European Union in Trouble

By Marieke van Woerkom

To the Teacher:

In this lesson about a very complex issue, students read a description of the current crisis in the European Union and conflicting views about how to address it, including the debate over "austerity" vs. "stimulus." Then they participate in "fishbowl" discussion of the issue.

Introduction:
The European continent (8 minutes)

Either project a map of Europe onto the smartboard, hang up a physical map of Europe or print up handouts so that everyone can look at the continent we'll be talking about today and pinpoint the countries discussed in the lesson below.

Before starting the lesson ask students what they know about Europe. Ask if anyone can explain what's happening with the European economy these days. Ask your students if they've heard of what's been taking place in Greece, and more recently in Italy and Spain. (All three countries recently changed governments.) Ask if anyone knows the reason for this change.

Check Agenda (2 minutes)

Explain that in today's lesson you'll be reading up on and discussing how Europe has been affected by the recent global economic crisis.

The European Union in Trouble (35 minutes)

Distribute copies of the student reading below. After students have read the piece, either have a full classroom discussion about it, or conduct what is known as a fishbowl discussion.

Fishbowl process: Ask 7 or 8 volunteers to discuss the reading sitting in a small circle facing each other. The rest of the students sit in a larger circle surrounding them. The 7 or 8 students start their discussion, but at any point a student on the outside of the circle can tap a student on the inside of the circle on the shoulder to switch seats. Ask students to make sure that those on the inside have had a chance to speak before taking their place.

You may start by asking students whether they have any comments or questions for each other based on the article they just read. Other questions to get the fishbowl conversation going might be:

• What was the reason for creating a European Union?
  
• How well has that worked out?
  
• Where do things stand now when it comes to Europe's stability and prosperity?
  
• What are some causes of Europe's problems now?
  
• Who is involved? Who helped cause the crisis? Who is most affected by the crisis?
  
• What are some ways Europe might improve its situation, according to the reading?
  
• How does all this relate to what's happening in the US right now?
• Do students know about the congressional super committee that was assigned to come up with a plan for reducing the US debt? What came out of the super committee?

What do you think about the US debate over stimulus and austerity

Closing

Ask a few volunteers to share:

• What is one thing you learned?
  
• What do you still have questions about?
  
  

Student Reading:
European Union in Trouble


The European Union (EU) is an economic and political partnership that was forged over several decades following World War II. Its purpose: to bring peace, stability and prosperity to the European continent. The EU was officially established by the Maastricht Treaty in 1993 and in 2002. The majority of member states adopted a new currency, the Euro, to replace their old currencies. Today, the European Union is a Europe-wide market in which people, goods, services, and capital move freely between member states. Every five years, voters across the EU elect a European Parliament.

The individual states making up the Union, however, are quite disparate in nature. Countries in the south and east of Europe have a significantly lower average income and a lower level of productivity than the majority of countries in the north and west of the continent. In addition, the different EU countries have very different fiscal policies, internal labor laws, taxation rules, and foreign policies.

As if that doesn't make for enough disparity, the different EU countries maintain their independent political systems, with voters in each country selecting their own national leaders. Leaders from the different countries represent widely varying political views. Throughout its short history, the European Union has enjoyed little popular support from the general European populace. Many people don't fully understand the project of economic unification, and participation in European Parliament elections has been low, by European standards. In the first years of the EU's existence, European member states experienced economic prosperity. More recently, however, Europe, has been hit hard by the world economic crisis. Greece is one of the EU member states that is struggling the most.

Why is Greece in debt?

The Greek government faces a severe debt crisis, and is in danger of defaulting as a nation. The Greek government for decades has been spending a lot more money than it has taken in. Although average Greek wages are lower than in most other EU countries, the retirement age in Greece is relatively low compared to the rest of Europe, while retirement benefits are high. Greece has a large public sector (government jobs) and government employees have been well compensated (relatively high salaries). To compound its financial problems, Greece also suffers from an endemic problem of tax evasion, which has severely limited government revenue.

When the Greek government could no longer pay its bills, it turned to banks in other European countries to borrow money. Before long, the government was had billions in loans, going further and further into debt.

The danger of default

It's quite normal for countries to borrow money, and for a while lots of money was available to Greece because it was assumed that Greece, eventually, would pay back what it had borrowed. In the meantime, Greece would pay interest on its loans, which is how lenders make money. Banks in some of the EU's larger and wealthier member states (like Germany and France), lent Greece lots of money, with the hope of making lots of interest.

In the past banks would take in money through savings accounts, then lend it to people, businesses or countries by issuing mortgages or other kinds of loans. Banks basically would take in money from one part of the population, then lend it to another part of the population to make a limited amount of profit. In recent years however, banks have not been satisfied with those kinds of procedures and have started making money in other ways.

