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Topic

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1 Evolution of the EU 2 List of Countries 3 Economic Benefits 4 One Currency For One Europe 5 European Union-Treaties 6 Trade Patterns in the EU 7 European Union- Fallacies and Crisis

8 Greek Default 9 European Union Future

10 Conclusion-Greece should exit the EU

EVOLUTION

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The idea of creating a unified Europe was not a new one. In the 9 Century, the Frankish
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emperor Charlemagne dominated much of Europe. At the beginning of the 19 century, Napoleon Bonaparte attempted to control most of Europe. In the 1930s, Adolph Hitler intended to conquer all of Europe. The key words here are dominated, control, and conquer. Throughout
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history, wars were fought in Europe over land, religion, and resourcesall with devastating results. At the end of World War II, it finally became apparent that violence and hatred could not unify Europe. In 1945, many European cities lay in ruins and people were homeless. Factories were destroyed, and bridges and railroads were bombed out. Without their homes and livelihoods, many Europeans were left in despair, not knowing how their lives could ever be normal again. It was going to take an entirely new way of thinking to rebuild Europe and help the Europeans rebuild their lives: people were going to have to work together peacefully. The ancient rivalries and prejudices had to be put aside and a new spirit of cooperation had to take their place. And
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cooperate they did in ways that were nothing short of miraculous! The Marshall Plan and the Berlin Airlift were just two examples of how allied nations worked together to help, instead of punish, the vanquished nations of World War II. They marked the dawn of a new era of European history, and set the stage for a peaceful unification of Europe. Already in 1921, the governments of the Luxemburg and Belgium had the idea that if they could work together economically, and make trade agreements, they would be more able to compete with larger countries. During World War II, The Netherlands and Belgium also took steps toward economic cooperation. Finally, in 1948, The Benelux Customs Union was formed, which enabled the free movement of goods, workers, services, and capital between the countries. In 1958, the Benelux Treaty was signed, formally establishing the Benelux countries as a free trade unit. Economists and statesmen in other European nations were also suggesting the possibility that an integrated Europe could have both economic and political advantages. For example, Jean Monnet of France believed that a union of European nations could better compete against countries with

a larger pool of resources, such as the United States. Likewise, French foreign minister Robert Schuman believed that the European producers of coal, such as France and West Germany, could integrate their coal and steel industries. On the one hand, as Monnet had suggested, this integration could give those countries more economic clout in the world markets. On the other hand, it would enable France and other European nations to keep a watchful eye on West Germanys quickly reviving economy. As West Germany was beginning its economic wonder, and recovering admirably from the devastation of World War II, the other European countries wanted to monitor it closely to be sure they werent using their coal and steel industries to rebuild a powerful military. As a result, the European Coal and Steel Community (ECSC) was formed in 1951 and became effective the next year. The ECSC integrated the production and trade of the iron, coal and steel in Belgium, Luxemburg, the Netherlands, France, West Germany and Italy. Thus, in 1952, six European countries began the path toward a unified Europe

Evolution Part 1 The Treaty of Paris, signed in 1951, created the European Coal and Steel Community (ECSC). It took effect in 1952, and eliminated tariffs and quotas on trade in iron ore, coal, coke, and steel within the six-nation economic union. In order to supervise the operations of the ECSC, the Treaty of Paris provided for an executive council, a council of ministers, a common assembly, and a court of justice. These groups of administrators had very limited power but they were the beginning of a cooperative organization involving a very important part of European industry. It laid the foundation for the future stability and prosperity that would become possible in a unified Europe.

The founders of the ECSC must have succeeded in gaining the trust and confidence of its citizens, because in 1957 and 1958 two more treaties were signed which greatly increased the areas of cooperation between the six countries. These treaties were called the Rome Treaties, and created the European Economic Community (EEC, or Common Market) and the Euratom. Euratom was created to promote the peaceful use of atomic energy, and the Common Market gradually expanded free trade to include all other areas of the member countries economies. In 1968, after the ratification of the Merger Treaty, the EEC also became known as the European Community (EC). Right after the Rome Treaties established the formation of the Common Market, the United Kingdom, Norway, Sweden, Denmark, Switzerland, Austria, and Portugal created the European Free Trade Association (EFTA). This organization relaxed tariffs on industrial products, but not agricultural products, and was much less powerful than the Common Market. Political tension between several European leaders prevented the formation of a stronger, more unified European organization for several years. In 1973, after several changes in leadership and much negotiation, three more countries from the EFTA joined the European Community. The EC now consisted of nine countries: France, West Germany, Italy, Luxemburg, the Netherlands, Belgium, the United Kingdom, Ireland, and Denmark. This enlarged European Community was very successful in promoting economic cooperation among its members, thereby increasing their prosperity; however, much more remained to be accomplished before the EC would have the political strength and influence on world affairs that the European Union has today. For example, there still was no general election of a European Parliament by the citizens of the member countries. Also, each of the nine EC countries still had its own currency. This would all change soon, though, as plans were already

underway to create an organization that would be elected by, and represent, ordinary European citizens. Economists from the nine EC countries were also working together to regulate their currencies and protect their economic stability. Finally, in 1974, the head leaders of the EC countries began meeting three times per year as an organization officially called the European Council. Gradually, through many more treaties and steps toward unification, the European Community would become a powerful organization that not only promoted prosperity for its members, but also the security and environmental welfare of its citizens.

Evolution Part 2

During the 1970s the European Community continued to strengthen its authority over the economies of its member nations. The European Court of Auditors was established in Luxemburg in 1977, and the European Monetary System was put into effect in 1979. These two organizations helped regulate the budgets and the currencies of the EC countries. Also in 1979, the first direct election of members of the European Parliament took place, and Madame Simone Veil was its President. Gradually, progress was being made to unify the European economies and direct representation was given to its citizens. In the 1980s, Greece (1981), Spain (1986), and Portugal (1986) entered the European Community, raising the number of EC countries to twelve. Another important development of this decade was the creation of the Single European Act. This act would ultimately provide for the total integration of the economies of the EC nations, and standardize their policies on such issues as health, employment, and the environment. Finally, the most significant event of the
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1980s was the fall of the Berlin Wall in 1989, and the beginning of the end of communism in the Warsaw Pact nations. East Germany became united with West Germany, which again increased the size of the European Community. Adding these new nations, and enacting the Single European Act, created a whole new dimension to the European Community. The main concerns of the member nations were not only economic, but also involved the standard of living of every citizen of the EC. Economic aid was given to the new Mediterranean members to help strengthen their economies, and a tremendous effort would be made to help the former Soviet Block countries achieve higher social and environmental standards for their citizens. Overall, the people must have felt that the increased stability provided by a unified Europe was an important goal, because they continued to work toward greater international cooperation. In the 1990s, negotiations and legislation continued to create the framework for the new European Union (EU). In 1990, the Schengen Agreement was signed, making it possible for people to easily travel throughout the member countries without having to show passports at border crossings. Most significantly, in 1993, the Maastricht European Council adopted the Treaty on European Union, which defined the EU as it is known today. This treaty, also known as the Maastricht Treaty, called for the EU nations to use a single currency by 1999. The new currency is called the euro (), and there are strict qualifications regarding economic stability that must be fulfilled by the EU nations that use it. The Maastricht Treaty also gave the EU more authority over such issues as security, the environment, education, health, and consumer protection. The decade of the 1990s also brought three more nations into the EU: Austria, Finland and Sweden joined in 1995. Finally, in 1999, the Amsterdam Treaty was signed and put into force, giving the EU even more power and responsibility regarding its citizens. By the end
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of the 20 century, the EU had become a powerful political and economic body consisting of 15 European nations.

Evolution Part 3

According to the Maastricht Treaty, all European Union countries were to be using euros by 1999. This almost happened, but not quite. The United Kingdom, Denmark, and Sweden fulfilled the requirements set by the treaty, but chose not to participate. Greece had not yet fulfilled the requirements in 1999, but did fulfill them one year later. So, in theory, eleven of the fifteen EU nations were using a single currency by the designated year. However, the transition could not happen overnight, and in 1999 euros were used for electronic (computerized) transactions only. It wasnt until 2002 that the individual currencies of the participating twelve nations were replaced by actual euro coins and bank notes. With the accession of twelve new countries, each one must apply separately to join the Euro Zone. Slovenia began using the Euro on January 1, 2007 and Malta and Cyprus will join on January 1, 2008. The thirteen nations currently using the euro are: Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxemburg, The Netherlands, Austria, Portugal, Finland, and Slovenia. The Euro is the common currency , yet , all twelve countries have special symbols, such as a king or a famous building, on the back sides of their coins. This indicates that the European Union is unified, yet diverse, with each country maintaining its own identity.

