate lies in a number of far reaching principles. First, the continent of Europe boasts of a number of visionary leaders. Among these are Germany’s Konrad Adenauer, and France’s Robert Schuman. The two leaders conceived a political alliance that operated on communal basis, and deviated from the traditional political model whose basis was the balance of power ((Bartolini). The United States’ support played a pivotal role at its conception was also crucial in the early years. Second, the Franco-German partnership was crucial in the integration process. For years, Berlin and Paris continue to be the engine of European amalgamation. Thirdly, the European political elite always share a common vision of sovereignty. This is instrumental in the common institutions that are strong, and legally binding on matters integration. Finally, Europeans share solidarity with their leaders on consensus approach based on tolerance. In this regard, the European decision makers try their best not isolate a member country (Bartolini. This approach saw Greece retain its membership in the wake of its recent economic crisis. The tolerance of policy makers in Europe encompasses an all-inclusive approach when dealing with a member nation. The basis of decisions, often, is on consensus, and political goodwill to offer colossal financial support to poorer member nations to take their rightful place in the union.
The four principles that continue to guide the European Union in crises, enables it to emerge stronger than ever whenever similar situations arise. This enables the union to ward off crises more easily. Some of the historical challenges that the EU warded off in the past include new treaties referendum failures. A case in hand is that of Ireland’s Lisbon Treaty in the year 2008 as well as the French and Dutch constitutional treaty. In each case, a referendum threw out each of the treaty. Another is the case of Charles de Gaulle who used “empty chair” tactic to withdraw his compatriots’ representation the political bodies of the union whenever these introduced the famed qualified majority voting (QMV). Charles de Gaulle ruled French during the 1958 to 1969 period (Dinan).
A more recent development involved the EU’s adoption of the flexible approach that resulted in a Europe divided into multiple layers of integration. However, not all the countries of Europe enjoy the Eurozone status. For instance, the United Kingdom trades in the Eurozone courtesy of the Schengen passport-free agreement. UK, however, continues to use the Sterling Pound as its currency. The EU allowed this arrangement to give leeway to Euro-sceptic nations to renege on certain obligations guarded by the union treaty (Volkens). Nonetheless, the EU remains committed to its core mandate that allows it the freedom to share sovereignty with any committed nation within the continent, while still committed to the values of strong common institutions.
Regional Groupings in Other Parts of the World
Other regions of the world continue to seek regional integration to push forward a common agenda. Notable here include associations such as the African Union (AU), the Mercosur of South America, the Association of South East Asian Nations (ASEAN), and the Gulf Cooperation Council (GCC). However, nothing in their progress mirrors the EU’s success. Amongst these the ASEAN model is second to in EU in performance. Perhaps this follows their efforts that saw them send delegations in a number of times to Europe to seek the European Union’s experiences from Brussels. However, throughout its existence, the ASEAN shows no interest in sharing sovereignty, and therefore, continues to be an inter-governmental body (Kelegama 110-131). The same applies for the other bodies mentioned above. Consequently, the EU remains the world’s most successful conglomerate of nations in terms of economic and political cooperation. Therefore, the union remains the globe’s best success story in integration.
Pronouncements on closer cooperation continue to dominate the political scenes in Africa, Latin America, South America, Asia, and the Middle East, but none of the declarations of these groupings matches the EU’s spirit of cooperation, integration, and political goodwill (Kelegama 110-131). Their pronouncements over time remains mere rhetorical expressions, for after these declaration are not matched with equal seriousness in action.
The EU’s success story arises from historical reconciliation over time. This is a vital factor if any political entity wishes to develop the matching good will, and step into the world of cooperation and, eventually, integration. The engine of EU’s success story rests on the historical frequent reconciliation of two Europe’s decision makers – Germany and France (Bartolini). Years of political resilience of the leaders of these two nations, often provide the fodder needed to take reconciliation, and cooperation forward. In sharp contrast, no other regional body, matches the EU’s ambitious efforts when it comes to political goodwill. For instance, in the East Asia case, unless Japan and China show similar commitment, there will never be a genuine integration, and the ASEAN model will always lag behind the European Union (Kelegama 110-131).
