Will The EU Fail? | Economics Explained

this is the European Union a joint group of member states that is collectively home to 447 million people and the third largest economy in the world after China and the USA the EU is also home to 20 member countries that use the euro the second most widely held Reserve currency after the US dollar with approximately equal Holdings to all other foreign currency reserves combined the euro is so popular in fact that six other countries and around a dozen autonomous regions all around the world use the euro despite not actually being members of the EU and having no control over monetary policy decisions the region is certainly very economically important but it also has its problems the free exchange of goods Services labor and currency works best when participating economies have similar statistics if one economy is clearly more prosperous than the rest it will attract all of the top talent get all the Investments and slowly make itself the center of a union That was supposed to be cooperative the EU has a much more egalitarian distribution of income and wealth than the world average but it's also much easier for things like brain drain and capital fly fight to take place amongst countries that have very few restrictions in place for people moving to Live work and invest even when adjusted for purchasing power parity the richest economy in the EU has a GDP per capita five times higher than the poorest country and some economists are starting to ask questions about how sustainable that can be long term these concerns came before considering other major economic problems like the debt crisis that played the economy over the past decade brexit a war on their doorstep amongst their largest energy supplies and a general shift towards less economic cooperation we have spoken a lot about what a collapse in the Chinese economy could look like for the global economy and every time you address that issue we always give the big disclaimer that it's impossible to predict the future and it's incredibly unlikely that the nation of China is going anywhere anytime soon speculation about the future of the EU is going to have the same problems nobody knows what's going to happen least of all economies but in terms of genuine economic threats to be aware of the EU is not only more likely to break up than a sovereign state like China it would also probably have a larger impact on the economy if nothing else as always exploring these economic problems can teach us a lot about how economic unions like the EU operate so what are the largest economic threats currently facing the European Union How likely are these problems to cause other nations to leave the union like the UK did and finally what would a non-unified Europe do to the global economy after we've done all of that we can put the European Union on the economics explained National leaderboard it's easy to think especially for our younger viewers that given its size influence and importance that the European Union has been around for a long time but the reality is that it's not even 30 years old yet you'll be celebrating its third decade at the end of this year on November 1st 1993 the Treaty of the European Union was signed by the original 12 member states the plans outlined in a very Hefty book called for shared European citizenship the eventual introduction of a shared currency aligned foreign policies and combined police and judicial cooperation the original 12 member states were not entirely random they were all members of the European communities which were three organizations the European economic Community the European coal and Steel Community and the European atomic energy Community the first two communities were rolled into the operations of the EU and the atomic energy Community still to this day technically remains separate and focuses on safety and development of nuclear energy the control of nuclear weapons and Research into nuclear technologies like nuclear fusion in collaboration with other International organizations like Esa before the European communities there was the Council of Europe the Western European union and RAM a dozen other groups that came together with the goal of unifying European countries on the grounds of economic cooperation after the first world war the benefit of having a mutual community and some level of interdependence between the diverse group of European countries or with long and checkered histories and rivalries became clear after the second world war with the development of nuclear weapons and the growth of communist powers to their East the motivation to unify turned up to 11. some proposals that gained a surprising amount of traction even called to create the United States of Europe but the long-established Nations that would become member states of that Union didn't like the idea of giving up their sovereignty the EU got the balance just right it introduced a lot of the benefits of being a single unified country but still let the members retain their sovereignty national identity and a good amount of their political autonomy the EU also came about at the right time 1993 was post-soviet Union and right as the world was well and truly into the swing of international trade and economic cooperation of course it's impossible to say for sure but had the EU been formed shortly after the end of the second world war it likely wouldn't have been able to Foster the level of interdependence and cooperation it has now because countries just traded less back then there wasn't modern Financial infrastructure in place to make cross-border businesses and transactions as easy as they are today travel was much harder for people to move and work across borders language barriers were much higher and economies just generally were more self-sufficient because Global Supply chains had not really become a thing yet most of the stuff that people bought back then would have been produced in their own home country unlike today where most of the stuff we buy is produced abroad and shipped in this is important because the EU has policies in place to make trade amongst member nations easier but they also make trade amongst external Nations harder this means countries benefit from being able to freely trade their goods and services and even labor forces around amongst other member countries with no import tariffs quotas or