Since 2002, the use of euros has made life much easier for tourists and merchants. No longer does money need to be changed at every border, and people who work in stores, restaurants, and other places of business can now work with one currency. However, not everyone was delighted when the old currencies were replaced with the new one. For some people, getting accustomed to new things can often be difficult, and learning to recognize all the new coins and bank notes took time. Also, converting prices from old currencies to the new one was a huge task, and many consumers felt that everything became more expensive as the prices were rounded up to euros. At first, skeptics were concerned that the euro would be too weak to hold its value against the US dollar and other major currencies. Time has proven, however, that consumers do have confidence in the EU currency, as it continues to compete well on the world market The European Union is not at all like the United States or any other single country. It also is unlike any other international organization. It is a complex system that enables its member countries to work together to preserve peace and promote prosperity, while maintaining their individual national interests. The following is a list of five EU institutions, and what they do: The European ParliamentThis is the only body of the EU that is directly elected by the citizens of the member countries. In 2003 there were 626 members of the EU Parliament; the 2004 enlargement and accession of Bulgaria and Romania in 2007 has increased the number to 785. The number will reduce to 736 after the 2009 elections. Any citizen of the EU may be a candidate and all citizens may vote. The elections to choose Members of Parliament are held every five years, and the President of Parliament is chosen every 2 1/2 years. The Parliament meets in Strasbourg every month and additional meetings are also held in Brussels (see photos above). It works with the Council of the European Union to pass laws and approve the budget. It also supervises the European Commission and can vote to dismiss them, if necessary.
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The Council of the European UnionThe Council represents the individual countries, so each EU member nation takes its turn at presiding over Council meetings for a period of six months. At each meeting, at least one minister from each member country must be present. Which ministers attend each meeting is determined by the subject matter of the discussions. For example, if agriculture is to be discussed, Ministers of Agriculture will be present. The Council must work with the Parliament to pass new laws and approve budgets. The Councils other duties include finalizing international agreements and making decisions that involve international security. Council meetings are held in both Brussels and Luxemburg. The European CommissionThis is the executive side of the EU Institutions triangle (see diagram below) and it represents Europe, as a whole. There is one appointed commissioner from each member country, and they serve for five years. They, and their president, must be approved by Parliament, and they can be dismissed or censured by Parliament. The Commission proposes new laws, and makes sure that treaties and other international agreements are upheld. It must monitor how EU money is spent, and ensure that EU laws are followed. It functions independently from the EU member states, and it meets in Brussels. The Court of JusticeThis is the supreme court, which makes sure that EU laws are correctly interpreted. It presides over disputes which involve member countries, EU institutions, businesses and individuals. Because so many cases are brought before the Court of Justice, the Court of First Instance was created in 1989 to hear certain types of cases. The Court consists of one appointed judge from each member country, and the judges serve for renewable terms of six years. There are also eight advocates-general to assist the judges. The Court of Justice is located in Luxemburg.

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Some other important EU bodies are the European Investment Bank (Luxemburg) which lends money for projects of European interest, and the European Central Bank (Frankfurt) which oversees the stability of the euro. These organizations look out for the interests of the European Union as a whole, and must function independently of the individual member countries. Finally, the European Council is made up of the heads of state of all EU member countries, and the President of the European Commission. It is supposed to meet four times a year, and these meetings are presided over by the president or prime minister of the country that is currently presiding over the Council of the European Union (see page 13a different head of state presides every six months). The European Council has the power to initiate new policies, and sometimes is called upon to resolve issues that the Council of the European Union has failed to resolve. What began as the European Coal and Steel Community in 1951, has gone through many steps of enlargement to become todays European Union. As the European Community grew, and its focus moved from economic interests to more human issues, its structure and procedures for doing business had to change. The European Union is the product of more than fifty years of continuous evolution. As it continues to enlarge and grow in international prominence, it will also continue to evolve. Change will be necessary to adapt to the needs of the future.

On May 1, 2004, Cyprus, The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia were added to the European Union, making it the largest trade unit in the world. In 2007, Romania and Bulgaria joined, and Turkey, Croatia, and the Republic of Macedonia are candidate countries. What must a European country do to qualify for EU membership? First of all, it must be a stable democracy, respecting human
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rights, the rule of law, and the protection of minorities. Second, it must adopt the common rules, standards and policies that make up the body of EU law. Finally, it must have a functioning market economy that has low inflation, a low budget deficit, and exchange rate stability (its currency doesnt fluctuate much). Once a country has fulfilled those obligations, and becomes a member state, it enjoys the benefits of the four freedoms on which the EU is basedfree movement of goods, services, labor, and capital. In other words, EU citizens may live in any EU country, work in any EU country, sell their goods in any EU country, and invest in any EU country. Everyone enjoys the opportunities and products of the largest and most diverse market in the world. As wonderful as that sounds, not all EU citizens are in favor of enlargement, and it certainly has challenges. The ten countries that were added in 2004, as well as the two added in 2007, represent a much more culturally diverse group than was ever added before in previous enlargements. The economies and societies of the new member countries are much less stable that those of the western European countries. Finally, in order for the standard of living of the new countries to be raised to the standards of the older member nations, much economic support from the EU will be needed. Many people from the western European countries feel that they are shouldering an unfair burden in the interest of less advantaged countries. They also worry that large companies may relocate their factories in the new EU countries because they can hire cheaper labor there or that cheaper consumer products from the new EU countries will be brought to western European markets and force them to lower their prices. Despite these concerns, most people feel that the enlargement is a good thing, because it will help the people in the new member countries improve their lives and promote peace and stability for the entire continent of Europe.

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List of Countries in the European Union As of Today, There are 27 countries in the European Union. There were six founding members of what was then called the European Economic Community or EEC. The full list, with the year of accession (joining) in brackets in each case, is as follows:

Italy (1957) Belgium (1957) France (1957) Germany (1957) Luxembourg (1957) Netherlands (1957) United Kingdom (1973)

Ireland (1973) Denmark (1973)

Greece (1981)

Spain (1986)

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Portugal (1986)

Finland (1995) Sweden (1995) Austria (1995)

Cyprus (2004) Czech Republic (2004) Estonia (2004) Hungary (2004) Latvia (2004) Lithuania (2004) Malta (2004) Poland (2004) Slovakia (2004) Slovenia (2004)

Bulgaria (2007) Romania (2007)

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Economic Benefits of The European Union.

The benefits of the single market A central feature of the European Union is its single market. The forerunner of the EU, the European Coal and Steel Community, was explicitly a project of economic integration, and economic issues have remained at the heart of the EU ever since. The single market, which is intended to ensure that a company in one member state can trade with a company in any other member state without the interference of national borders, is now the worlds largest trading area, with a population of 500 million people and a GDP of over 12 trillion. Being part of the European single market has brought great benefits to the British economy and to anyone who works, shops or trades in it. The effect of EU membership can be seen in the trade statistics. Britain joined the then EEC in 1973, since when its trade with the other member states has grown at an annual rate of 3.3 per cent (after adjusting for inflation). Its trade with countries outside the EU has, by contrast, grown at an annual rate of only 1.3 per cent.
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A recent study published by the European Commission reported the following benefits as a result: Increased prosperity: over the last 15 years the single market has increased the EU's GDP by 2.15 per cent. In 2006 alone this meant an overall increase in GDP of 240 billion - or 518 for every EU citizen - compared to a situation without the single market. Between 300,000 and 900,000 jobs have been created thanks to the single market. Wider choice of products and services: 73 per cent of EU citizens think the single market has contributed positively to the range of products on offer, while the establishment of common standards has led to safer and environmentally friendlier products, such as food, cars and medicines.

Lower prices: the opening up of national markets and the resultant increase in competition has driven down prices of, for example, internet access, air travel and telephone calls (the latter having been reduced on average by 40 per cent over the period 2000-2006). Delivery costs have been reduced by 15 per cent. Less red tape: rather than adding to red tape, single market rules often replace a large number of complex and different national laws with a single framework, reducing bureaucracy for citizens, and compliance costs for businesses, who pass those savings on to consumers. It has also become easier to start or buy a business: the average cost for setting up a new company in the former EU-15 has fallen from 813 in 2002 to 554 in 2007, and the time needed to register a company administratively was reduced from 24 days in 2002 to about 12 days today. 60 million customs forms have been scrapped as they are no longer applied to cross-border trade within the single market. It is worth a couple of paragraphs to explain how this has happened. A central objective of
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the EU, and in fact what turns 27 national markets into the European single market, is the abolition of tariff and non-tariff barriers. A tariff is a tax on trade, levied on goods or services that cross a border, while a non-tariff barrier is any other kind of law or rule that, in practice, makes cross-border trade harder. This can take the form of a quota, or a complex and cumbersome customs procedure, or a domestic law that has the effect of discriminating against imports. For example, the German law that required beer to be made solely of three specified ingredients water, barley, and hops had the effect of excluding from the German market foreign beers made with other ingredients. In effect, this was protectionism. A ruling of the European Court of Justice forced a change in the law so that consumers in Germany can have a wider choice of beers, including ones from abroad. The traditional beers are still available, of course, for those people that prefer them. Some non-tariff barriers can still be retained where there is an overriding reason of some other kind, such as public health. A major task for the European Commission and the European Court is to distinguish between the good reasons for retaining non-tariff barriers and the bad. Industry lobby groups often try to protect their own interests by arguing in favour of retaining particular non-tariff barriers from which they benefit, but the overall trend in Europe has been to reduce and eliminate them. The result of reducing and eliminating these non-tariff barriers has been to increase trade between the different European countries, creating jobs and increasing prosperity. It is often the case that, while also serving as non-tariff barriers, national rules also perform a valuable function, for example protecting health and safety or consumer rights. The answer in these cases is to replace the myriad sets of national rules with a single set of European rules instead. That way, the EU can get the benefits that the national rules provided consumers

