3.11 European Economic Community

Behind the eurozone lies the intention, stated as early as 1950, to make war between the member countries not only unlikely, but materially impossible. France, West Germany, Belgium, Luxembourg and Italy formed a European Coal and Steel Community in 1951, and these countries formalized a free market, and free movement of peoples in the 1957 Treaty of Rome. Even before the Maastricht Treaty of 1993, the community was known as the European Economic Community (EEC), the Common Market or the European Community (EC). In 1987 came the Single European Act, and in the 2007 Lisbon Act, after which the community was simply called the European Union (EU). {1-7}


The 1993 Maastricht Treaty paved the way for a common currency, the euro, which was introduced in 1999 and arrived fully with notes and coinage in 2002. Though dire warnings were issued to skeptics, not all countries voted yes to the required referendum, and some were denied a referendum at all. Ideally, it was thought, a common currency area would require:

1. Flexible labor markets, with mobility to prevent local skills shortages.
2. Responsible product and financial markets, with competition, innovation and entrepreneurship.
3. Integration of labor, services and capital.
4. Diversity, so as not to be overeliant on small market sectors.
5. Strong government, with common goals.
6. Similar inflation rates.
7. An emphasis on growth.

The specific rules for eurozone membership were:

1. Budget deficit should be below 3% of GDP.
2. Total public debt should not exceed 60% of GDP.
3. Members should have an inflation rate within 1.5% of the three EU countries with the lowest rates.
4. Long-term interest rates should be within 2% of the three EU countries with the lowest rates.
5. Exchange rates should be kept within a specified 'normal fluctuation' margin.

In fact, member states failed to bring their economies into line (convergence) but were admitted nonetheless, political agendas overriding sound policy. Matters were deliberately misrepresented, particularly those of Portugal and Greece. The latter kept public sector liability off the balance sheet, had a highly inflexible labor force (public officials were next to impossible to fire) and used a $1 billion credit from Goldman Sachs (at expensive rates).


The EU has various institutions to ensure democracy and smooth running:

1. European Council, where the government of each country is represented by one minister. Holds legislative and executive powers, and is the main decision-making body of the Community
2. European Commission, where each country has one representative expected to represent the community interests: the executive arm, drafting Community law, and dealing with its day-to-day affairs
3. European Parliament at Strasbourg, to which members are elected, seats being allocated according to the population of member states. Though EU MPs vote according to political allegiances, and often represent a wider spread of opinion than is possible with national governments, electorates still see the European Parliament is bureaucratic, petty-minded and distant from their affairs.
4. European Court of Justice, whose decisions can overrule national courts.
5. European Court of Auditors, which ensures that taxpayer funds are correctly spent.
6. European Central Bank (ECB), which administers the monetary policy of the 17 eurozone countries. Price stability and low inflation are its primary aims.

By 2007, the EU trade area was the largest in the world, accounting in 2010 for 40% of international trade. Trade in services had nearly doubled between 1993 and 2002, and trade in manufactures had risen in the same period, from €670 billion to well over €1,000 billion. Until recently, inflation was kept below 2% p.a., and its currency was more stable than the British pound. Social mobility has been less than hoped, however, and many states remained strongly nationalistic. {7}

Threat: Sovereign Debt Crisis

Many factors contribute to a situation where some countries in the eurozone now have difficulties in servicing their government debt.


When Governments across the world were forced to bail out their banks, and banks themselves cut back on lending, economies went into recession. Unemployment rose, tax revenues diminished, and welfare and infrastructure projects had to be pruned, adding further to unemployment and electorate dissatisfaction with their governments. Countries typically borrow in these circumstances through bank loans and government bonds, {42-43} but found it costly to do so because the rates increased sharply to cover the risk of default. The loans required were large, moreover, and investors saw better opportunities in China, India and Russia. Devaluation was not possible because countries were locked into a common currency employed by member states with different economies, problems and aspirations. {8}