working restrictions and they also benefit from the protections that the EU imposes so it's much harder for local Industries to be undercut by cheaper centers outside of the EU combined these are the factors that really hold the EU together not the headline features what's really in it for the countries that have signed up those are the benefits of political cooperation the benefits of free trade the benefits of a shared currency and the benefits have been able to work freely across borders that last one is a benefit both to the countries in the EU who get to hire from a larger pool of skilled labor and to the workers themselves to get access to job opportunities all across the continent instead of just in their home country it's important to remember that the EU is made up of democracies and governments will make decisions to Stay or Leave based on the will of their people even if those decisions are not entirely the best macroeconomic move all of these benefits also come with striking the right balance between a centralized Authority and maintaining National autonomy if the EU had much more control over its member states it would just become a country like the proposed United States of Europe and a lot of members wouldn't be happy with that and they would just leave if the EU had less Authority you wouldn't be able to manage and enforce the rules it needed to make sure that the member nations got these benefits he the EU was to fail spectacularly or even just gradually lose members it would be because it could no longer provide these benefits or maintain that delicate balance or authority and a lot of these are already under threat the global pandemic broke a lot of production lines as governments acted to slow down the spread of the virus by shutting down factories and controlling shipments it also slowed down workers Crossing Borders and made working from home much more common the war in Ukraine has further pushed the ideas the country should maintain their self-sufficiency so they're not totally helpless when external shocks stop the delicate supply lines that they become so dependent on since the EU sells itself so heavily on the free trade that it enables this trend is a major threat working from home has also made working from anywhere possible of course there are a lot of jobs that require people to be there in person but most economies in Europe are highly service based with roles that can be done remotely by Foreign workers who don't need visas because they'll never even enter the country this is also making it possible for companies within Europe to look outside of Europe for highly skilled workers or workers to do the job for a lot less than their European competitors of course this is an anecdotal example but the team here at ee has researchers from the UK Canada and Germany and it is from Greece Morocco and Ukraine and then of course there's myself from Australia none of us have ever met one another in person and all our work is done online ours might be a slightly unusual example but it's certainly not unique and it completely circumvents any of the working benefits of being an EU member in 1993 when the EU was first been formed this kind of cross-border work was unimaginable so the benefit of being able to hire workers from other countries and being able to work freely anywhere in Europe was a much bigger deal than it is today for a lot of member states the ease in which their workers can go and work elsewhere is also becoming a burden it makes sense for workers in highly valuating skilled roles from countries with lower average salaries to move to other countries where they can be paid more for their work an engineer in Romania would earn a lot more by going to work in Germany than they would by staying in their own home country but this means that Romanian companies miss out on workers will have to increase their salaries to compete with their much more economically established EU Partners this is a process called brain drain and we've recently made an entire video on the topic so I don't want to repeat too much here but in Europe brain drain is even more of a problem because unlike someone moving from India to the United States someone moving from Bulgaria to Ireland wouldn't need to apply for a Visa and go through the approval process they could just move and find a job the benefits of a shared currency are another double-edged sword on one hand they make trading commerce between member states much easier they also give those States access to a world Reserve currency which attracts much more confidence internationally than any of their own currencies would individually possible exceptions would have been the French franc or the German Deutsche Mark and of course the British pound not that particular example is relevant anymore all of the other countries in the EU would be forced to conduct their international trade and borrowing in an alternative Reserve currency which can be expensive complicated and very risky if countries can't get access to foreign currencies that they trade in they can be put in a position where they can no longer pay for Vital Imports or make repayments on their loans these desperate situations are playing out right now in countries like Sri Lanka and Pakistan but again we've recently done videos on these economies so I don't want to repeat too much sharing access to the world's second most widely traded and widely held Reserve currency means that the countries in the EU will never find themselves in that sort of position even if they do have debt problems so it sounds like the benefits of a shared currency are pretty compelling but the drawbacks are also quite serious especially for countries that are not more responsible with their debt burdens when Greece got into trouble in the early 2010s it brought the Eurozone down with it now other countries in the EU certainly weren't free of blame but most of them probably could have avoided the protracted economic stagnation that came with having to make monetary decisions to look after the weakest economic link Greece itself was also hurt by using the Euro during this time normally when an economy experiences a downturn its currency will be devalued which actually helps to attract foreign investment trade and tourism because if the Greek drukma fell by 30 then suddenly a trip to the Greek Islands becomes 30 cheaper for