Course Work

The Monetary Union Needs A Common Fiscal Policy

The European Union has become one of the largest trade and political blocs in history and is constantly expanding in numbers. On May 1, 2004, ten new countries joined the Union in an effort to improve their economies in the future. Most of these countries were former communist countries that fell under the Soviet bloc during the Cold War and, therefore, were undergoing a period of significant economic and political reform, although “the timing of each country’s recovery from the initial “transition shock”varied. Poland reached it first and the Czech Republic last” (Neal 377). Since 2004, the large and medium sized new members have been able to substantially grow their economies because the governments have made it a priority to get those countries out of debt. Once the debt is eliminated and the Euro is used as a currency, the countries will continue to grow until they are able to fully complete on the world stage. Some countries, however, have argued that a common fiscal policy is needed to supplement the monetary union. A common fiscal policy would only help the smaller countries in the European Union and, therefore, should not be implemented in the near future. Currently, “there is a common monetary policy among the Euro countries.

Fiscal policy for stabilisation purposes remains a national prerogative, but within the constraints imposed by the Stability and Growth Pact. Moreover, national fiscal policies are subject to reciprocal screening and monitoring within the EU, not just to guarantee respect of the Stability Pact, but also to insure a minimum of co-ordination and the achievement of some common goals (the so called “broad economic policy guidelines”)” (Tabellini 79). While these smaller countries should be helped economically, a fiscal policy should not be built just for them, as they can build their own fiscal policies, which can be just as effective.

Since joining the European Union, the Czech Republic has begun to change its economy completely. While the country has yet to adopt the Euro, as its economy is not yet strong enough to do so, there have been other important changes made. One important factor in all of this is that the government has started offering investment opportunities in order to attract foreign partners which, in turn, would spark economic growth. This includes the country adjusting its commercial laws and accounting practices in order to meet the standards that have been set by Western corporations. Banks that were formerly state-owned have now been privatized by Western European banks and the central bank now has an increased influence as well. The infrastructures of telecommunications have been upgraded, through privatization, which is another factor that has led to an increase in foreign investment. In fact, the Czech Republic is the first former communist country to receive investment-grade credit rating by international credit institutions.

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The current account deficits, which are at about 5% of the GDP, are starting to now decline because the demand for Czech products in the European Union is increasing. Inflation is currently under control in the country and having the ability to use European Union funds will be a great advantage in the future for the country. In fact, the Czech Republic received $2.4 Billion in economic aid from the European Union between 2004 and 2006, which has helped greatly as the country attempts to repair its economy. This is an excellent example of a country being helped by the European Union to not only become a contributing member of the Union, but also to become self-sufficient through the implementation of its own economic policies.

Hungary is another country that has benefited greatly from its decision to join the European Union. This is because it has created a scenario where it is financially viable for foreign companies to invest in the country and this has made Hungary into one of the most open economies in the European Union. Hungary’s integration in to the European economy has also made it one of the fastest growing economies in the region, which is significant for a country that was previously so overrun with debt. In 2002, the debt of the country doubled to 9.9% of the GDP, largely because the previous administration overspent prior to a national election in order to gain public support. What this did was leave a major problem for the new regime, which they attempted to combat by spending more money on the situation. The government then wished to create a business-friendly atmosphere in the country, but a wage increase did not help this at all. Finally in 2005, the country began to focus on deficit reduction as part of its policy. An economic reform plan was introduced in 2006 in which the Prime Minister “vowed to attack Hungary’s budget deficit, estimated to reach 9.5% of GDP for 2006, by raising taxes and combating waste in the public sector.