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remain protected, for example but without the obstructions to trade that non-tariff barriers might provide. In fact, because the EU is the worlds largest economic block and the worlds largest trader, the rules that the EU adopts for its own single market tend to be copied by other countries around the world. Partly this is because companies that wish to export into the EU market have to conform to EU rules for their export production; and partly this is because other countries, when drawing up rules of their own, often choose to copy EU standards because they are already the most widely used and so are likely to pose the fewest difficulties in being adopted. To be a member of the EU, therefore, gives a country influence over the setting of commercial rules that it would, in any case, be likely to follow even if not in the EU.

The role of the EU budget Discussion of the EU budget often centres on the EUs expenditure on the Common Agricultural Policy. However, the latest figures on the budget show this to be a declining aspect of EU activity and expenditure. Every recent reform of the EU budget has reduced the proportion of the EUs expenditure that is spent on agriculture, and in 2008, CAP spending fell to only 37% of the total. 25 years ago, that proportion was 70%. One might say that it is still too high, perhaps, but it is clearly incorrect to treat the EU as though it were the eurosceptic caricature of greedy farmers, idle bureaucrats and corrupt politicians. Furthermore, in the same year, EU spending on measures linked directly to jobs, growth and competitiveness rose to a record 40% of the budget, or 46.6 billion, including a 9% increase
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in spending on research. Note that this is more than is spent on agriculture. The EU budget increasingly reflects the priorities of an organisation determined to boost its competitiveness and productivity in the modern economy, rather than the agriculturedominated priorities of the past. If you think that competitiveness and growth should the priorities in the future, then you can be confident that the EU is representing your interests properly.

Even eurosceptic free market economists agree that a single market of 500 million consumers is likely to offer lower prices, more choice, and more prosperity than a single market of only 60 million. The European single market has simplified rules and cut red tape, to the benefit of companies, employees and consumers alike. Furthermore, the EUs commercial agenda is increasingly matched by its budgetary priorities. It is moving towards the agenda of competitiveness and growth, and away from the agenda of agricultural protection. This means that more than ever the EU is echoing the economic priorities that most people in Britain wish to see. It is a pity if a lack of information about Europe means that they do not know this, for Europe is where their prosperity lies.

The Euro-ONE CURRENCY FOR ONE EUROPE

The euro was created because a single currency offers many advantages and benefits over the previous situation where each Member State had its own currency. Not only are fluctuation risks

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and exchange costs eliminated and the single market strengthened, but the euro also means closer co-operation among Member States for a stable currency and economy to the benefit of us all.

When the EU was founded in 1957, the Member States concentrated on building a 'common market' for trade. However, over time it became clear that closer economic and monetary cooperation was needed for the internal market to develop and flourish further, and for the whole European economy to perform better, bringing more jobs and greater prosperity for Europeans. In 1991, the Member States approved the Treaty on European Union (the Maastricht Treaty), deciding that Europe would have a strong and stable currency for the 21st century.

The benefits of the euro are diverse and are felt on different scales, from individuals and businesses to whole economies. They include:

More choice and stable prices for consumers and citizens Greater security and more opportunities for businesses and markets Improved economic stability and growth More integrated financial markets A stronger presence for the EU in the global economy A tangible sign of a European identity

Many of these benefits are interconnected. For example, economic stability is good for a Member States economy as it allows the government to plan for the future. But economic stability also benefits businesses because it reduces uncertainty and encourages companies to invest. This, in turn, benefits citizens who see more employment and better-quality jobs.

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How do these benefits of the euro arise?

The single currency brings new strengths and opportunities arising from the integration and scale of the euro-area economy, making the single market more efficient.

Before the euro, the need to exchange currencies meant extra costs, risks and a lack of transparency in cross-border transactions. With the single currency, doing business in the euro area is more cost-effective and less risky.

Meanwhile, being able to compare prices easily encourages cross-border trade and investment of all types, from individual consumers searching for the lowest cost product, through businesses purchasing the best value service, to large institutional investors who can invest more efficiently throughout the euro area without the risks of fluctuating exchange rates. Within the euro area, there is now one large integrated market using the same currency.

Benefits worldwide

The scale of the single currency and the euro area also brings new opportunities in the global economy. A single currency makes the euro area an attractive region for third countries to do business, thus promoting trade and investment. Prudent economic management makes the euro an attractive reserve currency for third countries, and gives the euro area a more powerful voice in the global economy.

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Scale and careful management also bring economic stability to the euro area, making it more resilient to so-called external economic 'shocks', i.e. sudden economic changes that may arise outside the euro area and disrupt national economies, such as worldwide oil price rises or turbulence on global currency markets. The size and strength of the euro area make it better able to absorb such external shocks without job losses and lower growth.

Realising the benefits

The euro does not bring economic stability and growth on its own. This is achieved first through the sound management of the euro-area economy under the rules of the Treaty and the Stability and Growth Pact (SGP), a central element of Economic and Monetary Union (EMU). Second, as the key mechanism for enhancing the benefits of the single market, trade policy and political cooperation, the euro is an integral part of the economic, social and political structures of todays European Union.

The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) and the Eurosystem (composed of the central banksof the eurozone countries). As an independent central bank, the ECB has sole authority to set monetary policy. The Eurosystem participates in the printing, minting and distribution of notes and coinsin all member states, and the operation of the eurozone payment systems.

The 1992 Maastricht Treatyobliges most EU member states to adopt the euro upon meeting certain monetary and budgetary convergence criteria, although not all states have done so. The United Kingdom and Denmark negotiated exemptions,[12]while Sweden (which joined the EU in
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1995, after the Maastricht Treaty was signed) turned down the euro in a 2003 referendum, and has circumvented the obligation to adopt the euro by not meeting the monetary and budgetary requirements. All nations that have joined the EU since 1993 have pledged to adopt the euro in due course

The euro is the sole currency of 17 EU member states: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. These countries comprise the "eurozone", some 326 million people in total.

With all but two of the remaining EU members obliged to join, together with future members of the EU, the enlargement of the eurozoneis set to continue. Outside the EU, the euro is also the sole currency of Montenegro and Kosovoand several European micro states (Andorra, Monaco, San Marino and the Vatican City) as well as in three overseas territories of EU states that are not themselves part of the EU (Mayotte, Saint Pierre and Miquelon and Akrotiri and Dhekelia). Together this direct usage of the euro outside the EU affects over 3 million people.

Since its introduction, the euro has been the second most widely held international reserve currencyafter the US dollar. The share of the euro as a reserve currency has increased from 18% in 1999 to 27% in 2008. Over this period the share of the US dollar fell from 71% to 64% and the Yen fell from 6.4% to 3.3%. The euro inherited and built on the status of the Deutsche Markas the second most important reserve currency. The euro remains underweight as a reserve currency in advanced economies while overweight in emerging and developing economies: according to the International Monetary Fund]the total of euro held as a reserve in the world at the end of 2008 was equal to $1.1 trillion or 850 billion, with a share of 22% of all currency
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reserves in advanced economies, but a total of 31% of all currency reserves in emerging and developing economies.

The possibility of the euro becoming the first international reserve currency is now widely debated among economists.]Former Federal Reserve Chairman Alan Greenspangave his opinion in September 2007 that it is "absolutely conceivable that the euro will replace the US dollar as reserve currency, or will be traded as an equally important reserve currency." In contrast to Greenspan's 2007 assessment the euro's increase in the share of the worldwide currency reserve basket has slowed considerably since 2007 and since the beginning of the worldwide credit crunch related recession and European sovereign-debt crisis

Outside the eurozone, a total of 23 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro including 14 countries in mainland Africa (CFA franc and Moroccan dirham), two African island countries (Comorian franc and Cape Verdean escudo), three French Pacific territories (CFP franc) and another Balkan country, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark). On 28 July 2009, So Tom and Prncipe signed an agreement with Portugal which will eventually tie its currency to the euro

With the exception of Bosnia (which pegged its currency against the Deutsche Mark) and Cape Verde (formerly pegged to the Portuguese escudo) all of these non-EU countries had a currency peg to the French Franc before pegging their currencies to the euro. Pegging a country's currency to a major currency is regarded as a safety measure, especially for currencies of areas with weak

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economies, as the euro is seen as a stable currency, prevents runaway inflation and encourages foreign investment due to its stability.

