With market in 1993. This allowed free movement of

With the end of the Second Wold War, The
need for stability and economic development post-1945 was immense, and with the
establishment of the European Coal and Steel Community in 1951, arguably
sparked a chain of events that now became the European Union. The first step
towards cooperation that was necessary to create a governing body to oversee
economic and political policies was first seen during the creation of the OEEC which
was formed by 16 nations who weren’t influenced by the Soviet Union. The OEEC
oversaw the implementation of the Marshall Plan which was an economic aid
provided by the USA to stabilise the European economies. The European Economic
Community (EEC) initially was to bring about economic integration, including
common market and customs union, and achieved a single market in 1993. This
allowed free movement of capital, goods, services, and people within the EEC.  Some of these establishments provided a
framework for the Maastricht treaty, which formally established the European
Union. However the monetary union is riddled with structural problems that led
to the Euro Crisis and the Greece Sovereign Debt to name a few. 

The creation of the Economic and Monetary
Union (EMU) was another step forward in the process
of economic integration. The benefits of economic integration is immense with
coordination of economic policy makings between Member States, the usage of the
single currency, an independent monetary policy ran by the European Central
Bank (ECB). However within the framework of the EU lies structural problems
which includes “the rules, regulations and institutions that govern it – is
to blame for the poor performance of the region, including its multiple
crises.”1 

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The first problem that arose was fiscal moral
hazard. “They put fiscal and debt limits at the heart
of the Maastricht criteria for entry (3% of GDP and 60%, respectively)”2,
and adopted a No Bailout Clause meaning no member states should not be liable,
nor assume the commitments or debts of any other member states. Furthermore,
the Stability and Growth Pact (SGP) was agreed, however it was this pact that played a prominent role in
the causes of the Eurozone debt crisis. To illiterate, the basic premise
of the pact was to enforce budgetary discipline to Member States using the
Euro, but the key point is the two conditions that the member states have to
respect: Annual government budget deficit should not exceed 3% and Debt/GDP
ratio should be no more than 60%. The fiscal deficit limit was subject to the
Eurozone averages of 1990, as given growth and inflation assumption, the
European policy-makers believed the Debt/GDP ratio could be held constant at
60% with an annual deficit of 3%.  Given
this, it was pretty clear that no countries would be able to uphold these
criteria, as figure 1 shows that at some point between 1995 to 2007, all Eurozone
countries, except Luxemburg and Ireland had deficit levels exceeding 3% of GDP.

What’s noticeable about the graph is that
Ireland had held surpluses for mostly the entirety of the period and so
respected the 3% budget deficit, but was later affected severely by the sovereign
debt crisis.  Germany and Spain made
efforts to have fiscal surpluses, however still remained deficit countries.
Nevertheless, their deficit levels reached the 3% criteria by 1998.

 

What’s even more surprising is that France who’s
considered a core member in the EU also had a high level of deficit, and despite
lowering its deficit to meet the requirements to enter the Eurozone, had increased
its deficit after 2001.

Another key criteria defined in the SGP was
the Debt levels as a percentage of GDP. Several categories were outlined by the
European System of Accounts that would contribute to the general government gross
debt, which were: Currency and deposits, loans, and securities. Figure 2 shows
the Eurozone countries Debt/GDP levels.

What’s noticeable is that overall; the
trend of the government gross debt of the Eurozone countries has been
decreasing during the time period. At the start of 1995, Greece, Belgium and
Italy had very high debt levels, and what’s apparent is that Belgium and Italy
made substantial improvements over the years, thus justifying that they were
actively reducing their debt to satisfy the Maastricht criteria. Greece on the
over hand, instead of decreasing had increased their debt levels by 10% over
the time period.