When the Good goes Bad

Traditionally free trade agreements and their kin are the principle agents of more competitive, efficient, and economically viable countries. However, people often look at the overall effect of FTA’s in their questioning for whether or not FTA’s should be implemented. The smaller country is usually considered the major benefactor after an FTA is implemented, but what happens when the opposite happens? There is an obvious, glaring example that is often overlooked, I myself just stumbled upon it a few days ago. Looking at Europe currently, you have the PIIGS, the countries that seem to be on the fast track to nowhere, and the rest of the Union. The idea behind the Union was that the economies could build on each other and raise the smaller less developed countries to the same standard as the U.K., France and Germany. Did this actually happen though?

While the European economy as a whole has definitely benefited from consolidating to a single currency, eliminating billions of dollars devoted to the management of exchange rates and risk, the countries coming into the agreement lost that same great equalizer. Emerging markets are often able to compete with developed nations because the value of their currency makes it cheap for other countries to buy their labor and goods. This is the equalizer between unequal economies, like a handicap on a game of golf. While the individual corporations in the less developed economy are usually not as efficient as those in the developed nations, they could make up for the efficiency by making their products cheaper with exchange rates. It can easily be argued that the European Union took this handicap away from its less developed nations when it created the Euro. Instead of equal trading and competing in the same markets, all of a sudden it turned into professionals playing against amateurs.

As this article points out, Germany, an economically strong and developed country, was all of a sudden competing against Greece, Bulgaria and other much less efficient economies. They now had to pay their workers the same, without the same infrastructure, devoid of their competitive advantage, and were now competing for all the same customers. Until I had considered this I had thought the EU and the Euro was a great idea. While I still believe that the EU is a good idea, I do think some measures need to be taken to give some of the newer countries some type of small advantage until they can compete on equal grounds. Airbus didn’t compete with Boeing immediately or without help. Otherwise it almost looks like the EU needs to become more like a single country with one set of laws and national government in order to support the Euro, but that is a whole different debate.