Economic Interests

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Archive for the tag “Euro crisis”

Was the Euro Doomed from the Start? (Essay from my graduation year of university last year)

The European Union (EU), an economic union between 27 member states in Europe, has recently suffered its first serious setback since its creation, termed as the “Euro Crisis”. Various members of the eurozone have been found to have serious debt problems which have affected the rest of the EU as they all share a single currency, the euro. But as Verhofstadt (2011), the former Belgian prime minister said “A state can exist without a currency, but a currency cannot exist without a state”. In this essay, I will discuss whether the euro was in fact doomed from the start from structural and unforeseen problems. First a short history of the euro will fill in any background information for this essay. Then the problems that will be considered are; the monetary policy problems, fiscal policy problems, a lack of preparation for any crisis, the lack of a real political union and a lack of equality throughout the EU. I will also explain reasons why the EU has been beneficial to its members including; the growth experienced before the crisis and the safety net the EU provided for the now failing economies in eurozone. The Mundell Fleming model will also be used to help show the different effects of both fiscal and monetary policies.

The euro first came into existence in 1999, though the physical representation of the money wasn’t fully circulated until 2002. Important institutions for the EU are; the European Commission, the European Council, the Court of Justice of the EU and the European Central Bank which decide important decisions within the EU like legislation, European law and interest rates for the eurozone. Entry into the EU was regulated by the Maastricht treaty which stated any nation that wished to enter must pass certain fiscal criteria; inflation must not be 1.5% higher than the average of the three best performers, the budget deficit must not exceed 3% of GDP, government debt to GDP ratio must not rise above 60%, long term interest rates could not be 2% higher than the three lowest members and the applicant should have mirrored the domestic currency to the euro for two years without devaluating currency. Greece famously did not originally meet these criteria and weren’t allowed to join until later on, while the UK and Denmark decided against adopting the euro currency. In 2004, the eurozone expanded to include smaller nations like Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia and then in 2007 Bulgaria and Romania. Out of these nations only Slovenia, Cyprus, Malta, Slovakia and Estonia adopted the euro currency, while the other nations faced difficulties adjusting. Then in 2007/2008 there was a global financial crisis that pushed the eurozone into its first official recession in the third quarter of 2008, experiencing negative growth in the second, third and fourth quarters of 2008 and then into the first quarter of 2009. Greece suffered a crisis in confidence as international creditors started to doubt their ability to repay the huge debts they had acquired; with the debt to GDP ratio at a staggering 159% of GDP. This meant the eurozone countries along with the IMF had to bail out the country for the first time in May 2010, totalling €110 billion. This was followed by a second bailout this year of another €130 billion to help the country finance itself, while other countries like Ireland have also had to be bailed out. This has lead to a new European Fiscal Compact to be created that enforces nations to adhere to fiscal stability. This states that national budgets must either be in balance or surplus, otherwise punishments of fines of 0.1% of GDP and the loss of some of the countries fiscal sovereignty can be used.

The first fundamental problem with the euro was that it was expected a single monetary policy for all the countries would work. The monetary policy, which controls the supply of money into a country by targeting interest rates, is controlled by the European Central Bank (ECB) in the eurozone. This means every country in the eurozone has to operate under the same interest rates, despite the massive differences between the economies of the central countries (Germany, France) and the periphery countries (Greece, Spain). Andre Szasz, a retired Dutch central banker, supports this argument, suggesting it was a mistake to have “a monetary policy of one size fits all” as interest rates will be “too low” for some countries and “too high” for others.  This makes sense, as a country like Germany which produces a lot would be inclined to target low interest rates while a country like Greece which doesn’t produce enough would have higher interest rates. This led to the periphery states like Spain, Portugal and Greece being able to exploit the low interest rates that would not have been possible without being part of the euro. These low interest rates meant poorer countries could borrow money easily from international investors, not a big problem by itself, but when mixed with low productivity it encouraged nations to spend more money than they were making. This has lead to these nations building up vast amounts of debt that they cannot realistically pay back and with the financial crisis making credit scarce, these countries are finding it hard to obtain the loans they once found easy, with Portugal, Ireland and Greece being given junk credit status by credit rating agencies. This mass borrowing by the periphery nations (and Ireland) was good news for the central countries, especially Germany, as it meant new possible customers for their exports financed using money loaned from the richer nations like Germany: A vicious cycle. Zemanek (2010) supports this stating “Germany has experienced rising trade surpluses against the euro area countries starting from 2002 up to the recent crisis… other countries have large current account deficits, thereby accumulating increasing stocks of international debt”.