Similar reconciliation must also exist between Korea, and Japan. The mistrusts in political leaderships witnessed in East Asia is rife all over the world. Issues remain unsolved because a deeply lingering suspicion by the political players of the day. For instance, when one discusses this, India and Pakistan comes to mind. So is Argentina and Brazil, Iran and Saudi Arabia, and so on. The European Union model shows that cooperation, and integration is only possible after historical reconciliation amongst the warring nations. It only then that they can proceed gradually into the necessary steps crucial for creating a regional community. After this, the regional community can go a step further and create a customs union, a free-trade area, a common passport, a single market, a common foreign-policy, and eventually a common currency (Kelegama 110-131).
The Current State of the EU
The European Union stands tall as a secure, prosperous, and a safe haven in comparison to other regional bodies of this world. Following its recent economic turmoil, however, the European Union needs to tackle its perennial major challenges, if needs to remain a global player and influencer worth emulating. It needs to tackle these challenges now with urgency, and determination. Only then will the European Union remain the world’s leading model of cooperation, integration, and economic union. However, the European Union’s current problems arise from a number of factors. First, the European Union experiences a rapid expansion and integration. The number of member states currently stand at 28. This is in contract to only 12 members in 1972. This is not commensurate with the European Union’s economic, and political strengths.
The emerging differences, and economic gaps between the member nations require urgent attention necessary. The EU must coordinate and institute the expansion of its capacity building efforts to bring all players at the same level. Currently, though, Germany and France seem to be its major beneficiaries. For these two nations, the EU provides a readily available labour force and a vast market for their rapidly expanding domestic industries. The European Union member nations must find equal footing if their model of economic integration is to suggest lessons for other bodies pursuing regional integrations (Volkens). These lessons will remain vital particularly when these regional entities come to the later stages of economic cooperation, and integration.
The second challenge that the European Union must tackle is increased fiscal coordination. This is necessary in the wake a seemingly worsening economic position. The European Union’s financial systems require cleaning, in order to bring them into agreement with the austerity plans that now most member nations embrace. The European Union continues to roll through murky waters, though. The ever persistent present danger of disintegration, and euro collapse remains. More so in the wake of rising national debt situation in member countries. Portugal and Ireland have since found their footing. Greece is reeling out of a life threatening debt situation that almost forced it out of the union. Similarly, the economic situation of Spain and Italy look dim. In addition, dissenting voices are heard in Britain, the Netherlands, and other quarters that threaten the very existence of the union as it is today (Hix and Høyland).
The major factor that seems to deem the influence of the European Union stems from the dismal performances of the euro internationally. The union’s central bank is the European Central Bank (ECB). Presently, 17 of the 28 European Union member nations use the Euro as its currency. The fact is that euro comes second to the dollar in the forex market trading. This gives it an international appeal, and thereby makes it one of the leading global reserve currencies. The euro came into existence on 1 January 1999 (Damian 222-229). Consequently, the account currency placed the European Union member currencies at the same level of strength, and thereby, sent the entire member nations individual currencies into oblivion. At launch, only eleven of the EU states adopted the euro. These included Germany, France, Spain, Italy, Portugal, the Netherlands, Ireland, Finland, Luxembourg, Belgium, and Austria. Greece joined the union in 2001, and similarly adopted the euro as its currency. So did Slovenia in 2007. Cyprus and Malta followed suit in 2008, while Slovakia adopted the euro in 2009.