Within the EU several currencies have a peg to the euro, in most instances as a precondition to joining the eurozone. The Bulgarian levwas formerly pegged to the Deutsche Mark, other EU member states have a direct peg due to ERM II: the Danish krone, the Lithuanian litasand the Latvian lats.

In total, over 150 million people in Africa use a currency pegged to the euro, 25 million people outside the eurozone in Europe and another 500,000 people on Pacific islands

Economic Advantages of Euro

In economics, an optimum currency area (or region) (OCA, or OCR) is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency. There are two models, both proposed by Robert Mundell: the stationary expectations modeland the international risk sharing model. Mundell himself advocates the international risk sharing model and thus concludes in favour of the euroHowever, even before the creation of the single currency, there were concerns over diverging economies. Before the Late-2000s recessionthe chances of a state leaving the euro, or the chances that the whole zone would collapse, were considered extremely slim. However the Greek government-debt crisis led to former British foreign secretary Jack Strawclaiming the Eurozone could not last in its current form.[41]Part of the problem seems to be the rules that were created when the Euro was set up. John Lanchester, writing for The New Yorker explains it thus:

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The guiding principle of the currency, which opened for business in 1999, were supposed to be a set of rules to limit a country's annual deficit to three per cent of gross domestic product, and the total accumulated debt to sixty per cent of G.D.P. It was a nice idea, but by 2004 the two biggest economies in the euro zone, Germany and France, had broken the rules for three years in a row

Transaction costs and risks

The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks in the eurozone must charge the same for intramember cross-border transactions as purely domestic transactions for electronic payments (e.g., credit cards, debit cards and cash machine withdrawals).

The absence of distinct currencies also removes exchange raterisks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones. Companies that hedgeagainst
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this risk will no longer need to shoulder this additional cost. This is particularly important for countries whose currencies had traditionally fluctuated a great deal, particularly the Mediterranean nations.

Financial markets on the continent are expected to be far more liquidand flexible than they were in the past. The reduction in cross-border transaction costs will allow larger banking firms to provide a wider array of banking services that can compete across and beyond the eurozone.

Price parity Another effect of the common European currency is that differences in prices in particular in price levels should decrease because of the 'law of one price'. Differences in prices can trigger arbitrage, i.e. speculative trade in a commodityacross borders purely to exploit the price differential. Therefore, prices on commonly traded goods are likely to converge, causing inflation in some regions and deflation in others during the transition. Some evidence of this has been observed in specific eurozone market

Macroeconomic stability

Low levels of inflation are the hallmark of stable and modern economies. Because a high level of inflation acts as a tax (seigniorage) and theoretically discourages investment, it is generally viewed as undesirable. In spite of the downside, many countries have been unable or unwilling to deal with serious inflationary pressures. Some countries have successfully contained them by establishing largely independent central banks. One such bank was the Bundesbankin Germany; as the European Central Bank is modelled on the Bundesbank,]it is independent of the pressures of national governments and has a mandate to keep inflation low. Member countries that join the
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euro hope to enjoy the macroeconomic stability associated with low levels of inflation. The ECB (unlike the Federal Reservein the United States of America) does not have a second objective to sustain growth and employment.

Many national and corporate bondsdenominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in national currencies. While increased liquidity may lower the nominal interest rateon the bond, denominating the bond in a currency with low levels of inflation arguably plays a much larger role. A credible commitment to low levels of inflation and a stable debt reduces the risk that the value of the debt will be eroded by higher levels of inflation or default in the future, allowing debt to be issued at a lower nominal interest rate.

Trade

A 2009 consensus from the studies of the introduction of the euro is that it has increased trade within the eurozone by 5% to 10%although one study suggested an increase of only 3%[47]while another estimated 9 to 14%]However, a meta-analysis of all available studies suggests that the prevalence of positive estimates is caused by publication biasand that the underlying effect may be negligible.

Investment Physical investment seems to have increased by 5% in the eurozone due to the introduction.[ Regarding foreign direct investment, a study found that the intra-eurozone FDI stocks have increased by about 20% during the first four years of the EMU.[ Concerning the effect on corporate investment, there is evidence that the introduction of the euro has resulted in an
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increase in investment rates and that it has made it easier for firms to access financing in Europe. The euro has most specifically stimulated investment in companies that come from countries that previously had weak currencies. A study found that the introduction of the euro accounts for 22% of the investment rate after 1998 in countries that previously had a weak currency[

Inflation

The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices, but this impression was not confirmed by general indices of inflation and other studies. A study of this paradox found that this was due to an asymmetric effect of the introduction of the euro on prices: while it had no effect on most goods, it had an effect on cheap goods which have seen their price round up after the introduction of the euro. The study found that consumers based their beliefs on inflation of those cheap goods which are frequently purchased.]It has also been suggested that the jump in small prices may be because prior to the introduction, retailers made fewer upward adjustments and waited for the introduction of the euro to do so[

Exchange rate risk

One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates. It has been found that the introduction of the euro created "significant reductions in market risk exposures for nonfinancial firms both in and outside of Europe"]These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-Euro firms with a high fraction of foreign sales or assets in Europe".

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Financial integration

The introduction of the euro seems to have had a strong effect on European financial integration. According to a study on this question, it has "significantly reshaped the European financial system, especially with respect to the securities markets [...] However, the real and policy barriers to integration in the retail and corporate banking sectors remain significant, even if the wholesale end of banking has been largely integrated. Specifically, the euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the eurozone. []On a global level, there is evidence that the introduction of the euro has led to an integration in terms of investment in bond portfolios, with eurozone countries lending and borrowing more between each other than with other countries.

Effect on interest rates Long-term interest rates of Euro countries, 1993-2012

The introduction of the euro has decreased the interest rates of most members countries, in particular those with a weak currency. As a consequence the market value of firms from countries which previously had a weak currency has very significantly increasedThe countries whose interest rates fell most as a result of the euro are Greece, Ireland, Portugal, Spain, and Italy.]The effect of such low interest rates made it easier for banks within the countries in which interest rates fell and the countries themselves to borrow significant amounts (above the 3% of GDP budget deficit imposed on the eurozone initially) and increase their public deficit and levels of privately held consumer debt.]Following the Late-2000s financial crisis, governments in these

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countries found it necessary to bail out or nationalise their privately held banks in order to prevent systemic failure of the banking system.]This further increased the already high levels of public debt to a level the markets began to consider unsustainable, via increasing government bond interest rates, producing the ongoing European sovereign-debt crisis.

Price convergence

The evidence on the convergence of prices in the eurozone with the introduction of the euro is mixed. Several studies failed to find any evidence of convergence following the introduction of the euro after a phase of convergence in the early 1990s. Other studies have found evidence of price convergence, in particular for cars[ A possible reason for the divergence between the different studies is that the processes of convergence may not have been linear, slowing down substantially between 2000 and 2003, and resurfacing after 2003 as suggested by a recent study (2009)

Tourism

A study suggests that the introduction of the euro has had a positive effect on the amount of tourist travel within the EMU, with an increase of 6.5%

European Union Treaties.

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The European Union is based on the rule of law. This means that every action taken by the EU is founded on treaties that have been approved voluntarily and democratically by all EU member countries. For example, if a policy area is not cited in a treaty, the Commission cannot propose a law in that area.

A treaty is a binding agreement between EU member countries. It sets out EU objectives, rules for EU institutions, how decisions are made and the relationship between the EU and its member countries.

Treaties are amended to make the EU more efficient and transparent, to prepare for new member countries and to introduce new areas of cooperation such as the single currency.

Under the treaties, EU institutions can adopt legislation, which the member countries then implement.

The main treaties are:

The Treaty of Lisbon (signed 13 December 2007) entered into force on the 1 December 2009. Also known as the Reform Treaty, it amends the Treaty on European Union (Maastricht 1992) and the Treaty Establishing the European Community (Rome 1957). The Treaty of Rome has been renamed the Treaty on the Functioning of the European Union. Treaty texts and commentaries signposted below show how the amendments take shape and include consolidated versions of Rome and Maastricht treaties. Amendments include changes to

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the institutional structure and to the way legislation is negotiated, enhancement of the rights of individuals and organisations, and the attribution of legal personality on the Union. Evolving from the failed constitutional treaty the Lisbon Treaty proposed greater coherence, efficiency and democratic legitimacy in an enlarged European Union. Following protracted ratification, the Reform Treaty continues to face challenges however. Following the treaty of Nice a Convention on the Future of Europe (aka European Convention) was established to draw up a draft constitutional treaty for Europe between March 2002 and July 2003. The Draft Treaty establishing a Constitution for Europe was the subject of an intergovernmental conference intended to revise the structure and decision making process to support the enlargement of the Union. Although the treaty was adopted by the Heads of State and Government at the Brussels European Council on 17 and 18 June 2004 and signed in Rome on 29 October 2004, it was never ratified. Reflection on the reform process, prompted the establishment of a new Inter Governmental Conference in 2007.