international visitors this would give the country a source of income to help pay its debts buy vital Imports and keep its citizens quality of life from completely collapsing of course this works best if the country has highly attractive investment opportunities exports or tourist destinations Pakistan's currency has fallen significantly in recent months but the price was never really what was keeping people from booking their next family holiday in Islamabad but this process doesn't work at all if the country doesn't have its own free floating currency during the time that Greece was days away from bankruptcy other economies in the EU most notably Germany were doing just fine and exporting highly desirable goods and services maintaining the price of the euro in foreign exchange markets this method the Euro didn't get as cheap as it would have if it was exclusively the national currency of Greece and Grace didn't get the self-correcting market forces that they would have from a normal free-floating currency the inflexibility of a singular currency is having similar problems today even though 20 countries use the same currency they all have different rates of inflation luxembourg's most recent inflation rate is 4.8 percent which is high but not too far outside of the target range if they manage their own monetary policy they probably wouldn't need to take drastic action Estonia on the other hand has an inflation rate of 17.6 percent which is a problem and would warrant some pretty drastic monetary policy action the European Central Bank has to set interest rates to accommodate for everyone which during periods of high inflation like right now ends up being ideal for nobody from a macroeconomics point of view the advantages of the EU outweigh the disadvantages for the member states countries that have recently become members have enjoyed increased growth rates and overall Europe has become a wealthier place because of the Union but people tend to see problems more than they see benefits and it won't be macroeconomist deciding if member states stay in the year you or not it will be their voting populations so the next question becomes what happens if the EU collapses the only correct answer is of course that nobody knows and it depends on what that collapse looks like a slow and steady Exodus of countries from the union like a slow trickle of brexit would hurt economic growth over the next decade just like brexit itself is projected to do in the UK the estimates for the economic cost of brexit range from around two and a half to eight percent of the UK's GDP but it had some advantages that other countries would not it never adopted the Euro and it kept its own currency the pound which is also a well recognized and at least up until recently rightly respected Global Currency other countries would need to create a new currency from scratch which would make even the most basic economic functions impossible until that system was set up conservatively that would put economic losses at the higher end of the estimates only scaled up to all of Europe more realistically it would cause a severe continent-wide recession that would make the Eurozone crisis look insignificant in comparison important questions would also need to be answered about what happens to countries with foreign reserves of euros and how are debts denoted in obsolete currency be settled dozens of European the use of calm and gone just the past Century and while the EU has obviously been the most influential and successful it's just bad economic planning to assume that it will go on forever every country in the EU should at least have a plan for what happens if their country decides to leave or what happens if the union just falls apart hopefully those plans will never need to be put into action but the job of a good Economist is to know how to minimize the damage if they do okay now it's time to put the European Union on the economics explained National leaderboard again this is a national leaderboard so the scale is not really meant for it but he goes anyway starting as always with size the European Union has a collective GDP of 17.2 trillion which still only makes it the third largest economy in the world if official figures from China can be trusted there have been some doubts raised by some very reputable economists the Chinese economy might be significantly small and their figures suggest so the EU might claim the runner-up position behind the U.S the EU gets a 10 out of 10. GDP per capita is quite High most members of the EU are advanced service-based economies and new members from Eastern Europe have typically enjoyed a boost to their growth rate after becoming a member state with a GDP per capita of 38 411 it gets an 8 out of 10. stability and confidence is interesting the EU has benefited from the combined strength of using a widely recognized Global Currency and sharing economic prosperity and challenges amongst member states but it's also had a lot of challenges in its Short History despite everything though it still gets an 8 out of 10. as most International institutions would have more confidence dealing with the EU collectively than they would dealing with most of the member states individually growth in the EU over the past decade has been fairly stagnant the small economies that are growing don't contribute enough to make up for the larger economies that haven't been growing or have been going backwards it gets a 3 out of 10. finally industry this is where the EU really shines it has been able to Share technology Manpower and investment to where it needs to be in order to expand some of the most recognizable companies in the world that service not only the eu's massive Market but also add value to the global economy as well it gets a 10 out of 10. altogether that gives the EU an average score of 7.8 out of 10 which puts it all the way up here on the leaderboard that again was never meant International organizations like this one thanks for watching mate bye

Channel: Economics Explained

Views: 1,329,163

Keywords: economics, economics explained, EU, European Union, Germany, France, Italy, UK, United Kingdom, Poland, Ukraine, Spain, Portugal, Ireland, Greece, Euro, Crisis, Democracy, Future, Challenges, Opportunities, Immigration, Nationalism, Globalization, History

Id: ds5FVrT5udw

Length: 15min 28sec (928 seconds)

Published: Sun Apr 02 2023