Bayumi and Eichengreen (1992) argued that the European monetary union could not be an optimum currency union. An optimum currency union is a region where a single currency would maximise economic efficiency, satisfying the criteria of; labour mobility, capital mobility, price and wage flexibility, fiscal transfers and similar business cycles. It is argued that the eurozone does not have price and wage flexibility, fiscal transfers or labour flexibility. Issing (2000) supported the lack of this last quality, arguing “dangers can be identified relatively easily. The most obvious one is the lack of flexibility in the labour union… this poses an almost lethal threat to monetary union”. A single monetary policy also meant individual countries couldn’t de-value their currency by printing. When the financial crisis hit, countries like the UK and USA were able to devalue their currency by printing more money, this helps boost exports and stop imports and can be an important tool in restructuring a countries economy. But countries like Greece and Portugal within the EU don’t have that option and therefore the only way to restructure their economy is through internal austerity; cutting wages and spending.  The Federal Union (2011) wrote “British government borrowing grew from 29.7% of GDP in 2002 to 36.5% in 2008… Since August 2007, the pound has lost 20 percent of its value against the euro”  showing the UK was fiscally irresponsible as well, but that they had the ability to de-value their currency and boost exports and therefore not have to adhere to severe austerity policies like their EU counterparts.

The second fundamental problem of the euro was the fiscal policy of the EU. In contrast to the monetary policy of the EU, each nation has a separate fiscal policy which leaves a very mixed economic structure for the EU. The fiscal policy refers to the government expenditure (e.g. new roads) and the collection of revenue (taxes) which affects the economy of the country. White (2011) suggested that it was “impossible to completely separate fiscal policy from monetary policy as central banks can prop up government bond prices by monetising debt” meaning the central banks of countries can buy up the debt of the country (though it is illegal to directly buy the debt, it can easily be bypassed) to help increase the supply of money, therefore affecting the monetary policy.

The Mundell-Fleming model (an adaptation on the IS-LM model) helps shows the relationship between a country’s interest rates, output and nominal exchange rates. The model argues that a country cannot simultaneously achieve a fixed exchange rate, free capital movement and an independent monetary policy. The EU for example has flexible exchange rates and instead decides to target interest rates and free capital movement. The model shows; the IS curve: Output = Consumption + Investment + Government Spending + Net Exports, the LM curve: Money supply/Price = Liquidity preference (Interest rates, Output) and the Balance of Payments curve: Current accounts (Net Exports) + Capital accounts (Cash Flow). The EU uses flexible exchange rates, which means the European Central Bank allows exchange rates to be determined by market forces alone. With flexible exchanges rates, the central bank can increase the supply of money to try and boost the economy (Monetary change). This causes the LM curve to shift to the right, thereby increasing output and lowering the domestic interest rate in comparison to the global interest rate. This depreciates the local currency, making local goods more attractive and thereby increasing net exports. Increasing net exports shifts the IS curve to the right as well, up until the point where the balance of payment is equal again and the domestic exchange rate equals the global interest rate. But while this returns to normal, the GDP increases once again, meaning any increase in the money supply doesn’t have an effect on interest rates in the long term, but does increase the GDP of the country and vice versa for a decrease in the supply of money. The European Central Bank increases money supply through Quantitative easing, where it prints more euros for all the countries to help boost the economies that are underperforming. Too much quantitative easing can be bad for the economy, leading to a poorer standard of living, bad reputation with foreign markets and even the risk of hyperinflation, while the ECB has to try and balance out whether quantitative easing would benefit all the countries in the eurozone. Another option with flexible exchange rates is to increase government spending (fiscal change), this causes the IS curve shifts to the right, causing an increase in GDP and in the domestic interest rates compared to global interest rates. This leads to the currency appreciating, making foreign goods more appealing and decreasing net exports. This shifts the IS curve back to its original position where domestic interest rates are equal to global interest rates and has no impact on the LM curve. This means if there is perfect capital mobility, then an increase in government spending has no impact on GDP and vice versa with cuts in spending. This shows that both the fiscal and monetary policy are integrated and cannot just be separated like the EU have tried to do with the euro.