Many eurozone members ran large budget deficits. That of Greece continued to widen throughout 2011, growing to €20.52 bn in the first 11 months of that year. Ireland's widened from €18.7 bn in 2010 to €24.9 bn in 2011. In contrast, some countries ran trade surpluses. The value of German exports was $1.334 tn in 2010, second only to China's (twice that of the UK, and some 60 times that of Greece. {10}) Imbalances vary with the country concerned, but many showed a decrease until the 1980s and an increase thereafter. {9}

A common currency rewards the more efficient countries. The labor cost of output increased by only 5.8% for 2000-09 period in Germany, for example, but rose in Ireland, Spain, Greece and Italy by some 30%. {10}

Outside trade by member states also varies widely. The largest surplus was achieved by Germany (+ €45.0 bn in January-March 2012), followed by the Netherlands (+€11.8 billion) and Ireland (+€10.3 billion. The UK registered the largest deficit (-€37.1 bn), followed by France (-€21.6 bn) and Spain (-€10.7 bn). {16} The deficit has to be funded by banks and financial institutions, with German banks indeed holding $250 billion of troubled eurozone member bonds. {51}


The banking crisis left Ireland, Portugal and Spain much at risk, but the main threat of default came from Greece. {2} The country had not brought its financial measures into line with core eurozone members, but retained its 'clietelism', where inward investment is diverted by politicians to buy votes from important interest groups, a legacy from Ottoman days and later. The country suffered a civil war immediately after W.W.II (1946-9), a mass migration from the countryside, and then the 1976-74 backward-looking, repressive military dictatorship, which did not improve public accountability. Corruption affects all levels of government and business (the country came 71st out of 180 in the 2009 Corruptions Index ranking.) Restrictive practices are rampant. The tax system is Byzantine, with the authorities hounding the honest few and leaving higher-earners untouched. (Less than 5,000 of an estimated 60,000 households currently declare annual incomes over €100,000.) In contravention of EEC rules, heavy subsidies were pledged in 2009 to cotton producers (€75 million) and to wheat producers (€100 million), €75 million being made immediately available. In 2011, more than a million Greeks paid a bribe for better service in the public sector. Hospitals are notably inefficient. Scandals are commonplace. Four Greek pension funds were implicated in a JP Morgan scam involving €280 million of Greek government bonds in 2007, and money laundering in the 2007 Siemens case, which led Switzerland to freeze €200 million in bank accounts.

In short, Greece is a low-tax, low public-service country papered over by EU cohesion funds, bond market borrowings and omerta from its better-off inhabitants. {26} Notably lacking are those features Michael Porter termed 'advanced' — skilled labor, natural resources and infrastructure sufficient to compete in given industry sectors. Demand is fueled by overseas borrowing. Supporting industries are not internationally competitive, and businesses generally lack the structures of eurozone core counterparts. Nonetheless, Greece was accepted into the European single currency in 2001, and three years later hosted the Olympic games. For ten years, Greece enjoyed a prosperity founded on tourism, shipping, agriculture and real estate. Northern European banks and institutions gave loans because Greece was importing their manufactures, helping to depress local prices and so lower the apparent inflation. Greek textile companies indeed moved to Bulgaria and Turkey, while Greek households splashed out in cars and holiday homes. In 2008 the GDP was still 2%, but the following year it reversed to -2%. Public debt was then 115.1% of GDP, and the trade balance was 12.0% of GDP. {2}


Though many banks put quick profits (casino mentality) above the funding of sound business and public welfare projects {11} {12}, the pattern shows wide geographic variations. Debts levels are higher in the US and UK, their citizens being more addicted to credit cards than are Germans or even the French. Banks and hedge funds have benefited from uncertainty in the currency markets, some of it created by their actions. {13} Much is held off the balance sheets, though the sums are large (US$ 13-22 trillion) and are complexly interconnected. {14} {53} British and American banks are variously exposed to loans taken out by troubled European countries. {15} {17}

Funding Needs

Very large sums are involved. The 2010 OECD forecast indicated that US $16 trillion would be raised in government bonds {42-43} among its 30 member countries, and that financing needs for the eurozone would total €1.6 trillion (compared to US$1.7 trillion of Treasury bills and securities, and ¥s 213 trillion of government bonds in Japan). {18} {52}

