Weakness in the EU’s Approach to Economic Regionalism Exposed by the Global Financial Crisis and its Aftermath

POL 298B International Political Economy
Assignment 2
Research Essay
Weakness in the EU’s approach to economic regionalism exposed by the global financial
crisis and its aftermath
And
Lessons learned for other economic regions

European financial crisis
Introduction
Economic regionalism can be used for facilitating the free flow of goods and services. It
also helps in coordinating the foreign economic policies between the countries in the same
geographical region. The economic regionalism can also be viewed as an attempt for managing
the opportunities and constraints which is created by the dramatic increase in the international
economies which have been created since the World War II (Beetsma et al. 2016). There are
various forms of economic regionalism which involves the free trade area which is known to
reduce the custom duties between the members. Another form is the custom union which is
known to create a greater degree of integration through tariffs. International trades have always
been a significant issue for both the developing as well as for developed countries to help the
global markets for increasing growth as well as welfare. After the global financial crisis, the
European Union has experienced an interesting transformation from regionalism to
globalization.
Global financial crisis
The global financial crisis is known to have affected Europe severely. After a period of
huge expansion of economies across the world, a financial crisis had broken out in the financial
sector. The financial crisis hit various members’ states of the European Union. It is also known
as the debt crisis which has been taking place in the European Union since 2008 where several
members of the Eurozone were unable to repay their government debts or bails out over
indebted banks (Schivardi et al. 2017). The global financial crisis was a critical event for the
world economy as it has led to serious slowdowns and huge losses of wealth around the world.
It have also known to reverse the growth of the world trade and forced financial rescues at a
huge scale. Financial crisis can be stated as the economic situation which is related to banking
panic, losses in the financial sectors and creating stock market downfalls. This particular global
financial crisis took place in mid-2007 and had affected the whole world.
The new economic regionalism approached by the European Union involves nations
which involve low tariff barriers and also followed outward oriented strategies. These policies
also help in reducing the diversion cost of trade. It also stresses the gains from cost of
transaction and trade barriers. The global financial crisis, therefore, had affected the framework
of regionalism and for this reason the European Union has promoted trade liberalization in
trade.

Weakness in the EU's approach to economic regionalism
Imbalance in trade
The root cause of the financial crisis can be found in trade and capital flow imbalances of
the previous years. The Eurozone countries who were experiencing trade surpluses did not
notice that their currency appreciate relative to the other countries. The export dominance of
Germany had allowed it to emerge as the largest economy in Europe. The financial crisis had
illustrated the downside of the trade prowess of Germany. It is known to have a deep trade
imbalance with the European neighbors. This means that Germany used to export large amount
of goods to the European countries while the other countries did not produce enough goods to
make their own market profitable. The global crisis had created huge amount of pressure which
resulted a trade imbalance in China. Also, the gap between the productivity of Greece and
German increased which resulted to current account surplus and it was financed by capital
flows (Fatás, Antonio and Lawrence Summers 2018, 238). Therefore, it can be said that the
trade surplus of Germany is one of the major problems. The real gross domestic product of
China had grown with the Asian crisis which had been above 10 percent over the 2003-2005
periods. The current account surplus of China had increased from 3 percent to more than 7
percent. The low interest rates in the United States led to a powerful multiplier mechanism
which was based on asset market distortions. The subprime crisis in United States in the year
2007 -2008 led to an uncontrollable boom, fuelled by abundant capital and low rate of interest.
The European crisis had also lead to partial breakup of the euro. A trade deficit can also be
happened due to changes in the relative labor costs and leading some of the nation’s less
competitive in nature and a rise in the imbalance of trade (Frutos et al. 2016). The unit cost of
labor rose to a high rate. Most of the nations of European nations had a huge rise in the labor
cost which was greater than Germany.
Foreign policy: The foreign policy which has been adopted by European Union has become
one of the weaknesses in their approach in economic regionalism. It has been found out that
the other countries have also posed various challenges through their foreign policies which have
also affected the economic growth of the nations.
Political integration: Another weakness of European Union was the degree of political
integration within the economy. The low level of political integration gave rises to huge