A fiscal change with floating exchange rates graph shows what happens when government spending is increased (or taxes are decreased). A monetary expansion with floating exchange rates shows what happens when the supply of money is increased.

The EU also had to make an assumption that with interest rates fixed and a single currency, each country would be fiscally responsible. That assumption was proven badly wrong, as a lot of countries used low interest rates to borrow irresponsibly without having the output to support such loans and built up uncontrollable amounts of debt. Marian Tupy (Legatum Institute) argued that “Greece’s membership in the eurozone allowed the Greek government to borrow at lower interest rates, and thereby enabled its overspending” showing the allure the EU created for poorer nations to borrow beyond their means.  A new fiscal compact has recently been agreed between the countries in Europe (as described previously), with the UK and Czech Republic notably opting out of the treaty, which has the aim of stopping states running huge debts. This new fiscal compact shows an original problem with the structure of the EU, that regulation of fiscal activity in the eurozone was too relaxed. Dominguez (2006) came to this conclusion in her paper, writing “In 2000, one year after the euro was launched, five of the eleven countries in the eurozone were in violation of the public debt rule”, she then added “In 2005, the three largest eurozone economies – France, Germany and Italy – were out of compliance with both the budget deficit and public debt rules”.

Another fundamental problem with the euro was that it seemed totally unprepared for a crisis. As the Economist captured perfectly “the designers of the good ship euro wanted to create the greatest liner of the age. But as everybody knows, it was fit only for fair-weather sailing, with an anarchic crew and no life boats”. The European central banks main purpose was to keep inflation low, not deal with any potential credit problems which it had neither the financial nor political power to accomplish.  David Cameron (British Prime Minister) argued that successful currency unions have a lender of last resort, fiscal transfers, collective debt, economic integration and flexibility to deal with shocks, suggesting “currently it’s not that the eurozone doesn’t have all of these, it’s that it doesn’t have any of these”. Looking at the EU structure, it is easy to see what he is saying; countries are unable to transfer funds to struggling regions (e.g. Germany couldn’t transfer funds to Greece), debt is split unequally between different countries despite all using the same monetary policy, economies are kept largely separate with trade barriers still existing and there is absolutely no flexibility to deal with shocks as the financial crisis showed. Stelzer (2012) wrote ”Nor does Europe have a seamless method of transferring income from flush to stricken areas. America does: cash flows automatically to troubled states with falling tax receipts and rising welfare costs, from states doing better” which shows the one reason how America have been able to bounce back faster than the eurozone, because they have been able to transfer funds to poorer regions and have spread the debt collectively over all the states. But the most important of these factors is arguably having a lender of last resort, some sort of institution that can bail out the government if they can’t pay its debt. The USA has this in the form of the Federal Reserve, which can provide funds for any of the states if they require it. One of the main problems of the euro crisis was a lack of liquidity; this should have been the role of the European Central Bank as a lender of last resort. Instead the EU had a rule of no bail outs, relying on markets to keep a government from acting fiscally irresponsible, which has now backfired as the EU has hurriedly created a rescue fund to help solve a liquidity time bomb. The rescue fund created has little use however as it is massively underfunded, unable to bail-out a country the size of Italy for example. Without the ability to bail out countries, the EU could break up, a topic politically avoided. Ulrike Guerat of the European Council on foreign relations expresses fear in his paper that rather like the Soviet Union, the EU would go down quickly if the euro started to break up, showing a general worry that if a country like Greece (in the worst condition in the eurozone) defaults on its debt and leaves the euro, it could have a domino effect on the rest of the EU, with Portugal and Ireland very vulnerable to any shocks in the market.

