Reference no: EM133716569

Prompt:

What are two reasons for the creation of the European Union (EU)?

What are four reasons a country might have for borrowing money?

Paper: (that I need conclusion for)

The European Union is an economic union that was created to prevent any wars occurring between countries in Europe. This organization consist of twenty-eight states that are located in Europe and was formed around 1950. Moreover, there are some countries that borrow money for multiple reasons. In this analysis, there are four reasons listed as to why countries borrow funds but there can be more reasons as to why a country might take out a loan. The reasons listed is for war, politics, investment purposes, or the country is going through a recession. However, one thing is clear is when a country borrows money, regardless of the purpose, it leads to them increasing their debt.

There can be multiple?reasons?for the EU but two of?those that?I?concluded?must?be?Peace and Stability, as well as Economic Integration and Prosperity. Peace and?Stability is the?main objective of the?European Union. The EU?was founded in the?ends?of World?War II. Promoting?the idea?of?peace and stability throughout Europe. Organizations were aiming to push?cooperation and integration because of the damage caused from the war. This was done so?future conflicts amongst European states were prevented. The goal of the EU?was to make?a political and economic union which would reduce the chances of conflict between European nations. Another reason for the forming of the EU was because the needed to encourage economic integration and prosperity among the European states. The EU's focus was to remove trade obstacles and increase economic growth. They did so by creating a single market which allowed the free movement of capital, labor, goods, and services. The creation of?the?rules and guidelines were designed to be innovative, which increases competitiveness, and make sure of fair growth among the states. The EU focused to make a successful and creative economic body on the international stage. They did so by using resources and overlooking economic policies.

Governments operate first from tax revenues before resorting to borrowing money. Bigger countries, with the inclusion of countries that have large tax revenues, may not need to borrow money at all. This means that countries with low tax revenues might need to borrow money. There are four main reasons that countries usually borrow money. Other countries usually borrow money during wars, through politics, during a recession or in order to invest. I think the two most important would be borrowing for politics and improving investments. Borrowing to invest in building infrastructure or roads would be great because it will do its justice in keeping society running. This can help politically to help reduce tax in that certain economy.

Countries might also take out loans to fund wars or military growth, using borrowed funds for combat expenses and enhancing military capabilities. However, this strategy can result in heightened national debt, affecting the country's long-term economic stability. Borrowing money for war can lead into another reason for borrowing more money, recession. In times of recession, a nation may be forced to get loans to sustain essential public services until economic conditions improve. Once businesses and workers regain economic stability, contributing to tax revenues, the need for borrowing money goes away.

Case Study:

Opening Case: Making Sense of the Economic Chaos in the European Union

In?Chapter 2 "Globalization, International Trade and Foreign Direct Investment-Understanding the Debate"?you saw how political and legal factors impacted trade. In this chapter, you'll learn more about how governments seek to cooperate with one another by entering into trade agreements in order to facilitate business.

The European Union (EU) is one such example. The EU started after World War II, initially as a series of trade agreements between six European countries geared to avoid yet another war on European soil. Seven decades later, with free-flowing trade and people, a single currency, and regional peace, it's easy to see why so many believed that an economic union made the best sense. However, in the past decade, the EU has faced a number of financial crises as well as?Brexit?(we'll talk more about Brexit later in this chapter), that threaten its very survival, and many pundits are questioning whether the EU will be able to withstand these challenges. Will it survive? To better answer this question, let's look at what really happened during the financial crisis in Europe and in particular in Greece in 2010 and the seven years following.

At the most basic level, countries want to encourage the growth of their domestic businesses by expanding trade with other countries-primarily by promoting exports and encouraging investment in their nations. Borders that have fewer rules and regulations can help businesses expand easier and more cheaply. While this sounds great in theory, economists as well as businesspeople often ignore the realities of the political and sociocultural factors that impact relationships between countries, businesses, and people.

Critics have long argued that while the EU makes economic sense, it goes against the long-standing political, social, and cultural history, patterns, and differences existing throughout Europe. Not until the 2010 economic crisis in Greece did these differences become so apparent.

What Really Happened in Greece?

