The European Union By The New York Times

http://topics.nytimes.com/top/reference/timestopics/organizations/e/european_union/index.html

The European Union evolved out of the European Coal and Steel Community, formed in 1950 by Belgium, France, Germany, Italy, Luxembourg and the Netherlands to help revive heavy industry in a region still staggering after World War II. While the organization had a practical side, just as important was its broader vision: that economic cooperation could bring an end to the region’s centuries-old history of national conflicts. In 1957, the Treaty of Rome created the European Economic Community, or Common Market.

Thirty years later, in 2007, Europeans took great pride in what the union had become, with 27 nations, about half a billion people and the world’s largest economy. The euro, the common currency created in 1998 and shared by 15 of the European Union’s members, was on its way to becoming the world’s strongest currency, rising steadily as the dollar has slipped. The union had taken on a number of the structures of a sovereign state, including a Parliament that meets in Brussels.

Three years later, the debt crisis sparked by Greece has deeply shaken Europeans’ confidence in the union and the euro. Months of wrangling led to a series of progressively larger aid packages, none of which succeeded in calming fears of contagion.

With markets wavering around the world, Europe’s leaders on May 9 agreed to a huge rescue package. Officials were hoping the size of the plan – a total of $957 billion – would signal a “shock and awe” commitment to such troubled countries as Greece, Portugal and Spain. In addition, central banks began buying euro zone government bonds directly – an unprecedented move to inject cash into the financial system.

But the new loans, combined with the effect of the austerity measures demanded of Greece, Ireland and Portugal, drove them into recession and did little to ease their debt burden — Greece’s debt load even increased. As the debt crisis renewed over the winter of 2010 and spring of 2011 it led to the fall of governments in Ireland and Portugal, and saw unrest rise in Spain, where unemployment remained close to 20 percent.

By the summer of 2011, it was clear that Greece would need a second big bailout package, and worries rose again about contagion, as Italy and Spain saw the interest rates charged on its borrowing rise steeply. The European Central Bank responded by buying large amounts of Italian and Spanish bonds, as leaders put together a plan that would increase the powers of the European Financial Stability Facility to head off a “run” on governments seen as in danger of default.

By September, with growth slowing, stalled or in reverse across the continent, European leaders were increasingly discussing the creation of a central financial authority — with powers in areas like taxation, bond issuance and budget approval — that could eventually turn the euro zone into something resembling a United States of Europe.

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A new set of laws were drafted to address a fatal flaw in the construction of its common currency: the lack of fiscal rules tough enough to provide a foundation for the euro.

While steering far clear of transferring actual authority over national budgets to Brussels, the revamped rules, are described as tougher, more credible and more sophisticated than the original set, on paper at least.

Laid out in six pieces of legislation and known as the six pack, the rules contain the same targets for euro zone members as the old one: budget deficits of no more than 3 percent of gross domestic product, and a maximum debt level of 60 percent of G.D.P.

But this time, the drafters hope the policing system will be more credible. In part, that is because countries that break rules will face potential sanctions sooner, and a new voting system will make it harder for finance ministers to block them, as has happened in the past.

Background

At the very beginning, when the euro was created, France met the rules laid down by the currency’s founders thanks to a windfall from the state-owned utility, France Télécom. Overnight, the French budget deficit shrank by 0.5 percent of G.D.P.

In 2003, Paris and Berlin both exceeded the deficit limits set in the rule book, officially called the Stability and Growth Pact. Faced with the prospect of sanctions and potential fines, Paris and Berlin used their political muscle to tear up the pact, and a weakened version was adopted in 2005.

The new sanctions system is even tougher than in the original, because countries that break rules will be pressured early on to put up a cash deposit — in a noninterest-bearing account — worth 0.2 percent of G.D.P.

If they then fail to correct their course, the deposit is converted to a fine and forfeited.

And, while the finance ministers still have to give the European Commission permission to punish errant countries, the voting system has been tweaked to make this significantly harder to block.

In another innovation, countries with high debt that resist bringing levels down by a specified amount can also be fined in a similar way. Had such a system been in place before, Italy — with a debt ratio of twice the maximum target — would have been required to consolidate more rapidly.

The package is expected to pass the European Parliament, its final hurdle, though opposition to some parts from the Socialists could make for a close vote. Once enacted, it would begin to take effect in stages in January 2012, with the rules on debt delayed until 2015.

If approved, an early warning system would be set up to spot developments like asset bubbles, including the housing booms that later collapsed in Spain and Ireland. Countries thought to be at risk could find themselves in an “excessive imbalance procedure” that could also lead ultimately to sanctions.

Though targets apply to all 27 E.U. members, fines can be levied only on the 17 countries in the euro zone.

Perhaps the more pressing question is whether the European Commission’s recommendations will be pushed through once they encounter inevitable political opposition.

The very culture of E.U. politics discourages countries from being tough with each other, since every country knows that it might one day need to call in favors.

In the wake of the financial crisis only four E.U. members — Estonia, Finland, Luxembourg and Sweden — currently meet the bloc’s targets, a reminder to the rest that, at some point, they might find themselves in the dock.

Some countries appear worried about this too. The Dutch prime minister, Mark Rutte, recently proposed a system under which a powerful economic figure would be able to intervene in a member country’s finances in the way that the European commissioner responsible for antitrust could act independently in his domain.

That reflects fears among some of the small and midsize countries that Germany and France cannot be trusted to obey the rules if life gets tough for them again.

Some also continue to have trouble understanding the logic of fining a government in financial difficulty. Others say that the E.U. should be trying to construct broader tools to integrate economic policy, including developing a common Treasury and issuing bonds backed by the collective weight of all the countries in the euro zone

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About tony sobrado

Tony Sobrado is a Research Analyst and Social Scientist woking in London. He Sobrado holds a BSc in Political Science from the London School of Economics and Political Science as well as an MRes in Social and Political Theory. He is the author of the forthcoming Who rules the world? An analysis of Conspiracy Theory which addresses the phenomena of Conspiracy Theory from the perspective of the social sciences
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