An additional structural problem with the euro was that there wasn’t a political union. George Soros (2011) stated “the euro is a flawed construct “by which he meant the euro needed a stronger political union behind it. He then went on to suggest a single-pan European Union welfare state would allow for the creation of one fiscal and monetary policy for all of Europe. The EU faces constant bickering from different members over different policies, and struggles to achieve a united front at times. One such example was with foreign policy, where the UK and France agreed to intervene in the conflict in Libya, while Germany decided against joining in, showing that a conflict in interests can divide the eurozone. The United States of America is a good body to compare the European Union to as it shows the difference of being united politically. The Economist supports this argument, stating “America created political union followed by a fiscal union. But Europe is doing things backwards, creating the euro in hope of fostering political union”. EU policy has long been seen as being dominated by the central nations, with Germany suggested as having a lot of sway in the decision making process. This has stemmed from EU policy benefitting Germany before the crisis; as a weak currency meant they could export their goods more easily and low inflation was suggested to be focused on strongly because of German fear of hyperinflation, indeed the European Central Bank’s main policy is to control inflation.  This has been resented by the periphery nations which feel they are not represented in EU policies. The EU parliament has long been an institution with little power, with the economist describing it well, suggesting they measure “themselves against America’s congress without having its means” meaning that unlike Congress, they have little sway in uniting different countries inside the eurozone and although it can decide how to spend the EU money, it cannot dictate how it is raised. The EU parliament gained mores powers in 2009 after the Lisbon Treaty to monitor national budgets but any decisions have to be debated between two other bodies; the European Commission and the Council of Ministers while all the major topics like education and health are decided by national governments. This sort of system keeps the different nations separate and makes decision making a long and tedious process. The German Chancellor, Angela Merkel, has spoken of a potential “political union” for the EU with a strong parliament, showing the lack of one originally has been realised as a mistake by the leading figures of the EU.

The final structural problem found with the euro was the lack of equality throughout the EU. There is a vast difference between the economies of the central nations and the economies of the periphery nations. Germany has been a highly competitive saving nation since the euro’s creation whiles the “PIIGS” countries (Portugal, Italy, Ireland, Greece and Spain) were the complete opposite; uncompetitive in production and too reliant on credit to finance themselves. This meant the capital flowing into these countries created a wage boom which saw wage growth rise above productivity growth, while Germany’s wage growth remained moderate meaning they could remain competitive over their rivals. A rigid labour market meant that when the financial crisis hit, real wages couldn’t adjust quickly enough in the periphery states, which coupled with an inability to devalue their currency led to a deep recession for these countries. Rogoff (2012) argued that the lack of labour mobility in the euro was a big problem, suggesting “if intra-eurozone mobility were anything like Mundell’s ideal, today we would not be seeing 25% unemployment in Spain while Germany’s unemployment rate is below 7%” meaning the eurozone is not one of Mundell’s optimal currency areas. Zemanek (2010) produced some facts, saying “while Germany and Austria broadly kept unit labour costs at the level of 1999. In Iceland, Portugal, Spain, Greece, Italy and the Netherlands unit labour costs have increased significantly – by up to 30% compared with 1999” showing how competitive Germany had become compared with most other countries. This inequality throughout the eurozone has destabilised the EU, leading to hugely contrasting current accounts; with Germany having a big surplus and Greece having a large deficit.

We can use the idea of an optimal allocation to show the problems with inequality in the eurozone. An allocation (consumption of an individual in an economy) is only an optimal allocation if it is both efficient and equitable. We can judge efficiency by using the idea of Pareto efficiency: that no-one can be better off without making another individual worse off. A lot of allocations can be pareto efficient but still be unfair however, for example if one person has 7 apples and another 3 this would be considered pareto efficient. To make the allocation equitable, it needs to maximise social welfare (benefit society). A good model to show this is the Utilitarian model, which shows an economy of two individuals, where a UPF curve shows the pareto efficient utilities of both consumers and the social welfare function curve shows the point on the previous curve where the allocation is both pareto efficient and equitable. In the case of the EU, the redistribution of endowments in the market is the responsibility of the EU government and they haven’t done this effectively, as the imbalances between different countries shows. Germany is highly productive, export more than they import and have high employment, this is in contrast with Greece where they import more than they export, have high unemployment and have low productivity. The EU needs to fix these sorts of problems, where jobs are available in some areas of the eurozone and non-existent in others. They could do this by producing more public sector jobs in areas that have low unemployment or improving infrastructure to attract private industry, but this will be hard as countries in the eurozone still have individual governments (not in the EU’s power) and political mistrust between countries will interfere in the sharing of resources e.g. Germany are unlikely to agree with strengthening their rivals in the market. A more unified European Union, as discussed in earlier points, in the shape of a real political union could help different countries become more equal in the EU.