What is the European debt crisis? While experts continue to debate the causes of the 2010 crisis, it's clear that several European countries had been borrowing beyond their capacity. This excess borrowing was compounded by overzealous global lenders (big banks as well as other financial institutions), who had relaxed their lending standards in order to reap sizable profits.

Let's look at one such country, Greece, which received a lot of press attention over its debt crisis in 2010 and has been considered to have a very severe ongoing problem. In April 2010, following a series of tax increases and budget cuts, the Greek prime minister officially announced that his country needed an international bailout from the EU and International Monetary Fund (IMF) to deal with its immense debt levels. The financial crisis in the EU, in large part, began in Greece, which had concealed the true levels of its debts. Once the situation in Greece came to light, investors began investigating the debt levels of other EU countries.

The crisis began in 2009 when the country faced its first negative economic growth rate since 1993. This was a fast-growing crisis, and the country couldn't make its debt payments. Its debt costs were rising because investors and bankers became wary of lending more money to the country and demanded higher rates. Economic historians have accused the country of covering up just how bad the deficits were with a massive deficit revision of the 2009 budget. The EU bailouts of 2010 and another in 2012 included new loans that mostly helped the Greek government repay its obligations to French and German banks, and the European Central Bank acted to preserve the market for Greek debt. In other words, to prevent a European financial crisis, Greek debt was not reduced but rather transferred from private banks to European governments and international institutions.

These drastic bailouts of 2010 and 2012 were necessitated by the country's massive budget deficits, the economy's lack of transparency, and its excess corruption. In Greece, corruption has been so widespread that it's an ingrained part of the culture. Greeks have routinely used the terms?fakelaki, which means bribes offered in envelopes, and?rousfeti, which means political favors among friends. Compared with its European member countries, Greece suffered from high levels of political and economic corruption and low global-business competitiveness. Greece agreed to implement many of the austerity measures and spending cuts required under the bailout; however, they were deeply unpopular with Greeks who felt the pain of these cuts more directly. Thus, at its low point between 2012 and 2014, youth unemployment stood at almost 65 percent; there were 800,000 people without unemployment benefits and health coverage; 400,000 families were without a single bread winner; the far right was consistently polling a double-digit share of the vote; the Greek health care system was on its knees; and HIV infection rates were up 200 percent.?Out of frustration in December 2014, voters elected the anti-bailout party Syriza into power.

The new Greek government spent much of 2015 negotiating with the EU, the IMF, and its private lenders. In June 2015, Greek citizens voted against accepting the severe austerity measures proposed by EU governments, mainly Germany and France. At one point, the government nearly pulled out of the EU, but in August 2015, the government and the EU agreed on a third bailout which has enabled the country to continue to turn the corner on its economic crisis.

In the summer of 2017, the Greek government announced plans to sell debt for the first time in years, indicating that investors may soon have confidence in the country's economy once again. "Dimitri B. Papadimitriou, the economy minister, said his country was "getting out of a rut," adding: "There's an opportunity for Greece to become a normal country...and that would help it "gain sustainable and stable access to the international markets."

"Ireland and Portugal, which were also severely affected by the euro crisis, exited their international bailout programs several years ago and are experiencing economic revivals. The eurozone recovery has also been gathering pace, with annualized growth at 2.3 percent in the first quarter, stronger than that of the United States."

What's the Impact on Europe and the EU?

Economists around the world continue to debate the optimal way to counter similar debt crises. In the ashes of the European crisis, some see the seeds of long-term hope. That's because the threat of bankruptcy is forcing governments to implement reforms that economists argue are necessary to help Europe prosper in a globalized world-but were long viewed politically impossible because of entrenched social attitudes. "Together, Europe's banks have funneled $2.5 trillion into the five shakiest euro-zone economies: Greece, Ireland, Belgium, Portugal, and Spain."