The plan consists of austerity measures that involve cutting subsidies on gas, electricity, and medicines as well as a series of deep reforms in four key areas: healthcare, state administration, local government, and education” (CIA World Factbook). The Prime Minister also agreed to cut down on this ministry staff by 23% with the goal of gradually decreasing the budget deficit each year until the country is finally able to become a Euro trading country in 2011. While this is one year later than the country had originally hoped, it will be a significant milestone to be reached. This shows that even countries that get into significant financial trouble can recover without the entire Union having to adopt certain policies.
Slovakia features the strongest economic growth in Central Europe, which is significant because the region is growing so quickly. In 2005, the GDP had a growth of 6% due to a variety of reasons, including the country’s accession into the European Union, although it had been steadily increasing before this as well. In July of 2005, the inflation rate of the country dropped to 2.0% and is projected to stay at low rate in the future as well. Also, in 2006 GDP growth reached 8.3%, which was the third highest number in the entire European Union, behind only Estonia and Latvia. The current account deficit has also been shrinking substantially, due largely to a drop in the trade deficit. This has led to an increase in the foreign investment within the country. Despite these changes, the foreign debt that Slovakia is saddled with is on the rise. This is because the dollar has taken a hit on the foreign market, but the government is prepared to combat these problems by implementing fiscally responsible policies that will take the budget deficit below the ceiling of 3% of the GDP by 2007. This will be done so that the country could adopt the Euro as its currency, which will lead to economic growth for it in both the domestic and foreign markets. The budget for 2006 targeted the deficit as being 2.9% of the GDP, which would put it under that limit. Slovakia has been able to implement its own fiscal policies in order to combat any problems that might arise, which means that other countries can do so as well.

Cyprus has benefited quite substantially from its integration into the European Union. Since Cyprus is a smaller country, it relies on larger countries to outsource its goods and services. It has also benefited from financial assistance from the member countries. The country has also benefited from investment from these foreign countries, particularly in the housing industry. Cyprus has become a popular tourist destination since its accession into the European Union, as many Europeans have taken advantage of the relatively low prices in comparison to the rest of Europe. This sector has been used to help the GDP rise, as it rose 4% in 2006 alone. The long term effects of Cyprus joining the European Union are not yet known, as the country has not grown significantly enough to tell yet, but it is possible to see Cyprus continuing to increase in popularity as a tourist destination, which would make tourism into the country’s leading source of revenue. Since Cyprus is mostly a tourist destination, it would not benefit from a common fiscal policy as much as many other small countries that rely on trade.

Malta is another small country that has benefited from the money that comes in from other European Union member countries. The government spending in this country is very high, as in recent years this number has been as high as 49.1% of the GDP. Therefore, financial help is needed in order for this country to become self-sufficient. Inflation in Malta is quite low, as it averages around 2.9%, but much of this is regulated through state-owned enterprises. This means that there is not as much private investment in Malta as there is in other European Union countries, especially developing ones. The financial sector in Malta is quite small, but it has grown lately as many of the formerly state-owned banks are now privatized and foreign banks also have increased in numbers. Foreign investment in Malta is welcomed, but it is judged on a case-by-case basis, which slows things down. Unlike Cyprus, foreigners are not permitted to own real estate in Malta, which has slowed down the tourism industry and growth in the country since becoming part of the European Union.

These countries joined the European Union with the goal of achieving economic expansion and most of them have done so at a rapid rate, as “the links between trade and macroeconomic cooperation are, of course, at the heart of the formation of the European Union. Certainly trade links are weaker in the developing world – although they have been growing rapidly in some regions” (Ocampo 36). A major goal of each of these countries, especially the large and medium ones, is adopting the Euro currency in order to fully integrate into the European Union. Once this complete integration occurs, these countries will develop even further and will, in hope, be able to compete with the major financial countries in this region. The European Union, however, does not need a common fiscal policy because countries can be successful without one. Also, there is such a wide range of countries that it would be impossible to come up with a policy that would meet the demands of every country. It is best that each individuals government come up with its own policy, as this will promote the most growth in the near future.

Sources

  1. CIA World Factbook. “Hungary – Economy”. U.S. Dept. of State Country Background Notes. June 2006. Retrieved March 22, 2007. http://globaledge.msu.edu/ibrd/CountryEconomyPrint.asp?CountryID=56&RegionID=2
    Neal, Larry. The Economics of Europe and the European Union. Cambridge: Cambridge University Press. 2007.
    Ocampo, Jose Antonio. Regional Financial Cooperation. Baltimore MD: Brookings Institution Press. 2006.
    Tabellini, Guido. “Principles of Policymaking in the European Union: An Economic Perspective”. CESifo Economic Studies. Jan. 2003. Vol. 49. Viewed 28 November 2007. http://cesifo.oxfordjournals.org/cgi/reprint/49/1/75.pdf
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