Treaty of Lisbon

Signed: 13 December 2007 Entered into force: 1 December 2009

Purpose: to make the EU more democratic, more efficient and better able to address global problems, such as climate change, with one voice.

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Main changes: more power for the European Parliament, change of voting procedures in the Council, citizens' initiative, a permanent president of the European Council, a new High Representative for Foreign Affairs, a new EU diplomatic service.

The Lisbon treaty clarifies which powers:

belong to the EU belong to EU member countries Are shared.

Treaty of Nice

'The present generation should lay the final brick in the edifice of Europe. This is our task and we ought to get down to it.' - Tony Blair, British Prime Minster, 2000

The Treaty of Nice was agreed at the Nice European Councilin December 2000. It represented a further attempt by the governments of the member states to find a workable means of moving forward the process of European integration, and to prepare for the coming enlargementof the EU to include ten new members. Negotiations were divided by the reemergence of old arguments over the benefits of intergovernmental as opposed to
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supranationalmodels for the running of the EU. Nevertheless, the final document made significant changes to how the EU would be run in the future.

Signed: 26 February 2001 Entered into force: 1 February 2003

Purpose: to reform the institutions so that the EU could function efficiently after reaching 25 member countries.

Main changes: methods for changing the composition of the Commission and redefining the voting system in the Council.

Treaty of Amsterdam

The Treaty of Amsterdam (1997) was the third major amendment to the arrangements made under the Treaty of Rome(1957). It was largely an exercise in tying up the loose ends left over from the Maastricht Treaty(1992). However, in the ways in which it changed the operation of the Council of the European Union, absorbed the Schengen Conventionand increased the role of the EU in home affairs, it pushed forward the model of a supranationalEuropean Union at the expense of intergovernmental cooperation.

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Signed: 2 October 1997 Entered into force: 1 May 1999

Purpose: To reform the EU institutions in preparation for the arrival of future member countries.

Main changes: amendment, renumbering and consolidation of EU and EEC treaties. More transparent decision-making (increased use of the co-decision voting procedure).

Treaty on European Union - Maastricht Treaty

The Maastricht Treaty (formally, the Treaty on European Union or TEU) was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands.[1] On 910 December 1991, the same city hosted the European Councilwhich drafted the treaty.[2] Upon its entry into force on 1 November 1993 during the Delors Commission,[3] it created the European Unionand led to the creation of the single European currency, the euro. The Maastricht Treaty has been amended by the treaties of Amsterdam, Nice and Lisbon

Signed: 7 February 1992 Entered into force: 1 November 1993

Purpose: to prepare for European Monetary Union and introduce elements of a political union (citizenship, common foreign and internal affairs policy).
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Main changes: establishment of the European Union and introduction of the co-decision procedure, giving Parliament more say in decision-making. New forms of cooperation between EU governments for example on defence and justice and home affairs.

Single European Act

The Single European Act (SEA) was the first major attempt made by member states to amend the arrangements made in the Treaty of Rome(1957). Although the European Community had been in operation for nearly thirty years, it had not achieved its aim of establishing a genuine common market. The SEA's main pupose was to set a deadline for the creation of a full single market by 1992. It also created deeper integration by making it easier to pass laws, strengthening the EU Parliamentand laying the basis for a European foreign policy. In these ways it took the process of European integration to a new level, laying the groundwork for the rapid changes of the 1990s and 2000s

Signed: 17 February 1986 (Luxembourg) / 28 February 1986 (The Hague) Entered into force: 1 July 1987

Purpose: to reform the institutions in preparation for Portugal and Spain's membership and speed up decision-making in preparation for the single market.

Main changes: extension of qualified majority voting in the Council (making it harder for a single country to veto proposed legislation), creation of the cooperation and assent procedures, giving Parliament more influence

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Merger Treaty - Brussels Treaty

The Merger Treaty, signed in Brussels on 8 April 1965 and in force since 1 July 1967, first gathered together the organizational structures of the then three European Communities (European Coal and Steel Community, European Economic Community and Euratom). This formal name was Treaty establishing a Single Council and a Single Commission of the European Communities.

It created the European Commission and the Council of the European Communities to be the governing bodies for all three institutions, and it also had them share a single budget. This treaty is regarded by some as the real beginning of the modern European Union. The term European Communities or EC also came into use from this time onward.

Signed: 8 April 1965 Entered into force: 1 July 1967

Purpose: to streamline the European institutions.

Main changes: creation of a single Commission and a single Council to serve the then three European Communities (EEC, Euratom, ECSC). Repealed by the Treaty of Amsterdam.

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Treaty establishing the European Coal and Steel Community

The first Community organisation was created in the aftermath of the Second World War when reconstructing the economy of the European continent and ensuring a lasting peace appeared necessary. Thus the idea of pooling Franco-German coal and steel production came about and the European Coal and Steel Community (ECSC) was formed. This choice was not only economic but also political, as these two raw materials were the basis of the industry and power of the two countries. The underlying political objective was to strengthen Franco-German solidarity, banish the spectre of war and open the way to European integrationThe aim of the Treaty, as stated in Article 2, was to contribute, through the common market for coal and steel, to economic expansion, growth of employment and a rising standard of living. Thus, the institutions had to ensure an orderly supply to the common market by ensuring equal access to the sources of production, the establishment of the lowest prices and improved working conditions. All of this had to be accompanied by growth in international trade and modernisation of production.

In the light of the establishment of the common market, the Treaty introduced the free movement of products without customs duties or taxes. It prohibited discriminatory measures or practices, subsidies, aids granted by States or special charges imposed by States and restrictive practices

Signed: 18 April 1951 Entered into force: 23 July 1952 Expired: 23 July 2002

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Purpose: to create interdependence in coal and steel so that one country could no longer mobilise its armed forces without others knowing. This eased distrust and tensions after WWII. The ECSC treaty expired in 2002.

When new countries joined the EU, the founding treaties were amended:

1973 (Denmark, Ireland, United Kingdom) 1981 (Greece) 1986 (Spain, Portugal) 1995 (Austria, Finland, Sweden) 2004 (Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia).

2007 (Bulgaria, Romania)

Trade Patterns in the European Union Trade isnt just big business, its everybodys business. It allows us to buy everything from our morning coffee to the homes we live in, and hundreds of thousands of Irish citizens work in jobs related to the trade of goods and services. That makes Irelands trade policy crucial to creating employment and improving living standards, but as an island nation with a population of just over four million its difficult for us to compete with bigger countries on international trade markets.

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However, as part of the European Union Ireland can trade on a level playing field and get a fair deal on our imports and exports. The EU has developed around the central philosophy of free, fair trade something that will be a cornerstone of Irelands economic growth on the road to financial recovery. At the heart of that philosophy is the Internal Market, one of the EUs most important achievements. The Internal Market has removed import duties and other barriers to free trade between EU member states. Its helped create a more competitive market place thats been good for business by reducing costs, and good for consumers by lowering the price of goods and services and providing more choice in the marketplace.

Being part of the European Union also makes it easier for Ireland to trade effectively on world markets. Much of our trade policy is made in agreement with the other 26 Member States, and we all negotiate as one on the international scene through the European Commission.

The EU's trade policynot only ensures member states get the best possible deal when trading with countries outside Europe, its also designed to help developing nations benefit from fair access to both European markets and the global economy

The European Union Emissions Trading System (EU ETS), also known as the European Union Emissions Trading Scheme, was the first large emissions tradingscheme in the world.It was launched in 2005 to combat climate change and is a major pillar of EU climate policy. As of June 2012, the EU ETS covers more than 11,000 factories, power stations, and other installations

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with a net heat excess of 20 MW in 30 countriesall 27 EU member states plus Iceland, Norway, and LiechtensteinThe installations regulated by the EU ETS are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions.

Installations must monitor and report their CO2emissions, because every year they must return leftover emission allowances to the government. In order to neutralize irregularities in CO2emission levels due to extreme weather events (harsh winters or very hot summers), emission creditsare doled out for a period of several years, called a "trading period". The first ETS trading period lasted three years, from January 2005 to December 2007. The second trading period began in January 2008 and spans a period of five years, until December 2012. The third trading period will run from January 2013 to December 2020.

Installations currently receive trading credits from their national allowance plans (NAPs), administered by the governments of participating countries. If carbon emissions exceeds what is permitted by its credits, a factory can purchase trading credits from other installations or countries. Conversely, if an installation has performed well at reducing its carbon emissions, it can sell its leftover credits for money. This allows the system to be more self-contained without necessitating too much government intervention.

