By using the data (Up to the year 2008) for Euro zone countries (excluding Malta
ID: 1215298 • Letter: B
Question
By using the data (Up to the year 2008) for Euro zone countries (excluding Malta and Cyprus) from ‘OECD fact book’ discuss the impact of the following factors in bringing about the ‘Euro crises’: - Budget deficits and national debt 2- Balance of payments 3- Social expenditures Using graphs compare the above factors for the countries in trouble, PIGS (Portugal, Ireland, Italy, Greece and Spain) vs. other countries in the Euro zone like Germany and France that fared well and contrast which of the above factors may have contributed to the crisis. The fact that all these countries were using a single currency and did not have the power to devalue their own currency could be another factor you need to consider when analyzing this issue.
Explanation / Answer
Dear sir / madam,
Western Europe has gone through five decades of increasing economic integration, from inconvertible currencies, trade quotas, and prohibitive tariffs at the end of world war II to unrestricted free trade within borders, total mobility of labor across borders, and indeed the abolition of internal borders, along with common passports, a European parliament , and a central economic authority in Brussels. Lots of decisions remain at the national level, but it is impressive just how much Europe has moved from segmented national economies to an integrated political and economic area.
This process of economic and political integration has led to the European Union (EU) A controversial crowning piece of that economic agenda has been the creation of a monetary union, The Economic and Monetary Union and its new common money, the euro. This new currency started in January 1999 with exchange rates immutably fixed and was completed in January 2002 with the introduction of the actual currency- coins and notes. No more lira, deutsche marks, francs , or pesetas- just euros with the symbol E denoting the new money.
The new money was highly controversial for one simple reason: For much of the postwar period, Germany had a good money- low inflation- and most other European economies, France or Italy in particular, did not. No surprise then that Germans worried about their money. The key issue was the creation of a convergence process in which countries would have to reach specific targets ( the "Maastricht criteria", named after the Dutch town where the agreements were reached) These qualifying hurdles were, specifically, inflation no more than 1.5% points above the inflation rate in the three lowest inflation members, no restrictions on capital flows and no devaluation in the preceding 2 years, a budget deficit of less than 3% of GDP , and a debt ratio below 60% of GDP or at least committed to falling to that level over time. Convergence has happened - as evidenced by the fact that Italian interest rates, debts and deficits notwithstanding, have fallen to German levels !
Even though the European Central Bank and the euro are up and running, questions remain about whether it was really a good idea to give up national monies and exchange rates. The key question is this: Can the various European economies adjust to shocks by movements in wages and prices ? If not, exchange rates should be doing the job, but they are gone now. Suppose, eg. that demand shifts from Italian products ( Fiats) to those of Germany (Mercedes and BMW) There would be unemployment in Italy and a boom in Germany. If German wages rise and Italian wages fall, that will help restore full employment in both regions. If the wage does not fall in Italy but only rises in Germany, that helps the German labor market but creates an inflation problem for the euro area. It does little to restore Italian full employment. Before the euro, Italian currency depreciation would have been the right answer- but with common money that option is gone. The answer to this issue, in practice, is twofold. First, Europe gave up the exchange rate as a policy tool quite a while ago, long before the new money. Second, whatever the difficulty, this is a political integration project, and that is what political integration is all about.
In 2007, the euro was the official currency of 13 nations. An additional 10 EU member countries were scheduled to convert to the euro as soon as each one met the Maastricht criteria. A decade from now the euro will be used, one way or another, in a much larger part of the world map than just western Europe. Europe has taken a huge step toward creating a money that is on a par with the dollar.
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