The latest entrant into the union is Latvian who joined the membership on 1 January 2014. A number of other countries outside the Eurozone also use the euro. These include the Vatican City, San Marino Republic, Monaco Principality, as well as the Andorra Principality. In addition, many territories of the Eurozone countries including Madeira Islands, the Canary Islands, the Azores, the Reunion, French Guiana, the Balearic Islands, Europa Island, Martinique, Guadeloupe, Saint Pierre, Mayotte, Juan de Nova, and Saint Martin among many others also use the euro in their day-to-day transactions. Equally, the North Korean Republic, Cuba, and Syria also use the euro. Most currencies of the world similarly exchange their currencies to the euro based on the prevailing market exchange rates (Damian 222-229).
The Eurozone Crisis
The major challenge that the EU faces today is the continued fragile economies of a given Eurozone member nations. These include Italy, Spain, and Greece. Greece recently received a third bailout package to the tune of 85 billion euros. Like before, the bailout came with stringent austerity measures. Spain and Italy faces renewed speculation on the ability to service their national debt portfolios in the financial markets (Hix and Høyland). Even though there appear to be some light at the end of the tunnel for many of the European Union countries, economists warn on possibilities of a “double dip” recession in the Eurozone.
Many attribute the European debt crisis to a number of financial guarantees by the EU nations that feared financial septicity, and by the global moneylender, International Monetary Fund (IMF). When ratings agencies downgrade the Eurozone debt, and even giving the Greek debt a junk status at one point, it creates a panic in the financial markets. Consequently, the basis of the bailout agreements requires the recipient countries to have stringent austerity plans aimed at reducing the national debt portfolio (Hix and Høyland).
The national debt crisis among the European Union member nations began in 2009. It stemmed from the inability of some Eurozone member countries to repay or refinance the nation debt of their countries. The nations affected included Cyprus, Portugal, Ireland, Spain, and Greece. They became unable to foot the loans of the beleaguered banks without European Central Bank inputs. Further assistance became necessary from the lenders such as the International Monetary Fund and the European Financial Stability Facility (EFSF). Seventeen of the member countries created the EFSF sometime in 2010 (Hix and Høyland). Its mandate was to offer solutions on the spiraling European debt crisis.
The EU’s debt crisis has its genesis from the financial crisis that plagued the world in 2007 and 2008. This gave rise to the recession in 2008 to 2012. The latter led to the property bubbles in a number of countries, including the United States, and consequently, led to the crisis in the real estate markets. The culmination of the recession was in 2009, and led to the Greece’s discovery that its previous government exceedingly under reported the national budget deficit. The pronouncements signaled Greece’s a violation of the EU treaty policy, and led to fears of the euro collapse, as it eroded investor levels. This led to unsustainable high interest rates in the euro bonds. The fear this sparked in the fiscal world led to beliefs that the Eurozone debts were unsustainable (Hix and Høyland).
In 2010, in the wake of the fear of unsustainable Eurozone sovereign debt, each lender began demanded higher interests on the EU member nations’ loans, and consequently, spiraled the debt out of control. This made most member countries fail to finance budget deficits. In the phase of negative economic growth, and shrinking Gross Domestic Products (GDP), some countries raised taxes to finance the deficit as most governments slashed their expenditures. The negative social vices and economic downturns followed. This even led to votes of no confidence in the leadership, especially in Greece. In view of this, rating agencies downgraded three Eurozone debt statuses to the junk, and thereby, worsened the investor fears. The countries affected included Ireland, Portugal, and Greece (Hix and Høyland).
The Greek Case
In the wake of the upheavals in the Eurozone in 2010, the national bond yields for a number of the EU countries shot up. Those affected included the Federal Republic of Germany, Portugal, Ireland, and Greece. The escalation in bond yields forced the Greek government to seek the country’s first assistance in May 2010 (Hix and Høyland). Now, Greece got two bailouts. All the assistance came from the EU over a five years period. During this time, the country undertook the EU-led austerity measures. It aimed to reduce costs in the phase of a biting economic recession, political, and social unrest. Come June 2015, the Greek government in a phase of political divisions amid the never ending recession, faced a default on its national debts amid calls to leave the EU altogether. To save the day, the Greek parliament voted for further austerity on 5 July 2015. This led to the third bailout to the country totalling 85 billion euros.