Map showing the different debt to GDP ratios of the countries in the eurozone. This shows the contrasting levels of debt in the eurozone; with Greece, Italy, Portugal and Ireland in much worse positions than France and Germany. This inequality is bad for the EU and a collective measure of the debt would help sort out these issues. (Economist, 2011).

However, it cannot be said that the euro was all bad. Most of the countries that joined the EU experienced big growth in the period up to the crisis. Yannos Papantoniou (2011) found that in the years 1999-2008 compared to 1989-1998, the eurozone countries experienced; 1% lower unemployment, 1.1% lower inflation and GDP growth of at least 5% each year (excluding 2003). The periphery nations like Spain and Greece experienced big economic growth (with Greece growing larger than the eurozone in 2003) which has seen their standard of living for their people improve greatly. During this period life was good for those nations, despite it being financed by debt, and their business sectors and infrastructure were upgraded in the process.  Having the same currency also meant countries could trade with each other much easier without the need for different exchange rates. The euro has benefited businesses in Germany and France (whose main customers were in Europe) and tourism for countries like Greece and Spain (whose economies rely on this sector) as there were no longer any transaction costs for each country and made prices in each country relatively equal and transparent. Also it is comparable to look at Iceland who possesses a single currency and has had troubles with volatile exchange rates due to changes in the market. This shows the problems that each country could still be facing if they hadn’t been part of the euro; highly vulnerable to any changes in the world market like rises in oil prices or commodity prices. Papantoniou (2011) supports this stating “the growth of output seems to have been stabilised in the euro area since the end of the 1990’s. Although the eurozone has not been the only area enjoying this decline in volatility of output growth, the convergence of economic policies of the eurozone countries coupled with a steady monetary policy of the ECB in its response to major events, such as the global economic downturn in the early 2000’s”. By employing data over 1982-2002, De Sousa and Lochard (2005) found that the euro has raised flows of foreign direct investment within the euro area by 62%.

Another benefit of the euro has been the safety net that each nation in the eurozone now possesses. Since the euro crisis, Greece and Ireland have had to be bailed out by the EU and IMF, this wouldn’t have happened had they not been part of this union that they can fall back on. The EU can’t afford to let any nation default as it could trigger a domino effect, so all the countries in the eurozone will continue to help bailout any countries in need to stop another crisis. Also, though countries like the UK do have the option of de-valuing their currency that members of the euro don’t have, it does have negative effects. The Federal Union website supports this stating “devaluation leads to reduced living standards, higher inflation and creditors deprived of full repayments abroad” with the last factor leading to countries losing their credible reputation with foreign investors. White (2011) reiterated this stating “For the citizens of an open economy who want to enjoy cross-border trade and investment, and want to have a trustworthy currency, the option of their central bank to devalue carries a near zero or even negative value, while the benefits of membership in a common currency area are important and positive”. He went on to suggest “The euro has so far held its value better than the drachma or the lira or the peseta used to” meaning the countries in the eurozone could have been much worse off had they not shared a currency and seen their economies lose their value. Tilford (2012) suggests that the EU compares favourably with its rivals, stating “Eurozone members as a whole … have a lower budget deficit than the US and the United Kingdom, and a similar level of public debt. Unlike the US and the UK, the eurozone in aggregate is running a current-account surplus” though the problem is whether to perceive the EU as a single organism or a host of multiple countries. The economist also found that “Prior to the crisis, Italy’s government was running a primary surplus and bringing down its debt-to-GDP ratio. So long as markets were prepared to finance Italy’s old debt at low rates, it was in good shape. Now, of course, markets aren’t prepared to do that” showing not all the nations now in trouble were spending outrageously, it’s just that once markets were spooked it effected some fragile economies in the eurozone like Italy. The European Central Bank also managed to keep its inflation rates at low levels throughout the euro (at around 2%), an important step in making sure a problem of hyperinflation didn’t spread through the eurozone.