Some of these banks, in fact, loaned Greece more money than was fiscally responsible and started playing games with this money to make even larger returns. This is what is known as speculation. When banks speculate they make money by moving it around in search of the highest returns, essentially using it to make economic bets. This is a risky practice that US banks also engage in heavily, and it is a chief cause for the current global economic slowdown. The slowdown has affected countries across the EU, but EU economies with weaker economies were hit hardest.

Not only was Greece no longer able to pay the interest on the loans it had taken out, it was starting to think about not even paying back the original amount it had borrowed. If Greece defaulted on its loans, all the banks/countries that had loaned Greece money would risk losing that money, which would deepen the European economic crisis.

Greece, Italy, Spain: Domino Effect?

Unfortunately, Greece is not the only EU country at risk of defaulting on its loans. The Greek economy is relatively small, and the European Union would have been able to accommodate that default without too much problem. But Italy, Spain and Portugal are now also struggling to pay back their debt. They too owed lots of money, for a variety of different reasons. And because of the slowing world economy, they haven't been able to make money fast enough to pay back their debts.

What to do?

In the old days, before the common Euro currency, a country like Greece might have devalued its currency at a time like this with the aim of reducing the cost of what it owed.

Devaluation basically means to make a currency worth less compared to other currencies (de-value). In the short run this takes the pressure off a country's economy by stimulating exports and devaluing the debt payments owed -- that is, making them cheaper. Such currency devaluations also make imports more expensive, thus slowing down those imports, which results in less money leaving the country.

Of course, since EU countries all have the same currency, devaluation is no longer an option -- unless Greece drops out of the Euro zone and returns to its old currency. This is the last thing the banks holding Greek debt want to happen because the banks would then lose control over how Greece spends its money or whether the Greek economy stabilizes enough to pay back any of its debt.

Europe's larger, stronger and more stable economies, with Germany at the head, are promoting a different way to handle Greece's debt. Their solution is known as "austerity." These larger economies are demanding that indebted countries like Greece must cut wages and benefits, raise taxes, and speed up production. The idea is that these moves, while causing hardship for many workers, will save the Greek government money and generate new revenue that Greece can use to pay its debts.In return the banks holding the debt are willing to write off up to 50% of what is owed them, so that Greece doesn't have to pay back the full amount. ("Austerity" is also being proposed as a solution to reducing debt in the US.)

This may seem like a good compromise in theory, but many economists say that a policy of "austerity" during a time of recession or depression is likely to worsen the crisis. Cutting public sector jobs, reducing wages, and cutting back on government services actually slows economies down. The government no longer receives tax revenues from the workers it has laid off, those who are working have less to spend, so businesses can no longer sell their goods and services. If you want to cut spending, these economists say, do it during a time of prosperity, not when the economy is already sputtering. What's more, austerity hits middle and lower income people the hardest.

Austerity versus Stimulus?

As Peter Schiff argues on the Forbes website: "We … are witnessing a struggle between two camps that I playfully call the "stimulators" and the "austereians." Both warn that a worldwide depression will ensue if governments now make the wrong choices: the stimulators say the danger lies in spending too little and the austereians from spending too much."

Of course the global economic crisis can't be reduced to a simple political debate over austerity versus stimulus. For one thing, conditions vary greatly country by country. In the United States, politicians from both political parties and the media have maintained that austerity is necessary, with Democrats including President Obama arguing for softer austerity, and Republicans arguing for radical cuts in public employment and public services.

However, the U.S. has by far the greatest economic inequality of any developed nation. The rich have gotten dramatically richer over the past three decades, while the rest of the population has seen few if any gains. Further, the economic crisis was touched off in part by ultra-wealthy investors who gambled dangerously on Wall Street. This situation helped give rise to the Occupy Wall Street movement, which calls for a redistribution of wealth from the 1% to the 99%.

This movement has strengthened the hand of those who argue that further stimulus is needed to create more jobs to build and fix roads, bridges and other infrastructure; to keep teachers in schools; police and firefighters on the street, etc. The idea is that with more people employed, more people will be paying taxes again, restoring government revenues. They'll also be buying more goods and services, which will help bring the economy out its doldrums.

However, Republicans continue to argue that the debt the country has incurred is too high and is likely to destabilize the American economy. They argue for cutting the government sector (jobs) as well as social benefits and social welfare programs. There is no money in the budget for these government jobs, they say. In addition, they argue that higher taxes on the rich are likely to lessen investment in the economy, which is why some support the continuation of the Bush era tax cuts, even for the richest Americans.

This lesson was written for TeachableMoment.org by Marieke van Woerkom. We welcome your comments. Please email them to: lmcclure@morningsidecenter.org.

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