Credit Rating Agencies

Some have questioned the impartiality of credit agencies. From being too lax in grading the junk bonds that helped create the financial crisis, the agencies have swung to being more severe with governments, downgrading many of them from AAA status and so making loans more costly. Moody's downgrading of Portugal's foreign debt to the category Ba2 'junk', was strongly criticized, as was Standard & Poor's lowering of France's rating, below that of the UK which had more deficits, as much debt, more inflation, and less growth. Germany accused S&P of playing international politics. {19}


Greek and Spanish governments have criticized the English press, believing that the euro is under attack so that the UK and the US can continue funding their large deficits with loans and bond purchases by China. {20}


Political considerations have sometimes overridden economic matters, and countries have later admitted they were not wholly suitable members, the convergence data being obligingly fudged. Greece and Portugal kept their their public debt off the books, and in both Greece and Italy the gross governments debt has exceeded 60% of GDP for long periods (as indeed was Germany's at times). {2}


Countries vary greatly in educational standards and training of their workforces, as in the proportion working in public services (the latter high in Greece and France). Labor has been much less mobile than expected, and some trades unions (e.g. Greece) have negotiated unsustainable pensions and expansions in the public sector. {2} {61}

Private Debt

Fortunes were lost when the property boom collapsed (Spain, Ireland, UK), and losses transferred to banks, which then had to be bailed out or taken over with taxpayers' money. {21}

Proposed Remedies

Many remedies are being considered, some practical and immediate, others utopian.

1. Austerity. Lenders exacted policy changes, usually a speedy reduction in debt so that outstanding obligations could be met. Many countries therefore found themselves trapped in the vicious spiral of austerity. Falling tax receipts required countries to cut back on welfare and public services, which only further reduced employment and tax revenues. Countries rife in corruption, tax evasion and financial misrepresentation (e.g. Greece on all three counts) found loans were only granted on strict conditions (usually more austerity) and at punitive levels of interest, making default even more likely. Generally it was the public service and lower-paid staff, and not the parties responsible, that bore the brunt of austerity measures, which only increased hostility to banks, politicians and further integration with Europe. {22-23}

2. European Financial Stability Facility (EFSF). Finance ministers on 9 May 2010 agreed a €750 bn rescue package aimed at ensuring financial stability across Europe. {24}

3. Debt write-off. In February 2012, the eurozone leaders agreed a 53.5% write-off of Greek debt owed to private creditors. They also increased the EFSF to €1 trillion, and required capitalization in European banks to reach 9%. {25}

4. European Central Bank. The ECB began open market buying operations in 2010. A year later, the Bank loaned €489 billion to 523 commercial banks for three years at a rate of one percent: Long Term Refinancing Operations (LTROs). In June 2012, the Bank was considering underwriting the government bonds of member states, creating a single supervisor to oversee the euro zone's banks, and allow the creation of mutual bonds that would reduce borrowing costs for member states. {26}

5. European Financial Stabilisation Mechanism. Created in January 2011, the EFSM is an emergency funding program reliant on financial markets but which uses the EU budget as collateral. This Commission fund, backed by all 27 European Union members, has the authority to raise up to €60 billion, and is rated AAA by the credit rating agencies. It will be replaced by the permanent rescue funding program (ESM), expected to be operational in October 2012. {4} {27}

6. Closer Economic and Political Integration. Such integration would solve many problems but also increase the power of corporations and financial institutions. Most electorates are opposed to further losses in national identity and political accountability. {23} {28}

7. Banking Reform. Many argue for large banks to be broken up, and investment (casino) activities to be separated from high street banking facilities. Banking supports the US political process, however, and Britain has impeded European reform to protect her large banking industry. {29}

8. Electoral Reform. Critics assert that governments do not consult the great mass of their citizens but rely on media propaganda, misrepresentation and voter apathy to create self-perpetuating oligarchies that share power between themselves. Moves to remove money from politics have widespread support, {54} except and critically from those currently enjoying power. Reform will no doubt come, but probably slowly if European history is any guide. {30}