In conclusion, the euro has some fundamental problems that need to be solved if it is to survive. The first two problems are interlinked, as the EU cannot have one monetary policy and multiple fiscal policies. The EU will need to either centralise the fiscal policy of the eurozone, giving more power to the EU parliament over taxes/government spending or give up some of its power over monetary policy and allow countries to print their own euros with some sort of maximum limit in place. The first choice seems the most likely as the EU continues along a current path of greater unification (bailing out countries to keep the EU in existence) and this could result in Eurobonds, as a way of reducing borrowing costs for each country and creating a safer asset for the EU. The current structure of the EU has political fractures between different governments, as countries fight for their own interests, this will need to be sorted by giving more power to the EU parliament and getting rid of current trade barriers between nations. The vast inequality will need to be treated too, as contrasting statistics between central and periphery states (budget deficits, current accounts) will continue to split the EU. A solution could be to have a system like that in USA where the richer states can transfer funds to the poorer states; this is basically in use now in the eurozone as countries like Germany and France are being forced to bail-out their neighbours. The last fundamental problem of having no preparation for a crisis is already being resolved, as the recent Euro Crisis has caused countries to stop either living fiscally irresponsibly (Greece) or to stop relying on certain  markets (Spain too reliant on construction market). There is also more regulation over fiscal activity and bank credit, which was badly missing from the original set up and encouraged nations to live beyond their means. The euro did allow growth in poorer regions of Europe, but this was financed by easy debt. While the safety net it now provides relies on the belief that the countries footing the bill will continue to decide the costs of bail outs outweigh the costs of a breakup of the euro. Instead there should already be a lender of last resort set up, the European Central Bank for instance, which can help out any country and already have been financed by years of savings from each country. These points add up to suggest the euro was in fact doomed from the start due to innate problems in its structure and the only way it can survive in its current form will be through reforms in its monetary and fiscal policy and its political unity.

Britain: The Coalitions first two years

Have David Cameron and Nick Clegg been good leaders?

So the Coalition has been in power for two years now, that’s long enough to paint a good picture of where they are leading the country and how well they have done in charge.

One of the biggest factors in the coalition’s reign has been their reforms in education, health and the military. With education the government has set about creating “academies” which are schools that have been freed from local authority and allowed to make their own decisions on budgets, working hours and teaching styles. This has really kicked off across the country, with nearly half of all state schools being turned into these “academies”. Along with this the government is changing the exam structure in secondary schools, with the old O-level system being brought back in to replace GCSE’s. This is aimed to make exams harder after renowned criticism of exams becoming easier each year, while it also hoped to raise Britain’s poor standing in international tables for key subjects like Maths and Science. All in all, this makes sense as the current structure is flawed and corrupt (with schools manipulating the system to rise up the league tables), but those students unlucky enough to be the guinea pigs will likely achieve lower results. Finally there has been changes to higher education, with the cap on university fee’s raised to £9,000 from £3,000, to much protest from current and potential students. This is a debateable subject, with fees now very expensive considering you would have to study three years plus the costs of living, but the fact that student loans are accessible to everyone means it shouldn’t punish the currently poorer families too much (though the maintenance loans have been accused of being too low).

Protests against University tuition fee increases.

Next up are the reforms in the health sector, with a shake-up wanted for the NHS. The idea was to diversify the NHS, make doctors more accountable for budgets and open up the private market more. This has been an unmitigated disaster however; with substantial criticisms leaving the health bill a complicated mixture of compromises. This leads back to the Governments clear weakness throughout their reign, poor public relations. The government failed to make clear what exactly they wanted to change about the NHS (an already popular institution) and made it worse by not publicising such plans in the election campaign. Then there is the military, which the government has proceeded to cut down. With budgets tight, the army has been a big victim to the government’s cuts, with it being told to lowers its numbers by 60,000 people by 2015. This is to help close the £38 billion hole found in the defence budget, but critics now suggest the UK military is markedly weaker and would struggle to win conflicts such as a possible Argentinean invasion of the Falkland Islands.

Protests against the NHS reforms (you can see a pattern starting to emerge).