Ireland went the Greek way in its request for a bailout late in 2010, while Portugal came in next in the month of May 2011 (Hix and Høyland). Spain and Italy also found themselves in the rather precarious situation, and therefore, Spain put in her request to the EU for a bailout in June 2012; and so did Cyprus. Portugal also followed suit. However, come 2014, Spain, Portugal, and Ireland exited the bailout plan in the wake of domestic austerity actions, these countries’ fiscal reforms, and other favourable economic factors. Full economic recovery may still be far, but at least they are able to stand on their own. However, for Spain, a recent economic development in the country pushes it toward a second bailout plan.
For the European Union, the economic turmoil within the union comes amid momentous wealth shifts toward Asia and Africa. In the wake of this, the EU’s global GDP share dropped from 24 percent in 1990 to 22 percent in 2010. The emerging markets as those of China, India, Russia, and Brazil all compete the European Union for foreign direct investments, and growth resources like oil and gas. In addition, the European labour force ages drastically and now seeks leisure than work. Furthermore, the European Union lags behind in resource allocation to innovation. Innovation is the engine of growth, and where it lacks, stagnation quickly follows. The European Union’s Lisbon Strategy that aimed to turn the European Union into an economic powerhouse is conspicuously missing in action (Hix and Høyland). In addition, its latest 2020 plan, operating in an environment of lofty ambitions, certainly will not fare any better.
In this era of declining oil and commodity prices amid rising food prices economic recovery prospects for the European Union look grimmer. Simply put, future forecasts for the European Union paint a rather dark picture of the European Union, in the wake of its largely aging and immobile population. This gives the Union a competitive disadvantage in the wake of cheap labour markets in Asia and Africa, which now forces the union’s domestic enterprises to relocate to the two continents (Kelegama 110-131). This leaves the European Union economy overburdened by high unemployment rate amid rising health costs. In addition, the Asian communist and socialist development models now pose great challenges to the capitalist model of the Anglo-Saxon cooperation. Consequently, fewer Asian nations are eager to implement the American and European Union led reforms on environmental, labour, and social strata arguing this would greatly disadvantage their development plans at this critical juncture.
The third and critical challenge in the European Unionrevolves around finding a common identity. Member nations never speak with one voice, turning the union into a misdirected entity where opposing forces pull in different directions (Dinan). The current Syrian refugees’ crisis and the subsequent divisions it continues to cause in the leadership of Eurozone is a case at hand. Academicians describe it as one the greatest paradoxes of the European Union, in the phase of a widening and deepening rift. We have a European Union that progressively moved from the unification of its customs departments into a single-market economy, and currently boasts seventeen nations in its monetary union. We also have an EU that gradually increased the number of membership nations from just six at its onset to the current twenty-eight members. In this diversity that spans almost the entire continent, a common identity continues to be a great challenge.
Consequently, the European Union finds itself unable to strengthen the union’s political institutions further, in order to keep abreast with the deepening needs of this integration, in the wake of a heterogeneous membership. In the phase of a widespread public scepticism on the European Union’s vision of cooperation and integration, the citizens remain hooked to individual national values, and consequently, are reluctant in letting Brussels usurp the national powers. In addition, the two bearers of the EU’s vision, France and Germany are now openly divided on matters of economic governance (Hix and Høyland). Therefore, the union needs to find a common European voice in all matters that touch on global economic governance.