In January 2008, the European Commissionproposed a number of changes to the scheme, including centralized allocation by an EU authority (as opposed to national allocation plans), a turn to auctioning a greater share (more than 60%) of permits rather than allocating freely, and inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons.These changes are still in a draft stage.

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Compared to the 2005, when the EU ETS was first implemented, the proposed caps for 2020 (the final year of the third trading period) foresee a 21% reduction of greenhouse gases. The EU ETS has recently been extended to the airline industry as well. These changes took place starting January 2012

The ETS, in which all 15 Member States that were then members of the European Unionparticipated, nominally commenced operation on 1 January 2005, although national registries were unable to settle transactions for the first few months. However, the prior existence of the UK Emissions Trading Schememeant that market participants were already in place and ready. In its first year, 362 million tonnes of CO2were traded on the market for a sum of 7.2 billion, and a large number of futures and optionsThe price of allowances increased more or less steadily to a peak level in April 2006 of about 30 per tonne CO2[ but fell in May 2006 to under 10/ton on news that some countries were likely to give their industries such generous emission caps that there was no need for them to reduce emissions. Lack of scarcity under the first phase of the scheme continued through 2006 resulting in a trading price of 1.2 per tonne in March 2007, declining to 0.10 in September 2007.

The EU ETS has been criticized for several failings, including: over-allocation, windfall profits, price volatility, and in general for failing to meet its goal[

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Proponent argue, however, that Phase I of the EU ETS (20052007) was a "learning phase" designed primarily to establish baselines and create the infrastructure for a carbon market, not to achieve significant reductions.

In addition, the EU ETS has been criticized as having caused a disruptive spike in energy prices. Defenders of the scheme say that this spike did not correlate with the price of permits, and in fact the largest price increase occurred at a time (MarDec 2007) when the cost of permits was negligible

European Union: The Debt Crisis. The European debt crisis is the shorthand term for Europes struggle to pay the debts it has built up in recent decades. Five of the regions countries Greece, Portugal, Ireland, Italy, and Spain have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it was intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. In fact, the head of the Bank of England referred to it as the most serious financial crisis at least since the 1930s, if not ever, in October 2011.

This is one of most important problems facing the world economy, but it is also one of the hardest to understand. Below is a Q&A to help familiarize you with the basics of this critical issue.

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How did the crisis begin?

The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues making high budget deficits unsustainable. The result was that the new Prime Minister George Papandreou, in late 2009, was forced to announce that previous governments had failed to reveal the size of the nations deficits. In truth, Greeces debts were so large that they actually exceed the size of the nations entire economy, and the country could no longer hide the problem. Investors responded by demanding higher yields on Greeces bonds, which raised the cost of the countrys debt burden and necessitated a series of bailouts by the European Union and European Central Bank(ECB). The markets also began driving up bond yields in the other heavily indebted countries in the region, anticipating problems similar to what occurred in Greece.

Why do bonds yields go up in response to this type of crisis, and what are the implications?

The reason for rising bond yields is simple: if investors see higher risk associated with investing in a countrys bonds, they will require a higher return to compensate them for that risk. This begins a vicious cycle: the demand for higher yields equates to higher borrowing costs for the country in crisis, which leads to further fiscal strain, prompting investors to demand even higher

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yields, and so on. A general loss of investor confidence typically causes the selling to affect not just the country in question, but also other countries with similarly weak finances an effect typically referred to as contagion.

What did European governments do about the crisis?

The European Union has taken action, but it has moved slowly since it requires the consent of all 17 nations in the union. The primary course of action thus far has been a series of bailouts for Europes troubled economies. In spring, 2010, when the European Union and International Monetary Fund disbursed 110 billion euros (the equivalent of $163 billion) to Greece. Greece required a second bailout in mid-2011, this time worth about $157 billion. On March 9, 2012, Greece and its creditors agreed to a debt restructuring that set the stage for another round of bailout funds. Ireland and Portugal also received bailouts, in November 2010 and May 2011, respectively. The Eurozone member states also created the European Financial Stability Facility (EFSF) to provide emergency lending to countries in financial difficulty.

The European Central Bank also has become involved. The ECB announced a plan, in August 2011, to purchase government bonds if necessary in order to keep yields from spiraling to a level that countries such as Italy and Spain could no longer afford. In December 2011, the ECB made 489 ($639 billion) in credit available to the regions troubled banks at ultra-low rates, then followed with a second round in February 2012. The name for this program was the Long Term Refinancing Operation, or LTRO. Numerous financial instituions had debt coming due in 2012,
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causing them to hold on to their reserves rather than extend loans. Slower loan growth, in turn, could weigh on economic growth and make the crisis worse. As a result, the ECB sought to boost the banks' balance sheets to help forestall this potential issue.

Although the actions by European policy makers usually helped stabilize the financial markets in the short term, they were widely criticized as merely kicking the can down the road, or postponing a true solution to a later date. In addition, a larger issue loomed: while smaller countries such as Greece are small enough to be rescued by the European Central Bank, Italy and Spain are too big to be saved. The perilous state of the countries fiscal health was therefore a key issue for the markets at various points in 2010, 2011, and 2012.

Why is default such a major problem? Couldnt a country just walk away from its debts and start fresh?

Unfortunately, the solution isnt that simple for one critical reason: European banks remain one of the largest holders of regions government debt, although they reduced their positions throughout the second half of 2011. Banks are required to keep a certain amount of assets on their balance sheets relative to the amount of debt they hold. If a country defaults on its debt, the value of its bonds will plunge. For banks, this could mean a sharp reduction in the amount of assets on their balance sheet and possible insolvency. Due to the growing interconnectedness
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of the global financial system, a bank failure doesnt happen in a vacuum. Instead, there is the possibility that a series of bank failures will spiral into a more destructive contagion or domino effect.

The best example of this is the U.S. financial crisis, when a series of collapses by smaller financial institutions ultimately led to the failure of Lehman Brothers and the government bailouts or forced takeovers of many others. Since European governments are already struggling with their finances, there is less latitude for government backstopping of this crisis compared to the one that hit the United States.

How has the European debt crisis affected the financial markets?

The possibility of a contagion has made the European debt crisis a key focal point for the world financial markets in the 2010-2012 period. With the market turmoil of 2008 and 2009 in fairly recent memory, investors reaction to any bad news out of Europe was swift: sell anything risky, and buy the government bonds of the largest, most financially sound countries. Typically, European bank stocks and the European markets as a whole performed much worse than their global counterparts during the times when the crisis was on center stage. The bond markets of the affected nations also performed poorly, as rising yields means that prices are falling. At the same time, yields on U.S. Treasuries fell to historically low levels in a reflection of investors "flight to safety."

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What are the political issues involved?

The political implications of the crisis are enormous. In the affected nations, the push toward austerity or cutting expenses to reduce the gap between revenues and outlays has led to public protests in Greece and Spain and in the removal of the party in power in both Italy and Portugal. On the national level, the crisis has led to tensions between the fiscally sound countries, such as Germany, and the higher-debt countries such as Greece. Germany pushed for Greece and other affected countries to reform the budgets as a condition of providing aid, leading to elevated tensions within the European Union. After a great deal of debate, Greece ultimately agreed to cut spending and raise taxes. However, an important obstacle has been Germanys unwillingness to agree to a region-wide solution such as the issuance of bonds by all 17 countries in the Eurozone since it would have to foot a disproportionate percentage of the bill.

The tension has created the possibility that one or more European countries would eventually abandon the euro (the regions common currency). On one hand, leaving the euro would allow a country to pursue its own independent policy rather than being subject to the common policy for the 17 nations using the currency. But on the other, it would be an event of unprecedented magnitude for the global economy and financial markets. This concern contributed to periodic weakness in the euro relative to other major global currencies during the crisis period.

Is fiscal austerity the answer?

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Not necessarily. Germanys push for austerity (higher taxes and lower spending) measures in the regions smaller nations is problematic in that reduced government spending can lead to slower growth, which means lower tax revenues for countries to pay their bills. In turn, this makes it more difficult for the high-debt nations to dig themselves out. The prospect of lower government spending has led to massive public protests and made it more difficult for policymakers to take all of the steps necessary to resolve the crisis. In addition, the entire region slipped toward a recession in late 2011 due in part to these measures and the overall loss of confidence among businesses and investors.

