Will European Union’s Bailouts Backfire?

This paper will focus on the European Union’s controversial bailout plan for Italy and Spain. Following the recent financial crisis, these countries found themselves buried in high-interest debt. In order to prevent a snowball-effect throughout the continent, European Union leaders have decided that immediate economic intervention is necessary. The resulting proposal: a 600 billion euro (roughly 800 billion USD) bailout package. This raises a critical question: is it prudent for the European Union to bail out struggling member nations at the expense of the more economically successful EU countries? Needless to say, the possible ramifications of the bailout are significant- in both the short and long-term.

I have a feeling that the series of bailouts will backfire on both the indebted countries and the European Union as a whole. Throwing more money into depressed or failed markets is not a formula for economic prosperity. To me, the recent “bailout culture” in Europe may just be one manifestation of a deeper problem: dozens of independent sovereigns relying on the strength of a single currency. Proponents of these stimulus packages may argue that the European Union’s sole purpose is to provide financial stability to all of its members. They believe that if the prosperous countries have to loan money to the economic laggards, it is still better than the alternative of insolvency.

The first section of my paper will highlight the details of the bailout and its implementation. The second section will review existing views, while providing my own argument in contrast with these existing views. The third section will examine historical analysis of previous bailouts in order to further advance my thesis. Lastly, I will conclude with some of the implications of my findings.