The recent economic crisis in the European Union (EU) triggers doubts about whether it can survive. Can a collection of countries with separate political heads function as one economy?
In 2007, the answer seemed to be "yes!" as the EU overtook the U.S. as the world's largest economy. In 2009, the EU's economy produced $14.5 trillion in goods and services, while U.S. GDP came in at $14.3 trillion. Combined, the two produced over 40% of the world's economic power, which totals $70.3 trillion. (Source: CIA World Factbook, Rank Order GDP)
However, the rising debt of the PIGS countries (Portugal, Italy, Ireland, Greece and Spain) signals that the EU economic model may not be working. These countries continued to spend recklessly and increased their debt to unsustainable levels (sound familiar?). They gambled on the fact the Germany, the sixth largest economy in the world, would bail them out. So far, they were right.
What It Means to You
The U.S. economy has always benefited from an inherent economy of scale - large land mass, bountiful natural resources, and a large domestic population that loves to shop! The success of the EU model has eaten into this comparative advantage. As a result, the EU's currency, the euro, has competed successfully with the dollar as a global currency.
The bay of the PIGS crisis walloped the euro down to a four-year low from which it is only just now recovering. Many analysts now say that the EU "experiment" is doomed to failure, and these vastly different countries could never work together as a unified economy. Many areas such as Southeast Asia and Latin America have been considering copying the EU model. The world is watching.
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Photo: EU Internal Market Commissioner Michel Barnier (Credit: John Thyss / Getty Images)