SWOT Analysis

Strengths {13}

World's largest GNP
Common currency
Highly educated workforce
Extensive technical know-how
Tourism and cultural diversity


National and language differences
Low labor mobility
Declining birth rate
High social benefits
Ethnic divides, especially in new members

Internal Opportunities

Banking reform
Better integration of fiscal and investment legislation

Internal and external Threats

Sovereign debt crisis
Competition from China and USA


1. The EEC was a worthy project that has been successful on both political and economic fronts. It secured peace, created the world's largest trading block and brought prosperity to millions of its citizens.

2. Its current problems are widely recognized: {2}

a. the project was rushed, leaving wide discrepancies between member states without the means to correct them.
b. the true standing of member states has been obfuscated, and figures kept off the balance sheet.
c. flaws have been exploited for private gain by politicians, banks and trades unions.

3. The current austerity measures do not get to the heart of the problem, and are self-defeating: depressed economies do not yield the tax receipts to repay loans, and citizens will not accept such measures unless reform is also brought to political and financial institutions, which as yet acknowledge little need for change.

4. Greece will probably have to leave the eurozone eventually, possibly Portugal and Spain too. {31} Other member states will remain, suffering austerity but having their government bonds underwritten by the European Central Bank and some emergency fund or insurance to cover bank default. {32}


The EEC is export-orientated. The trade surpluses of the central EEC members (notably Germany's Bundesbank) were invested in property etc. in periphery members countries (Greece, Spain, Portugal) and in financial products sold by US banks. When German banks learnt they were contaminated with toxic assets they pulled in their assets to protect lending ratios, with serious repercussions. Investments in Spain, for example, amounted to €200 m. or 10% of GDP, and capital flight plunged the country into serious debt. Cut-backs in public services and bank loans led to recession.

Banking is a fraternity and, rather than change the rules and let the EEC Central Bank act as lender of last resort, the 'Troika' (the European Commission, European Central Bank, and International Monetary Fund) called for austerity, only granting bailout packages on that basis, and providing funds that were not to stimulate the economy but pay back existing loans. The Central Bank could have offered soft loans directly to the countries concerned, for example, but instead provided loans at under 1% to the major banks, which then offered loans to the countries concerned at much higher rates. Rates above 5% make loans difficult to repay, prompting more negative ratings, yet higher interest rates, and so more likelihood of default. The central banks are therefore strengthening their position, and indeed insisting that austerity — lowering salaries, cutting public services, and reducing social protection — be also a requirement of countries raising money on the bond markets, certainly if those bonds are to be underwritten by the European Central Bank. {33} The remedies lie with even-handed political action, but neither the European nor the national parliaments are viewed with much confidence or esteem by electorates. {34-44}

Alternative Models

Why is austerity still being imposed in the face of mounting EEC debt and unemployment? Because there is no alternative say governments and business leaders: loan repayments have to be honored, and the IFIs (international financial institutions) left to do their job. {55}

Not so, claim left-wing critics. The Latin American countries, for example are developing alternatives to austerity, though starting from a lower economic base, and with principles that distinguish between wealth and public good.{60}

Austerity is being imposed on Europe to weaken social structures and create a pool of lower-paid labor, {56} a strategy that benefits the IFIs and large corporations. {57} {63} Shrinking the economy is therefore intentional — 8% overall since 2009, and unemployment over 25% in Spain and Portugal, and nearer 50% among their young — because citizens will moderate their wage claims {59} and governments become increasingly dependent on banks to balance their fiscal shortfalls. Europe is arguably suffering the early liberalisation problems that afflicted India and Brazil, and facing the spectre of stagflation and 'a lost generation'. {58} Protests are widely reported, but have not changed government policies.

eBusiness Implications

The EEC is a large market moving towards parity in tax, services and investment opportunities. Many successful companies have therefore been drawn to the community, notably health care providers that are themselves undergoing change. Today the emphasis is on reducing costs, allowing patients to access cloud-based database records, education platforms and applications designed to keep patients from returning to the hospital or the doctor's office. Medical knowledge is more easily shared through such Internet devices, and billing is simpler.

