Furious Friday

Will the EU fall apart?

Welcome to Furious Friday where we look at misconceptions in the media about the economy

There is a lot of talk about fears that the European Union (EU) will fall apart – That this will cause a financial crisis

  1. Will it? A lot of people are saying that the financial markets will collapse if the EU were to break apart
  2. I wanted to break a few things down
    • What is the EU and what does it do?
    • Why are the member nations considering leaving?
    • What will be the effect on financial markets and the global economy?

What is the EU?

  1. The EU is a geo-political entity covering a large portion of the European continent.
    • It is founded upon numerous treaties and has changed quite a bit over the years
  2. In 1957, six core states founded the EU’s predecessor, the European Economic Community (EEC)
    • (Belgium, France, Italy, Luxembourg, the Netherlands and West Germany).
    • Trying to create a common market – European Coal and Steel Community
  3. 1999 – Monetary union was established – 2002 was in full effect
    • 19 members at the time
  4. Today – 28 members – undergone expansions that have taken it from 6 member states to 28, a majority of the states in Europe are a part of the EU.

What is the EU’s role?

7 EU bodies –  EU parliament & Council, EU Commission, and European Central Bank (ECB), etc.

  1. Set laws and rules on almost everything for member states
  2. ECB – They do things like sent lending rates for banks, and combat any inflation problems that may arise
  3. Has its benefits
    • Tax free trading among members – Tariff free for goods sold between countries
    • Mobility of labour – Members can travel and live in any of the member states
      • This is why many of the nations are wanting to leave – Come back to this
    • Common currency – Makes doing business, traveling or moving easy for all members
  4. Motto: United in diversity – Everyone getting along
    • NEW: They want to form their own army though – Worried a lot of people
    • Can be used to keep other nations in line – German soldiers could go to Hungry to put down riots

If the EU is so good, why are people looking to leave?

Effects – Practicality it has downsides for the good – 3 big ones

  1. Removes monetary policy for countries – Puts it in the hands of the European Central Bank
    • The central bank for the euro and administers monetary policy of the Euro area, which consists of 19 EU member states
    • ECB’s role – maintain price stability within the Eurozone
      • are to set and implement the monetary policy for the Eurozone – Inflation targets
      • conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks
      • operation of the financial market infrastructure under the TARGET2 payments system
    • Jointly owned by the member National Central Banks (NCB)
      • The capital of the ECB comes from NCBs – Requirement to issue capital is based around the size of a country’s economy in GDP
      • €10,825,007,069.61 currently
    • Currency – Being on the same currency might not be the best thing for some nations
      • Works well for Germany – Can export a lot and not experience currency appreciation pressures – Makes them more competitive
      • Estimated that the Euro is undervalued at 20% compared what a local German currency should be – adding to their trade surplus
      • Other countries in the EU might not able to sell goods at a profit on the Euro if their economy is struggling
    • Printing money – the exclusive right to authorise the issuance of Euro banknotes. Member states can issue Euro coins, but the amount must be authorised by the ECB beforehand
  2. Takes power from Member Governments – One stop shop on policy
    • There are 751 members of parliament in the EU parliament – That is a lot of politicians – We have 150 in the house of reps in Australia
      • Aus – 1 per 100k, EU – 1 per 700k people
      • Hard to get representation and is very bloated
    • What do they decide on?
    • Immigration policies and quotas – This is the big issue for most member states
      • Mobility of migration around the EU
      • Dublin Regulation
        • The first member state where asylum claim is lodged is responsible for a person’s asylum claim – Hasn’t been enforced well
      • Countries in the EU have been given quotas to fill – This is one of the biggest objections
        • Giant body choosing – Not the population
        • Similar to the UN’s Global Compact for Migration
      • Lots of EU nations feel they are losing their culture and national identity
      • Your first reaction might be to think that they are backward racists, I’ll share some stats with you next Friday that will probably shock as to the state of things
        • e. Natives are now the minority in many cities, like in Frankfurt and London
        • Plus – Only 1 in 5 is from a ‘war zone’ – goes against what you hear in the media
    • Regulation control – Single market regulation
      • Goods and services – The EU gets to dictate regulations on food, manufacturing, services, etc.
        • Makes some countries less competitive
      • Environmental – Quotas and caps on trade
      • Example – Common fisheries policy (CFP) – 77% of the UK fleet given rights to 3%
        • Other 97% goes to just 6 companies
        • One Dutch-owned super trawler has the right to catch 94%
      • Worse in Scotland – Lead to many small coastal towns having high unemployment
  1. Aims to serve the interest of the EU, not a country
    • The policies, decisions, and rules set in place by the European Union are not there to protect the best interest of each individual country.
      • their goal is to advance the EU as a whole. This has caused many damages in smaller countries, that are often left unheard
      • Officials from the EU make policy decisions that go against the peoples’ wishes
        • Greece – See mass protests? Debt is forgiven if Greece does what the EU wants
        • Will spend a whole ep running through how being part of the EU helped them into their debt crisis
      • Countries have to pay in and don’t decide on what the funds are used for – UK net contributed of $200 bn since joining – another reason why they are leaving

The Problem – Central planning – Nations need different economic factors to remain competitive

  1. It is very complex and slow – doesn’t allow for free market or free choice by nations
  2. Power without accountability
    • The European Council choose the presidents and commissioners of the EU – Not the public of the EU (almost like voting on the pope)
      • 5 presidents currently – EU Commission, Euro Summit, Eurogroup, ECB, Parliament
    • Taking away voting rights from Poland and Hungry due to not towing the line
  3. Leaving is hard – But the UK is the canary down the coal mine
    • June 2016 – UK will be a test subject – Hasn’t had a great process so far
    • UK market – Dropped 200 points to 6100 after the announcement – Bounced back to 6800 2 months later
    • 24th June 2016 – 6138 – Today 7004 – Up around 14% since Brexit
    • If they get their own army leaving may become harder

That is a summary of the current state of the EU

Next time we will explore:

  1. Who is looking to leave? And Why?
  2. What it will cause – More bark than bite, or will it collapse the world?

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