Even away from these big sectors there have been big reforms to the country. The government tried and failed to implement elected mayors in some major cities, with nine of the ten referendums being rejected. Then there are the big reforms to the police, which are set to integrate democracy into the Police hierarchy and allow the outsourcing of tasks like office work. Welfare is also being tackled, with benefits capped at £26,000 per household and David Cameron even pondering whether to drop the housing benefit for under 25’s. Finally there are possible changes to the Civil service being planned, to try and make individuals more responsible for their actions after criticism over the difficulty in passing through bills. So rightly or wrongly, the government cannot be accused of doing nothing, with a possible criticism instead being that they perhaps tried to do too much in such a short space of time.

Next we can look at the country’s economic performance. On the positive side of things, Britain surprisingly kept unemployment relatively low since the financial crisis, with the current figure of 8.1% (only 1% higher than the pre-crisis level) lower than its European counterparts; with Greece at 21.9%, Spain at 24.1% and even France at 10.1%. In fact, public sector jobs cuts of 424,000 over the last two years have more than been accounted for by a rise in private sector jobs by 843,000. In debt terms Britain isn’t too bad either, its public debt sounds incredibly high at just over £1 trillion, but this only accounts for 67% of their GDP. In comparison to other countries this isn’t too bad, with Germany and France having similar debt to GDP ratios, while Greece, Portugal and Italy boast debt levels over 100% of their GDP’s. In fact, all the worry over the Eurozone crisis has driven investors to Britain, with bond yields incredibly low at around 1.6% meaning Britain can borrow money very cheaply right now.

Current unemployment in Europe shows Britain in the bottom half and fairing better than its neighbors.

However, Britain is struggling deeply in other terms. Despite debt levels not being too high, the current budget deficit is 8.4% of GDP, which along with Ireland is the highest in the eurozone. This means that although Britain’s debt isn’t too high, they are adding to it much faster than any other countries in Europe. Even more disappointing is the Primary budget deficit which discounts the interest being paid on current debt. This stands at around 3% of GDP and is the highest in Europe, deafening criticism when the likes of Greece are boasting a surplus. It basically shows Britain is reliant on foreign money to survive right now, and is the main reason why the government is making such drastic cuts to the public sector. On top of this is Britain’s poor growth, with the country currently in recession, after a GDP decline of 0.4% in the final quarter of last year followed by a decline of 0.3% for the first quarter of this year. Though this isn’t a severe recession, it follows a long term trend of poor growth for the UK, with just 0.5% annual growth forecasted this year preceded by 0.7% annual growth last year. Such poor growth is not all Britain’s fault with oil prices and the Euro crisis obviously having an effect, but more must be done to implement growth within the country. At times the government is too set on cutting costs, with little ideas for boosting growth, a policy that is born to fail as low growth will only lead to less taxes and higher benefits being dished out. So in economic terms the government has done well to cut budgets without dropping the country into another deep recession, but without some sort of plan for Growth, they will be fighting a losing battle to lower the budget deficit.

The GDP forecasts of Britain show weak growth compared to Germany and France. 

Finally there are the international issues the government has had to face. International conflicts have seen Britain take a bigger role, with the intervention in Libya lead by Britain and France and the chaos in Syria seeing David Cameron condemn President Assad and argue the case for harsher sanctions and possible intervention. While the current disagreement with Argentina over the Falklands islands has been handled well, with a referendum set to end the debate and keep the islands under British control if the people reach such a conclusion (as is expected). However the debate over Scotland remains a touchy subject. Scotland is set to hold a referendum themselves over whether to stay as part of Britain and there is general worry that a decision could go against what the Coalition are hoping for. A messy split would not help the economy and debateable issues such as the North Sea oil revenues and transfer of Scottish bank debts could take a while to be sorted out. But by and large the biggest international issue remains the Euro crisis. Britain are one the few countries in the EU not to hold the euro currency and this has helped them devalue their currency, meaning the internal devaluing (public sector cuts etc) didn’t have to be as drastic. But the downside is that they are highly vulnerable to a break up without the safety net of having the EU bail them out. Britain actually doesn’t have much money tied up in Greece itself (roughly 0.4% of GDP) compared to Germany and France. But the combined money exposed to the weaker economies (Greece, Portugal, Spain, Italy and Ireland) accounts to £190 billion, which is higher than France or Germany’s exposure and is roughly 12.7% of British GDP. That’s not to take into account the money exposed to Germany and France at around £116 billion, which would be in big danger due to the domino effect expected to happen if just one economy in the eurozone fully crashes. So far Britain has gone against the trend in European discussions, opting out of the fiscal compact (such budget targets were beyond Britain right now) and largely looking out for itself (with the transfer of sovereign powers back to Britain high on the coalition’s plans). This has seen them marginalised somewhat and there is sense that if the EU is to solve this crisis they would have to become more unified. This leaves Britain with a big question to face in the near future, whether they join the new EU or leave the eurozone permanently.

