IB History Economic Policies and Their Impact Notes

EU Economic Policies: Single Market, Euro, and Crisis

The single market after 1990

1. Single market logic: the EU aimed to remove barriers to goods, services, capital, and labour so firms and consumers could operate across national borders.
   • The project grew from the Single European Act and became more important after the 1992 single market deadline.
   • After enlargement, the single market tied post-communist economies to Western production chains, banks, investment, and consumer markets. Integration became practical.
2. Regional funding: EU structural and cohesion funds supported poorer regions through infrastructure, training, environmental upgrades, and business support.
   • New members such as Poland, Hungary, Slovakia, and the Baltic states received funds to reduce the gap with older member states.
   • Funding helped roads, railways, universities, and local development, but it also increased dependence on EU transfers. Convergence had political strings.
3. Competition policy: the EU limited state aid, monopolies, and anti-competitive practices to keep the single market open.
   • This helped smaller firms and consumers, but it also restricted some national industrial strategies. Market rules narrowed state choice.
   • Debates over state aid showed a recurring tension between national economic planning and European market discipline. Sovereignty remained contested.

The euro and monetary union

1. The Maastricht design: the Maastricht Treaty of 1992 set the path toward a single currency and convergence rules on inflation, deficits, debt, interest rates, and exchange stability.
   • Supporters argued the euro would complete the single market and prevent competitive devaluations between member states. Currency stability was the aim.
   • Critics warned that one interest rate would not fit economies with different growth rates, productivity, and fiscal needs. One size problem was visible from the start.
2. Launch of the euro: the euro began electronically in 1999 and circulated as notes and coins in 2002, and by 2020, 19 of the EU's 27 member states used it as their currency.
   • The European Central Bank set monetary policy for the Eurozone, focusing heavily on price stability.
   • Member states kept national budgets, taxation systems, welfare systems, and debt responsibility. Monetary union did not include full fiscal union.

1. Cheap credit: the euro lowered borrowing costs for countries such as Greece, Ireland, Portugal, Spain, and Italy because markets assumed all Eurozone debt was safer.
   • Cheap borrowing funded housing booms, public spending, private credit, and bank expansion. Capital flows moved from northern to southern Europe.
   • The benefit looked like convergence during the boom, but it became vulnerability once confidence collapsed. Risk was hidden by low interest rates.

The Eurozone crisis

1. The 2008 shock: the global financial crisis exposed weaknesses in European banks, public finances, and private debt.
   • Ireland’s banking crisis, Spain’s property crash, Portugal’s low growth, and Greece’s fiscal weakness became linked by shared currency membership. Contagion spread through bond markets.
   • Countries inside the Eurozone could not devalue their currency to regain competitiveness or inflate away debts. Adjustment had to come through wages, spending, and taxes.
2. Greece in 2009: George Papandreou’s government revealed that the budget deficit was about 12.7 percent of GDP, much higher than previously reported.
   • Financial markets demanded higher interest rates, making normal borrowing impossible. Sovereign debt became a Eurozone-wide threat.
   • The crisis raised the question of whether the euro was an irreversible political project or a currency that weak members might leave. Grexit entered political language.
3. Bailouts and austerity: the EU, ECB, and IMF supplied rescue loans in return for spending cuts, tax increases, pension reductions, privatisation, and labour-market reforms.
   • Greece received bailout packages worth over 240 billion euros between 2010 and 2015.
   • Supporters said austerity restored fiscal discipline, while critics argued it deepened recession and protected creditor banks. Responsibility became the central dispute.
4. Social impact in Greece: Greek GDP fell by roughly 25 percent, unemployment reached about 27 percent, and youth unemployment rose above 50 percent.
   • Public services, wages, pensions, and household security were all affected. Austerity became a lived experience, not just a budget policy.
   • The crisis damaged trust between northern creditor states and southern debtor states. Solidarity weakened.

Responses and long-term effects

1. New rescue mechanisms: the EU created stronger bailout tools, including the European Stability Mechanism, to stop future debt crises spreading.
   • The ECB later promised to do whatever it took to preserve the euro, which calmed bond markets in 2012.
   • Banking supervision became more centralised, showing that crisis pushed the EU toward deeper economic governance. Integration by crisis was a recurring pattern.
2. North-south divide: Germany, the Netherlands, Finland, and other creditor states demanded rules and discipline, while debtor states argued for solidarity and growth.
   • The divide revived stereotypes about hard-working northerners and irresponsible southerners, which simplified a complex banking and currency crisis. Political language hardened.
   • These arguments affected later debates over Covid recovery funds and shared borrowing. Fiscal solidarity remained contested.
3. Populist consequences: austerity and crisis management strengthened anti-EU parties, protest movements, and distrust of technocratic government.
   • In Greece, parties such as Syriza and Golden Dawn gained from anger at austerity, though in very different ideological directions.
   • Across Europe, the crisis made the EU seem less like a prosperity machine and more like a system of rules that could impose pain. Perception changed.

Convergence, inequality, and recovery policy

1. Convergence successes: many Central and Eastern European economies grew faster after accession because they gained investment, export markets, EU funds, and labour mobility.
   • Poland avoided recession during the 2008 global crisis and became a major example of post-accession growth.
   • The Baltic states also integrated rapidly into European markets, although they faced sharp contractions during the financial crisis. Fast adjustment brought both growth and vulnerability.
2. Inequality inside member states: EU integration produced national growth figures that could hide regional decline, insecure work, and resentment in older industrial areas.
   • Workers in some sectors faced competition from cheaper imports, relocation, or migrant labour. Distribution mattered as much as total GDP.
   • These grievances fed Eurosceptic parties that argued EU economic policy benefited mobile capital more than rooted communities. Economic nationalism grew from uneven gains.
3. Covid recovery precedent: after 2020, the EU agreed large-scale shared borrowing through NextGenerationEU, partly because leaders wanted to avoid repeating the austerity politics of the Eurozone crisis.
   • This response suggested that the EU had learned from the social and political damage of the earlier crisis. Fiscal solidarity became more acceptable in emergency conditions.
   • It did not create a full fiscal union, but it showed how crises could push economic policy beyond earlier limits. Incremental change continued.

How to judge economic policy after 1990

1. Clear gains: EU economic policy expanded trade, investment, mobility, consumer choice, and regional development across much of Europe.
   • The single market and euro helped businesses plan across borders and gave smaller economies access to deeper capital markets. Economic integration produced real benefits.
   • New member states often grew faster after accession, though gains differed by region and social group. Convergence was uneven.
2. Clear weaknesses: the euro created a shared monetary policy without enough shared fiscal capacity to absorb shocks.
   • This made crisis response slow, politically divided, and socially costly. Design flaw is central to the judgement.
   • A strong essay should argue that EU economic policy deepened integration, but the Eurozone crisis exposed how incomplete that integration remained. Incomplete union is the safest judgement.

1. The euro delivered real integration in good years, but its missing fiscal union turned a global financial shock into a decade-long political crisis for the whole EU.