Health-funding in the EEC is currently both public and private, with wide variations between countries. Spending in France, the Netherlands, Germany and Denmark was 11% of GDP in 2009, but only 6% in Cyprus (compared with 17% in the States). {45} The largest spenders are hospitals, followed by ambulance services.

A digital agenda for Europe was agreed by the European Commission in May 2010, and envisaged not only US$9 bn for broadband implementation but cross-border applications that would empower patients through information systems. {46} Many companies are now making their pitches. Massachusetts's Department of Early Education and Care's presentation emphasized the unified nature of their system, its transparency, accessibility through mobile phones and openness to feedback from patients, healthcare professionals and EEC staff. {47-50}

Points to Note

1. Growth of the EEC and the current sovereign debt crisis.
2. Hijacking of a worthy project by special interest groups.
3. Decay of trust and common purpose.

Sources and Further Reading

1. The Political Economy of Monetary Union: Towards the Euro by Francesco Giordano and Sharda Persaud. Routledge, 1998. Detailed analysis of the institution and its internal mechanisms.
2. Greece's 'Odious' Debt: The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community
by Jason Manolopoulos. Anthem Press, 2011. Chapter 3.
3. Timeline: The unfolding eurozone crisis
. BBC News. June 2012.
4. European Union. Europa. Entry page to extensive articles.
5. The History of the European Union. European Citizens Consultations. Brief history and structure: unattributed and undated.
6. Balancing Nationalism and Federalism A History of the European Union. Random History. December 2007. Extended article.
7. 10 Years into the Euro: Achievements and Challenges by Pauline Ng Wan Ching. Scribd. February 2009.
8. Polarized prospects. Economist. May 2012. Pictorial presentation of European GDP, debt and growth.
9. The Euro's Effect on Trade Imbalances by Helge Berger and Volker Nitsch. IMF Working Paper. 2010.
10. Budget and Trade Deficits 101: Two Sides of the Same Coin by Abi Adams. Abi Adams Blog. January 2012.
11. Future Money: Breakdown or Breakthrough by James Robertson. Green Books, 2012.
12. Currency Wars by James Rickards. Penguin 2011.
13. The Eurozone and the Economic Crisis: An Innovative SWOT analysis by Maria Lorca-Susino. University of Miami. February 2012.
14. Shadow Banking and Financial Instability by Lord Adair Turner. Harvard Law School Blog. April 2012.
15. The Future of the Eurozone and US Interests by Raymond J. Ahern, James K. Jackson, Derek E. Mix and Rebecca E. Nelson. Congressional Research Service. January 2012.
16. Euro Area Balance of Trade. Trading Economics. July 2012.
17. Moody's: Here are the U.S. Banks Most Exposed to Euro Crisis by Matt Phillips. WSJ. January 2012.
18. European sovereign debt crisis. eNotes. September 2012.
19. Credit Rating Agencies: Part of the Solution or Part of the Problem? by Gunther Tichy. Centre for European Policy Studies. 2011.
20. Euroscepticism in the United Kingdom. Wikipedia. August 2012.
21. Spanish Financial Crisis: Eurobonds? No Thanks. Debt Isn't Solved With More Debt by Heinz Duthel. Create Space, 2012.
22. From PIIGS to protests, an A-Z of the eurozone by Russell Lynch. Independent. August 2012. Handy overview.
23. Greeks and Germans at Polar Opposites: European Unity on the Rocks. Pew Global Attitudes Project. May 2012.
24. European Financial Stability Facility — EFSF. Investopedia. September 2012.
25. What is Greek Crisis? ETNA. 2011.
26. Euro Zone Sees Single Bank Supervisor by Stephen Fidler, William Boston, Matthew Karnitschnid and Gerard Baker. WSJ June 2012. Includes useful graphs.
27. European Financial Stabilisation Mechanism (EFSM). Europa. September 2012.
28. Saving the euro: Bound towards a tense future by Tony Barber. F.T. October 2010.
29. Future Money: Breakdown or Breakthrough by James Robertson. Green Books, 2012.
30. US declares financial war on world - economist. RT. November 2010.
31. In Europe, the Secret Is Out: The Euro Will Not Survive by Our Wiesbaden Bureau. Executive Intelligence Review. August 2012.
32. A Synchronized Global Slowdown by Mike Whitney. Veracity Voice. June 2012.
33. Printing Money The European Central Bank's Discreet Help for Greece. Der Spiegel. August 2012.
34. Complete Absurdity in Greece: ECB Prints Euros to Give to Greece to Make Interest Payments to ECB. All Business Success. August 2012.
35. What do people really think of politicians? by Deborah McGurran. BBC News. January 2012.
36. The Conditional Electoral Connection in the European Parliament by Aaron J. Abbarno. Univ. of Pittsburg. April 2009. Argues that electoral vulnerability guides MEP actions, but quotes contrary literature.
37. The Democratic Audit of the UK. Democratic Audit. July 2012. Emphasizes electoral disaffection with the democratic process.
38. The flaws of the EU's asymmetric approach to imbalances by Miguel Carrion. EuroIntelligence. July 2011.
39. After the Fall: The End of the European Dream and the Decline of a Continent by Walter Laqueur. Thomas Dunne Books 2012. A US perspective.
40. The Euro Defies Gravity — for Not for Much Longer by Merryn Somerset Webb. F.T. August 2012. Money creation largely in hands of commercial banks.
41. European sovereign-debt crisis. Wikipedia. July 2012. An extensive and fully-referenced entry.
42. List of government bonds. Wikipedia. June 2012. Government bonds and their current grading, with links to detailed pages.
43. Types of Bonds Selected Euro-Zone Government Bonds. AFME. Background and investment advice.