Nevertheless, Europes richer countries have little choice but to pressure the smaller nations to tighten their belts since they are facing pressure from their own citizens. Taxpayers in countries such as Germany and France balk at using their money to fund what is seen as the overspending of Greece and the other troubled European countries. This type of fundamental, high-level disagreement has made a solution more difficult to achieve

From a broader perspective, does this matter to the United States

Yes The world financial system is fully connected now meaning a problem for Greece, or another smaller European country, is a problem for all of us. The European debt crisis not only affects our financial markets, but also the U.S. government budget. Forty percent of the International Monetary Funds (IMF) capital comes from the United States, so if the IMF has to commit too much cash to bailout initiatives, U.S. taxpayers will eventually have to foot the bill. In addition, the U.S. debt is growing steadily larger meaning that the events in Greece and the
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rest of Europe are a potential warning sign for U.S. policymakers, particularly with the "fiscal cliff" looming at the end of this year.

What is the outlook for the crisis?

As of May 2012, Europe remains in turmoil. Greece's exit from the euro appears inevitable; according to Bloomberg, Citigroup economists see a 75% chance that Greece could leave the euro after its elections later in the year, since the elections would likely lead to a rejection of the country's latest bailout package. In addition, over 50 percent of investors surveyed by Bloomberg News predict an exit of a euro member at some point in 2012. Instability continues to affect the rest of Europe as well: French President Nicolas Sarkozy lost power due in part to his support for austerity measures, and the region had fallen into a recession. Spain, for its part, faces 25% unemployment with no clear path to growth. European policymakers - who already lack unity face a difficult choice: keep the currency union together, with all of the challenges that would entail, or allow Greece (and possibly Spain and/or Italy) to exit, a path that would likely lead to financial market chaos. As a result, the chance of a further economic shock to the region - and the world economy as a whole - is still a significant possibility, and will likely remain so for several years

Greek Debt Scenario

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The Greek government-debt crisis is one of a number of current European sovereign-debt crises.. In late 2009, fears of a sovereign debt crisis developed among investors concerning Greece's ability to meet its debt obligations due to strong increase in government debt levels.[2][3][4] This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other countries in the Eurozone, most importantly Germany.

The downgrading of Greek government debt to junk bond status in April 2010 created alarm in financial markets, with bond yields rising so high, that private capital markets practically were no longer available for Greece as a funding source. On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a 110 billion bailout loan for Greece, conditional on the implementation of austerity measures. In October 2011, Eurozone leaders agreed to offer a second 130 billion bailout loan for Greece, conditional not only the implementation of another austerity package, but also that all private creditors holding Greek government bonds should sign a deal accepting a 53.5% face value loss. This proposed restructure of all Greek public debt held by private creditors, which constituted a 58% share of the total Greek public debt, would according to the bailout plan reduce the overall public debt burden with roughly 110 billion. A debt relief equal to a lowering of the debt-to-GDP ratio from a forecasted 198% in 2012 down to roughly 160% in 2012, with the lower interest payments in subsequent years combined with the agreed fiscal consolidation of the public budget and significant financial funding from a privatisation program, expected to give a further debt decline to a more sustainable level at 120.5% of GDP by 2020.

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The second bailout deal was finally ratified by all parties in February 2012, and became active one month later, after the last condition regarding a successful debt restructure of all Greek government bonds, had also been met. The latest bailout plan is to cover all Greek financial needs from 2012-14. If Greece can comply with all economic targets outlined in the bailout plan, the country is set for a possible return in 2015, to start using the private capital markets for debt refinance and as a source to cover its future financial needs.

In mid-May 2012 the crisis and impossibility to form a new coalition government after elections, led to strong speculation Greece would have to leave the Eurozone. The potential exit became known as "Grexit" and started to affect international market behaviour. A second election in midJune, ended with the formation of a new government supporting a continued adherence to the main principles outlined by the signed bailout plan. The new government however immediately asked its creditors, due to a delayed reform schedule and a worsened economic recession, to be granted an extended deadline from 2015 to 2017 before being required to be self-financed; with minor budget deficits fully covered by extraordinary income from the privatisation program for a subsequent 5-year period. The creditors are currently examining this request in the light of an updated and recalculated sustainability analysis of the Greek economy, and are expected to publish a report with their findings in September 2012. If Greece is granted the two extra years to restore their fiscal balance, this will either require creditors to: 1) fund Greece with a new extra third bailout loan, or 2) launch a new debt restructure to decrease the debt repayment (i.e., by imposing additional haircuts on governmental bonds, or by offering Greece to pay some lower/delayed interest rates).

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The scheduled 31bn bailout disbursement for August 2012, was withheld by the creditors, awaiting reassurance by the "surveilance report" that Greece was still following the agreed path to restore and reform the economy. An essential part of that, will be for the Greek parliament to present and approve a new 11.9bn austerity package in September 2012, in order to reduce the 2013 fiscal deficit, as planned from 8.4% to 4.7%

Greek Default

Without a bailout agreement, there was a possibility that Greece would prefer to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a wide range of default probabilities, estimating a 25% to 90% chance of a default or restructuring

A default would most likely have taken the form of a restructuring where Greece would pay creditors, which include the up to 110 billion 2010 Greece bailout participants i.e. Eurozone governments and IMF, only a portion of what they were owed, perhaps 50 or 25 percent It has been claimed that this could destabilise the Euro Interbank Offered Rate, which is backed by government securities.

Some experts have nonetheless argued that the best option at this stage for Greece is to engineer an orderly default on Greeces public debt which would allow the country to withdraw simultaneously from the Eurozone and reintroduce a national currency, such as its historical drachma, at a debased rate[ (essentially, coining money). Economists who favor this approach to

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solve the Greek debt crisis typically argue that a delay in organising an orderly default would wind up hurting EU lenders and neighbouring European countries even more

At the moment, because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy, as has happened with other economic zones, for example the U.S. Federal Reserve expanding its balance sheet over $1.3 trillion since the global financial crisis began, temporarily creating new money and injecting it into the system by purchasing outstanding debt

European Union-Future

WHAT will become of the European Union? One road leads to the full break-up of the euro, with all its economic and political repercussions. The other involves an unprecedented transfer of wealth across Europe's borders and, in return, a corresponding surrender of sovereignty. Separate or superstate: those seem to be the alternatives now.

For two crisis-plagued years Europe's leaders have run away from this choice. They say that they want to keep the euro intactexcept, perhaps, for Greece. But northern European creditors, led

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by Germany, will not pay out enough to assure the euro's survival, and southern European debtors increasingly resent foreigners telling them how to run their lives.

This has become a test of over 60 years of European integration. Only if Europeans share a sense of common purpose will a grand deal to save the single currency be seen as legitimate. Only if it is legitimate can it last. Most of all, it is a test of Germany. Chancellor Angela Merkel maintains that the threat of the euro's failure is needed to keep wayward governments on the path of reform. But German brinkmanship is corroding the belief that the euro has a future, which raises the cost of a rescue and hastens the very collapse she says she wants to avoid. Ultimately, Europe's choice will be made in Berlin.

Last summer this newspaper argued that to break the euro zone's downward spiral required banks to be recapitalised, the European Central Bank (ECB) to stand behind solvent countries with unlimited support, and the curbing of the Teutonic obsession with austerity. Unfortunately, successive European rescue plans fell short and, though the ECB bought temporary relief by supplying banks with cheap, long-term cash in December and February, the crisis has festered and deepened.

In recent months we have concluded that, whether or not Greece stays in the euro, a rescue demands more. If it is to banish the spectre of a full break-up, the euro zone must draw on its joint resources by collectively standing behind its big banks and by issuing Eurobonds to share the burden of its debt. We set out the scheme's nuts and bolts below. It is unashamedly technocratic and limited, designed not to create the full superstate that critics (and we) fear. But it is plainly a move towards federalismsomething that troubles many Europeans. It is a

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gamble, but time is running short. Rumours of bank runs around Europe's periphery have put savers and investors on alert The euro zone needs a plan.

Is the euro really worth saving? Even the single currency's diehard backers now acknowledge that it was put together badly and run worse. Greece should never have been let in. France and Germany rode a coach and horses through the rules designed to prevent government borrowing getting out of hand. The high priests of euro-orthodoxy failed to grasp that, though Ireland and Spain kept to the euro's fiscal rules, they were vulnerable to a property bust or that Portugal and Italy were trapped by slow growth and declining competitiveness.

A break-up, many argue, would allow individual countries to restore control over monetary policy. A cheaper currency would help match wages with workers' productivity, for a while at least. Advocates of a break-up imagine an amicable split. Each government would decree that all domestic contractsdeposits and loans, prices and payshould switch into a new currency. To prevent runs, banks, especially in weak economies, would shut over a weekend or limit withdrawals. To stop capital flight, governments would impose controls.