So if it was just a handful of European countries, why should the other stronger economies in the EU worry? Well, all of the nineteen member countries that use the euro as their currency now have their economies?interlinked?in a way that other countries don't. Countries that have joined the euro currency have unique challenges when economic times are tough. A one-size-fits-all monetary policy doesn't give the member countries the flexibility needed to stimulate their economies. (Chapter 7 "International Finance for Global Managers"?discusses monetary policy in greater detail.) But the impact of one currency for nineteen markets has made countries like Portugal, Spain, and Greece less cost competitive on a global level. In practice, companies in these countries have to pay their wages and costs in euros, which makes their products and services more expensive than goods from cheaper, low-wage countries such as Poland, Turkey, China, and Brazil. Because they share a single common currency, highly-indebted EU countries can't just devalue their currency to stimulate exports, which has been the way that most governments have emerged from fiscal troubles. Periodically, some economists suggested that it might be more beneficial for Greece or the other troubled economies to leave the euro in the long term.

Rigid EU rules don't enable member governments to navigate their country-specific problems, such as deficit spending and public works projects. Of note, a majority of the nineteen countries in the monetary union have completely disregarded the EU's Stability and Growth Pact by running excessive deficits-that is, borrowing or spending more than the country has in its coffers. Perhaps this is because they recognize that reducing debts either by raising taxes or cutting social programs often comes at a high political cost.

As Steven Erlanger noted in the?New York Times,

The European Union and the 19 nations that use the euro face two crises. One is the immediate problem of too much debt and government spending. Another is the more fundamental divide, roughly north and south, between the more competitive export countries like Germany and France and the uncompetitive, de?cit countries that have adopted the high wages and generous social protections of the north without the same economic ethos of strict work habits, innovation, more ?exible labor markets and high productivity. As Europe grapples with its ?nancial crisis, the more competitive, wealthier countries are reluctantly rescuing more pro?igate economies, including Greece and Ireland, from ?scal and bank woes, while imposing drastic cuts in spending there.

Early on, EU critics had expressed concern that countries wouldn't want to give up their sovereign right to make economic and political policy. Efforts to create a European constitution and move closer to a political union fell flat in 2005, when the Netherlands and France rejected the efforts. Critics suggest that a political union is just not culturally feasible. European countries have deep, intertwined histories filled with cultural and ethnic biases, old rivalries, and deep-rooted preferences for their own sovereignty, and independence. The economic crises have brought this issue to the forefront.

There were two original arguments against the creation of the EU and euro zone: (1) fiscal independence and sovereignty and (2) centuries-old political, economic, social, and cultural issues, biases, and differences.

Despite these historical challenges, most Europeans felt that the devastation of two world wars were worse. World War I started as a result of the cumulative and somewhat convoluted sequence of political, economic, and military rivalries between European countries and then added in Japan and the United States. World War II started after Germany, intent on expanding its empire throughout Europe, invaded Poland in 1939. All told, these two wars led to almost one hundred million military and civilian deaths, shattered economies, destroyed industries, and severely demoralized and exhausted the global population. European and global leaders were determined that there would never be another world war. This became the early foundations of today's global and regional economic and political alliances, in particular the EU and the United Nations (UN).

Of course, any challenges to the modern-day EU have brought back old rivalries and biases between nations. Strong economies, like Germany, have been criticized for condescending to the challenges in Greece, for example, when German commentators used negative Greek stereotypes. Germany was also initially criticized for possibly holding up a bailout of Greece, because it was unpopular with German voters. Many observers have also highlighted that Germany has forgotten its own history, when its massive national debt was both forgiven and reduced after both World War I and II. Through the Marshall Plan (officially called the European Recovery Program), spearheaded by the US after World War II, German debt was in large part forgiven. Additionally extensive economic aid was provided to a number of countries, including Germany, to rebuild the region's war-torn economy. The underlying premise of the Marshall Plan was to promote peace through "trade and aid" throughout Europe.

European leaders first joined with the IMF in May 2010 and agreed to establish a $1 trillion rescue fund for financially-troubled countries. Then, Greece announced deep budget cuts, Spain cut employer costs, and France raised its retirement age. France also joined Germany and the United Kingdom in imposing harsh budget cuts. Governments faced a crucial test of political will. Could they implement the reforms they had announced? Would they need the assistance of the EU to do so? The short-term response to those moves was a wave of strikes, riots, and-in Spain, Italy, Ireland, and France-demonstrations. Over the ensuing years, each of the countries recovered with varying degrees of economic success, although none have rebounded completely.

