What happened to the E.U.?

In the third quarter of this year, exactly one in four people in Spain are out of work with the unemployment rate still rising. And more government cutbacks are evident. Unfortunately, though an extreme, Spain is not an outlier in the European Union’s collapse.
So from an economist’s point of view, what happened? How did a cooperative system of developed states, collectively creating one of the largest world economies, fail so dramatically? And how are countries like Spain still feeling harsh repercussions from a crisis that started in late 2009?

A BBC News article written in June has one answer. Although it’s very difficult to identify all of the variables and conditions that cause an economic crisis, this article does a good job of articulating and diagramming the decisions that resulted in the huge amounts of debt. The short version is that the E.U. decided it would set a 3% borrowing limit for each nation. But many countries did not stay true on this promise, amassing large governmental deficits. In addition, investment in the private sector shot up due to extremely low-interest rates, adding to the “debt-fueled boom” and creating a trade surplus in Germany but trade deficits in the southern nations. Lastly, wages rose in some E.U. nations while others (Germany) kept the wage rates steady, resulting in a competitive price disadvantage for the rising wage nations. With a price disadvantage southern European countries found themselves in a hole, unable to make the capital needed to pay off their debts. Thus Spain and several other nations continue to have crippling unemployment today, and nations are asking for bailouts from the successful E.U. nations who arguably played a large role in their collapse.

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