Graph shows the extent to which Britain is exposed to the euro crisis. 

Overall, the Coalition government has had an eventful two years do far. Big changes to the county have had mixed effects, while the same could be said for their economic performance. Internationally they have fared well but will need to decide what direction they want to take in regards to the European Union. I would give them a 6/10, as they have fared okay in most departments, while it possibly could have been higher had they publicised their actions better. This has been the big problem with this government so far, they have dealt poorly with public opinion and are unpopular not down to their decisions as such, but rather the ways they have gone about making such decisions.

Spain’s current problem with Youth Unemployment

Debt crisis…Bank bailouts… Country bailouts… even some confusing statistics about Government bonds. This is all we hear about when the Euro crisis is on the news, but the most important statistic is usually the least talked about: Unemployment. In Spain, this is their most troubling problem, with unemployment currently around 20%. But even more troubling is their youth unemployment statistics (Under 25 years old) which currently reads just under a whopping 50%.

That is nearly half of young people in Spain not working, which doesn’t inspire much faith in the Spanish government or education system (not much point in entering higher education if there isn’t a job at the end of the road). So what caused such astronomical unemployment figures?

One major cause was the housing bubble that existed in most western countries; this was exacerbated in Spain as they let their economy rely too heavily on tourism. Spain was pushed into building houses to host tourists to bring money into the country which in turn funded more holiday homes. A vicious cycle that relied heavily on tourists coming into their country, which promptly stopped once people realised it was a luxury they couldn’t afford. Some statistics to back this up, show that when the financial crisis hit, construction accounted for 13% of employment and 12% of GDP and that in the 10 years previous to this, both borrowing and prices for houses tripled. This had a big effect on youth unemployment, where previously construction was a reliable trade to enter into.

Another major cause is the strange labour laws that Spain had. Due to tight regulation it was hard to fire employees, which meant employers were less likely to hire them in the first place. Instead temporary workers are hired, where employees have to work with no strong security for their future. These temporary workers aren’t included in employment statistics, so it makes the numbers a bit inflated, but still shows a problem of a lack of long term stability in the labour market.  A few days ago new labour reforms were released and were met with fierce protests from the public and on the face of it you can see why: giving employers more power over firing workers doesn’t seem to be helping the market. But maybe this might lead to more organisations employing people, as they now have more assurances that they can be flexible in the future. One example is in Germany, where labour laws are more lax and organisation were convinced to keep their staff on by lowering hours, this sort of co-operation was needed in Spain.

Youth unemployment can lead to some very negative impacts. One such impact is emigration, as young people looking for jobs feel they have better opportunities in other countries. This seems to be happening in Spain, where young potential employees are moving to the UK, Germany, France or even the USA. These countries don’t have particularly better employment rates, but it shows the complete lack of faith in Spain’s market. Another impact is that young people can become disillusioned with their surroundings and resort to crime; recent riots in the UK started in areas where unemployment was badly low and young Britons no longer had faith in the government to help them.

Spain aren’t alone, along with Greece they lead Southern Europe in poor employment prospects: Portugal currently have unemployment at just under 15%, Greece are just behind Spain with 18% while Italy are faring the best with around 8%. Check out the youth unemployment statistics and the southern states look even worse: Greece show nearly 50% as well, while Italy and Portugal are near the 30% mark. Their counterparts in central and northern Europe dealt with unemployment much better (excluding Ireland), with Germany using exports to keep their people in employment and the UK lucking out as there stricter construction laws meant the housing bubble didn’t quite have the same effect on employment as in Spain. So is there a lesson to be learned? From Britain no, low production and growth mean that unemployment is again rising.  But from Germany yes, high exports have kept people in employment and good relations between the government and organisations meant that employees weren’t sacked when times were at their worst.

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