All good, except that the people who believe that countries would be better off without the euro gloss over the huge cost of getting there (see article). Even if this break-up were somehow executed flawlessly, banks and firms across the continent would topple because their domestic and foreign assets and liabilities would no longer match. A cascade of defaults and lawsuits would follow. Governments that run deficits would be forced to cut spending brutally or print cash

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And that is the optimistic scenario. More likely, a break-up would take place amid plunging global share prices, a flight to quality, runs on banks, and a collapse in output. Devaluation in weak economies and currency appreciation in strong ones would devastate rich-country producers. Capital controls are illegal in the EU and the break-up of the euro is outside the law, so the whole union would be cast into legal limbo. Some rich countries might take advantage of that to protect their producers by suspending the single market; they might try to deter economic migrants by restricting freedom of movement. Practically speaking, without the movement of goods, people or capital, little of the EU would remain.

The heirs of Schuman and Monnet would struggle to restore the Europe of 27 when it had been the cause of such mayhemeven if a euro-rump of strong countries emerged. Collapse would be a gift to anti-EU, anti-globalisation populists, like France's Marine Le Pen. There would be so many people to blame: Eurocrats, financiers, intransigent Germans, feckless Mediterraneans, foreigners of all kinds. As national politics turned ugly, European co-operation would break down. That is why this newspaper thinks willingly abandoning the euro is reckless. A rescue is preferable to a break-up

But not just any rescue. Too much of the debate over how to save the euro puts the emphasis merely on a plan for growth. That would help, because growth makes debt more manageable and banks healthier. Mrs Merkel should have been more accommodating on this. But any realistic stimulus would be too modest to stem the crisis. The ECB could and should cut rates and begin quantitative easing, but official funds for investment are limited. More ambitious ways of boosting growth, such as the completion of a single European market for services, are sadly not even on the table.

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In any case, the euro zone's troubles run too deep. Banks and their governments are propping each other up like Friday-night drunks. The ECB's support for the banks cannot prevent the weak economies of Spain, Portugal, Italy and Ireland from enfeebling their banks and governments. For as long as bond yields are high and growth is poor, sovereigns will face doubt about their capacity to service their debt and banks will see loans go bad. Yet that same uncertainty pushes up sovereign yields and stops bank lending, further inhibiting growth. Fear that the state might have to deal with a banking collapse makes government bonds riskier. Fear that the state could not cope makes a banking collapse more likely.

That is why we have reluctantly concluded that the nations in the euro zone must share their burdens. The logic is straightforward. The euro zone's problem is not the debt's size, but its fragmented structure. Taken as a whole, the stock of euro-zone public debt is 87% of GDP, compared with over 100% in America. Similarly, the banks are not too big for the continent as a whole, just for individual governments. To survive, Europe has to become more federal: the debate is how much more.

A lot, according to some gung-ho federalists. For people like Germany's finance minister, Wolfgang Schuble, the single currency was always a leg on the journey towards a fully integrated Europe. In exchange for paying up, they want to harmonise taxes and centralise political power with, say, an elected European Commission and new powers for the European Parliament. Voters will be scared into grudging acquiescence precisely because a euro collapse is so terrifying. In time, the new institutions will gain legitimacy because they will work and Europeans will begin to feel prosperous again (see article).

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Yet to see the euro crisis as a chance to federalise the EU would be to misread people's appetite for integration. The wartime generation that saw the EU as a bulwark against strife is fading. For most Europeans, the outcome of the EU's most ambitious project, the euro, feels like misery. And there is no evidence that voters feel close to the EU. The Lisbon treaty and its precursor, the EU's aborted constitution, were together rejected in three out of six referendums; ten governments reneged on promises to put constitutional reform to the vote. The parliament is hopelessly remote.

Another version of the superstate is to accept that politics remains stubbornly nationaland to increase the power of governments to police their neighbours. But that, too, has problems. As the euro crisis has shown, governments struggle to take collective decisions. The small countries of the euro zone fear that the big ones would hold too much sway. If Berlin pays the bills and tells the rest of Europe how to behave, it risks fostering destructive nationalist resentment against Germany. And like the other version of the superstate, it would strengthen the camp in Britain arguing for an exita problem not just for Britons but for all economically liberal Europeans

That is why our rescue seeks to limit both the burden-sharing and the concession of sovereignty. Rather than building a federal system, it fills in two holes in the single currency's original design. The first is financial: the euro zone needs a region-wide system of bank supervision, recapitalisation, deposit insurance and regulation. The second is fiscal: euro-zone governments will be able to manageand reducetheir fiscal burdens only with a limited mutualisation of debt. But in both cases the answer is not to transfer everything to the EU level.

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Begin with the banks. Since the euro's creation, European integration has moved farthest in finance. Banks sprawl across national borders. German banks fuelled Spain's property boom, while their French peers funded Greece's borrowing.

The answer is to move the supervision and support of banks (or at least big ones) away from national regulators to European ones. At a minimum there must be a euro-zone-wide system of deposit insurance and oversight, with collective resources for the recapitalisation of endangered institutions and regional rules for the resolution of truly failed banks. A first step would be to use Europe's rescue funds to recapitalise weak banks, particularly in Spain. But a common system of deposit insurance needs to be rapidly set up.

These are big changes. Politicians will no longer be able to force their banks to support national firms or buy their government bonds. Banks will no longer be Spanish or German, but increasingly European. Make no mistake: this is integration. But it is limited to finance, a part of the economy where monetary union has already swept away national boundaries.

The fiscal integration can also be limited. Brussels need not take charge of tax and spending, nor need Eurobonds cover all government debts. All that is required is for overindebted countries to have access to money and for banks to have a safe euro-wide class of assets that is not tied to the fortunes of one country. The solution is a narrower Eurobond that mutualises a limited amount of debt for a limited amount of time. The best option is to build on an idea put forward by Germany's Council of Economic Experts, to mutualise the current debts of all euro-zone economies above 60% of their GDP. Rather than issuing new national government bonds, everybody, from Germany (debt: 81% of GDP) to Italy (120%) would issue only these joint bonds until their national debts fell to the 60% threshold. The new mutualised-bond market,
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worth some 2.3 trillion, would be paid off over the next 25 years. Each country would pledge a specified tax (such as a VAT surcharge) to provide the cash.

So far Mrs Merkel has opposed all forms of mutualisation (and did so again this weeksee Charlemagne). Under our scheme, Germany would pay more on a slug of its debt, subsidising riskier borrowers. But it is not a move to wholesale fiscal federalism. These joint bonds would not require intrusive federal fiscal oversight. Limited in scope and time, they do not fall foul of Germany's constitutional constraints. Indeed, they can be built from last autumn's beefed-up six pack, which curbs excessive borrowing and deficits; and January's fiscal compact, which enshrines budget discipline in law and is now being ratified across the euro zone.

Even this more limited version of federalism is tricky. The single banking regulator might require a treaty change, which would be difficult when ten EU countries, including Britain, are not members of the euro. The treaty setting up Europe's bail-out fund would also have to be changed to allow money to be supplied directly to banks. Countries would have to find convincing ways to commit future governments to pay their share of the interest on the Eurobonds. Greece's debts so outweigh its economy that it would need a further rescue before entering any mutualisation schemethough the sum involved is small on a continental scale.

So it is a long agenda; but it is more manageable than trying to redesign Brussels from the top down, and it is less costly than a break-up. Saving the euro is desirable and it is doable. One question remains: will Germans, Austrians and the Dutch feel enough solidarity with Italians, Spaniards, Portuguese and Irish to pay up? We believe that to do so is in their own interests. The time has come for Europe's leaders, and Mrs Merkel in particular, to make that case.

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Conclusion: Greece shouls Exit the European Union.

The European union faces a serious existence threat. The Debt deal negotiated to rescue Greece from default faces the threat of collapse, with those most responsible for agreeing to the pact's terms ousted in the nation's recent elections and Greek political leaders failing to cobble together a coalition government to replace them. European officials, led by Germany, agreed to bail out Athens in return for budget-tightening and other austerity measures. If Greece reneges and international bailout funds are withdrawn, Greece will begin to run out of money as early as late June and may have to return to its old currency, the drachma, and exit the eurozone. Austerity measures have been wildly unpopular in Greece, where there has been little economic growth and high unemployment in the last couple of years. Most Greeks say they do not want to abandon the euro, but the leader of the anti-austerity Syriza Party declared the bailout deal "null and void" after the May 6 elections in which his party placed second. The failure to form a coalition government has led Greece to call another set of elections for June. Syriza is now polling first, leading many financial analysts and traders to worry that a Greek exit from the eurozone is inevitable. Others are hopeful, however, that new numbers showing the European economy to be flat, and not slipping back into a recession as expected, will convince Greeks to stay in the eurozone, and that European officials may be willing to renegotiate the terms of the original deal to keep it there. A Greek departure from the eurozone would roil the global economy and cause chaos in Greece. However, some argue that a return to the drachma may allow Greece to become more competitive in the long run as it would allow Greece more control over its monetary and trade policy.

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Either place yourself at the mercy of capital, eke out a wretched existence and sink lower and lower, or adopt a new weapon this is the alternative imperialism puts before the vast masses of the proletariat. Imperialism bring the working class to revolution

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