Yet, supporters of the EU argue that the mutual common interests of the EU countries will ensure that reforms are implemented. Memories of the devastation of the continent after the wars still lingers. Plus, more realistically, Europeans know that in order to remain globally competitive, they will be stronger as a union than as individual countries-particularly when going up against such formidable economic giants as the United States and China.

What Does This All Mean for Businesses?

The first and most relevant reminder is that global business and trade are intertwined with the political, economic, and social realities of countries. This understanding has led to an expansion of trade agreements and country blocs, all based on the fundamental premise that peace, stability, and economic prosperity are interdependent. Both the public and private sectors have embraced this thinking.

Despite the crises in various European countries, businesses still see opportunity. UK-based Diageo, the giant global beverage company and maker of Ireland's famous Guinness beer, opened a new distillery in Roseisle, Scotland, located in the northern part of the United Kingdom.

David Gates, global category director for whiskies at Diageo, says emerging markets are leading the recovery: "The places we're seeing demand pick up quickest are Asia, Latin America, and parts of Eastern Europe. Southern Europe is more concerning because Spain and Greece, which are big scotch markets, remain in very difficult economic situations." . . . The renaissance of Scotland's whisky industry has had little to do with Scottish consumption. Drinks groups have concentrated on the emerging middle-class in countries such as Brazil, where sales shot up 44 percent last year. In Mexico whisky sales were up 25 percent as locals defected from tequila.?Whiskey has continued its global ascent and it's a big business for Diageo, experiencing favorable growth in Europe, North America, India, and Mainland China.

While Europe continues to rebound from the impact of ?economic crises and Brexit, there is hope for the future. Despite the many challenges it has faced, the EU has remained relatively resilient in continuing to foster regional economic cooperation.

It is too soon to write o? the EU. It remains the world's largest trading block. At its best, the European project is remarkably liberal: built around a single market of 27 rich and poor countries, its internal borders are far more porous to goods, capital and labour than any comparable trading area. . . . For free-market liberals, the enlarged union's size and diversity is itself an advantage. By taking in eastern countries with lower labour costs and workers who are far more mobile than their western cousins, the EU in e?ect brought globalisation within its own borders. For economic liberals, that ?exibility and dynamism o?ers Europe's best chance of survival.

Understanding the Basics of Why Countries Borrow Money

Governments operate first from tax revenues before resorting to borrowing. Countries like Brunei or Qatar, that have huge tax revenues from oil, may not need to borrow. However, countries that don't have these huge tax revenues might need to borrow money. In addition, if tax revenues go down-for example in a recession or because taxes aren't paid or aren't collected properly-then countries might need to borrow.

Countries usually borrow for four main reasons:

Recession.?During a recession, a country may need to borrow money in order to keep its basic public services operating until the economy improves and businesses and workers can resume paying sufficient tax revenues to make borrowing less of a need.

Investment.?A country may borrow money in order to invest in the public sector and build infrastructure, which may be anything related to keeping a society operating, including roads, airports, telecommunications, schools, and hospitals.

War.?A country may borrow in order to fund wars or military expansion.

Politics.?A country may borrow money in order to reduce tax rates, either because of political pressure from its citizens and businesses or to stimulate its economy. Usually countries have a much harder time cutting government spending. People don't want to give up a benefit or service or, in the case of a recession, may need the services, such as food stamps or unemployment benefits, thus making it very difficult to cut government programs.

When countries borrow, they increase their debt. When debt levels become too high, investors get concerned that the country may not be able to repay the money. As a result, investors and bankers (in the form of the credit market) may view the debt as higher risk. Then, investors or bankers ask for a higher interest rate or return as compensation for the higher risk. This, in turn, leads to higher borrowing costs for the country.

The national deficit is the amount of borrowing that a country does from either the private sector or other countries. However, the national deficit is different from the current account deficit, which refers to imports being greater than exports.

Even healthy countries run national deficits. For example, in the case of borrowing to invest long term in domestic facilities and programs, the rationale is that a country is investing in its future by improving infrastructure, much like a business would borrow to build a new factory.