44. Interim Forecast European Commission. February 2012.
45. Healthcare statistics. Eurostat. September 2011.
46. ICT for better healthcare in Europe. eHealth. Accessed August 2012.
47. A Case Study of the Massachusetts Department of Early Education and Health Care. Strategies for Children. April 2008.
48. Child Care Resource and Referral Service: Changes to Service Delivery FY13. Massachusetts Dept. of Early Education and Care. June 2012.
49. Child Care Resource and Referral Agency. Massachusetts Executive Office of Education. 2008.
50. The Changing Face of Healthcare Investment. HealthCareData Solutions. Accessed August 2012. Promotional but informative.

51. Euro area international trade in goods surplus of 5.2 bn euro 12.0 bn euro deficit for EU27. Europa Press Releases. April 2012.
52. OECD StatExtracts. StatsOECD.
53. It's All Connected: An Overview of the Euro Crisis. N.Y.T. October 2011.
54. Campaign Finance Reformers Launch Progressive Effort To Remove Money From Politics by Paul Blomenthal. Huffington Post October 2011.
55. IMF/World Bank Introduction. Globalization101. Series of unattributed articles stressing the importance of international financial institutions.
56. The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China by John Bellamy Foster and Robert W. W. McChesney. Monthly Review Press. 2012.
57. Obama and Europe's Meltdown Four More Years: Europe's Meltdown by Conn Hallinan. Dispatches From The Edge. February 2013.
58. The Euro Crisis and Austerity: The Road to a Lost Decade by Brian Fabbri. National Univ. of Singapore. July 2012.
59. Welcome to the Currency War, Part 2: Massive Euro Devaluation by John Rubino. DollarCollapse. June 2012.
60. Think there's no alternative? Latin America has a few by Seumus Milne. Guardian. February 2013.
61. Why Greece is slashing public sector jobs. Revolting Europe. July 2013.
An alternative view of publlic services in Greece.
62. Debt, austerity, devastation: itís Europeís turn by Susan George. New Internationalist. July 2013.
63. Ezone Profiteers: Time to Investigate the Bankers and Bureaucrats. CorpWatch. November 2013.