Many in the EU looked upon the Lisbon Treaty as a provider of the necessary impetus for deepening the economic prospects of the European Union, but the struggle seems to bare any fruit presently. As a result, national politicians are now reluctant to push forward the agenda for strengthening the European Union. The strongest proponent of the union, Germany, now relaxes its voice on closer integration (Hix and Høyland). This gives the sceptics raw fodder to publicly doubt the euro prospects. In this front, however, a number of European Union politicians, such as the former French president Nicolas Sarkozy, and Belgium’s former prime minister, Guy Verhofstad, who lead the liberals minds to the argument that the European Union now requires radical steps to best respond to its myriad political and economic crisis. This group believes that the European Union’s handicap stems from the weak central institutions of the European Union. Consequently, they assert that the European Union needs sufficient regulation that governs its energy and financial sectors. Unfortunately, for the group, lukewarm reception from Germany and a number of member nations continue to meet their recommendations.
The Validity of this Model
Recent political and economic crisis in the Eurozone puts heavy challenge on the European Union’s model of governance as an implantable system of governance. However, some scholars argue that this fallout is only temporary. History is rife with instances where the EU rebounded from the ashes. This group argues that the European Union will leverage its present day adversity, and move forward in its integration efforts. This group cite as an example, the 1954 case where the plan mooted for a common European defence system failed. It is this plan, however, that gave birth to the EEC in three years’ time. Another common point of reference is the empty-chairs crisis under the then French president Charles de Gaulle in 1965. His theatrical actions later resulted in the Single European Act in 1986 through a unilateral acceptance of QMV (Bartolini). In addition, the 1980s currency tribulations gave rise to the common European Monetary System, and eventually the euro.
In the wake of regional blocs’ dominance in the global economic and financial agenda, the European Union as a single player is unlikely to achieve much on its own. A long time ally, the United States, now presses for a reduction in the number of seats the European Union occupies in the Group of 20 (G20), and the global lending houses, including the World Bank, and the IMF (Hix and Høyland). In due course the changes could trigger stronger for the integration process.
In the phase of these crises, the EU continues to attract negative media attention. However, despite the critics, most governments of the member nations, and other regional groupings continue to show strong faith in this union. Of significance is the fact that despite the crises, neither the next door Russia, nor the now Asian economic giant China nor Russia sold their holdings of euros (Hix and Høyland).
Neither has the European Union’s problems dimmed other regional groupings’ quest for greater cooperation, and eventual integration. For instance, ASEAN continues to push forward its proposals for the establishment of its ambassadorial steering committee, in line with the arrangement in Brussels. They call theirs Coreper. Consequently, South Korea, China, and Japan continue to intensify the regional trilateral ministerial meetings. The aim is to establish closer ties in the East Asian cooperation (Kelegama 110-131).
Consequently, a lot exists for the benefit of many from the European Union model of integration. At the core of the matter is the fact that the European Union is a heterogeneous organization. Therefore, how the member countries manage crisis serves as a pointer to the emerging regional bodies. For instance, if one considers monetary union objectively, it becomes clear that an integrated economic and political system is necessary to evaluate the national debt of a member country, and consequently, defers speculation. This serves well those nations aspiring to forge a customs union and adopt a free market economy, which finally leads to a common currency (Kelegama 110-131).
Experts assert that the process of integration is very difficult indeed, as invariable setbacks and crises often arise. However, as one evaluates the European Union case, data available proves such sceptics wrong. The EU as a regional union boasts of an excellent record in tackling crises, and move forward ever strongly than previously. Experts attribute this to a very strong political will. Consequently, the valuable lessons from the European Union model gives an impetus on investment benefits member nations accrue from their goal to integrate regionally. In as much as the system may not prove politically convenient, however it is a platform that time testifies have great advantages to regional economies. Moreover, it is prudent to understand that integration only succeeds, in the arena where the citizens and governments believe in the cause as vital above national interests (Hix and Høyland). Consequently, where commitments lack, the regional grouping crumbles at the first bump on the road to this city called integration.
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Dinan, Desmond. “Ever closer union: an introduction to European integration. “Boulder, USA–2005 (2004).
Hix, Simon, and Bjørn Høyland. The political system of the European Union. Palgrave Macmillan, 2011.
Kelegama, Saman “South Asia and other regional economic groupings.” South Asia (2010): 110-131.
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