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Members of the European Union (EU) have reached a tentative compromise agreement about how to deal with euro-zone members who violate EU spending rules. Each euro-zone country is supposed to limit its budget deficit to no more than 3% of the nation’s gross domestic product (GDP) and its debt to 60% of GDP. One of the main criticisms of the common currency is that the EU lacks sufficient political power to keep individual countries from spending too much. Since the euro-zone crisis last spring, EU governments have been trying to implement policies which will keep member countries from overspending and to create systems for responding to a new crisis, should one develop. Germany, the Netherlands, Finland, and Sweden wanted strict and automatic imposition of sanctions against those governments that violate EU spending rules. France, Spain, and Italy wanted a more flexible system allowing member countries to vote on whether to impose sanctions.

In the agreement announced on October 18, Germany seems to have conceded on its views. Germany long resisted bailing out Greece and its citizens tend to have little sympathy for nations that live beyond their means. Angela Merkel, Germany’s chancellor, has been a strong advocate for implementing new reforms with the goal of restoring investor confidence in the euro zone. The compromise deal preserves the rights of euro-zone leaders to vote on whether to impose sanctions. Ms. Merkel may have conceded on the sanctions provision in the hopes of achieving her long-term goals of implementing changes to the treaties governing the EU, which would allow for the suspension of voting rights of euro-zone members who violate EU spending rules, and to create a more permanent system for dealing with debt crises.

QUESTIONS FOR DISCUSSION:

  1. Analyze the advantages and disadvantages of allowing euro-zone members to vote on whether to impose sanctions against nations who violate EU spending rule versus imposing automatic sanctions.
  2. Ms. Merkel may have conceded on the sanctions provision in the hopes of achieving her long-term goals of implementing changes to the treaties governing the EU. Discuss the challenges which will be faced in attempting to re-write EU treaties and analyze if this was a wise political move by Ms. Merkel.
  3. Moral hazard is the academic theory that people (or governments) will continue to engage in risky or aggressive behavior if they never suffer negative consequences for their actions. Greece received a $135 billion rescue package from the International Monetary Fund and the EU in May 2010. Evaluate the extent to which you think this rescue package may contribute to moral hazard for Greece.

SOURCE: Walker, M., & Forelle, C. (2010, October 22). Merkel’s concession shows lost clout. Wall Street Journal, p. A12. (Retrievable online at http://online.wsj.com/article/SB10001424052702303339504575566424176856294.html)

Related Article: Forelle, C. (2010, October 20). EU moves to soften debt-sanctions plan. Wall Street Journal, p. A13. (Retrievable online at http://online.wsj.com/article/SB10001424052702303550904575562353822879246.html)

Related video clip available at: http://video.ft.com/v/643389527001/Merkel-s-eurozone-policy

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