Analysis Of The Article ' Eurozone 's Inflation

In economics, with the inflation is a rise in the actual general level of prices of goods and services in an economy from over a period of time. When the general price level rise, such as each of the units currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power4 per unit of money. This therefore means that with the loss of real value in the medium of exchange and unit of account within the given and actual economy. With a chief measure for example and the price of inflation is within the given inflation rate, the annualised percentage change within a general price index over time in which is normally the consumer price index.

One of the most consistent defenses against deflation is for a central bank to target an inflation rate greater than zero. The Federal Reserve’s current inflation target is 2% and has informally been at that rate for quite some time. This nonzero target provides a cushion for policymakers: should inflation decrease due to an unexpected shock to aggregate demand, prices should not immediately start falling. This allows policymakers to act with easy money when inflation reaches 1 or 0%, thus avoiding deflation. Yet, during the last two recessions in the United States, the 2% inflation rate did not prevent significant fear of deflation. Extraordinary action was required, and many economists argue that the low interest rate policy following the 2001-2002 recession contributed to the housing bubble that was inflating at that time. It is not yet known what the impact will be from the unorthodox policies taken in response to deflation fears in 2009-2010. Based on these experiences, it may be time to consider alternative inflation targets to provide greater insulation from deflationary pressures.

The Los Angeles Times article by Jim Puzzanghera is about consumers saving their money rather than spending it regardless of an increase in income. Although the increase was not too dramatic, people have a sense of when the economy is hurting. One example is through the stock market which recently had a bad plunge in January. Another example is inflation. Inflation results in worthless money which connects to the following statement “Consumer spending accounts for about two-thirds of U.S. economic activity, so saving results in slower growth” (Puzzanghera 8). If we are not making money through our sales here in the U.S., the only way to make up for the loss is to raise prices abroad. The type of inflation Puzzanghera mentions as our problem to a recession is low inflation. This type of inflation is the one we are currently facing with low oil prices, low energy prices, and low food prices. Due to low inflation, Puzzanghera and other economists predict that there is a good chance of a recession (another term for depression so the public is not frightened in my opinion).

Inflation has been below the Federal Reserve’s target for more than 3 and a half years. Inflation is expected to keep declining under desired target as long as the oil prices are declining as well. “Yield movements in the Treasury inflation-protected securities, or TIPS, market indicate that compensation for inflation expected in five to 10 years has dropped to 1.56% annually, according to Barclays. That is down from 1.67% when the Fed raised short-term rates in December. Moreover, it is down from 2.5% two years ago” (Leubsdorf). If less inflations is expected in the future, it could change the way people are spending their money, but if they assume that the inflation is going to keep increasing, the prices are more likely to keep rising at a faster pace.

Monetary policy, which is usually managed by a central governing financial body, has become very out of focus in the EU. This power was once held by governing bodies in each individual country, thus allowing for them to make changes that helped their country and citizens the best. This apparatus once allowed a buffer to radical changes in the national economy and national disasters; which was taken away as the European Central Bank (ECB) became the single body that governs the monetary policy and action plans of the EU (Wypolsz, pg. 239). The ECB now has to consider all of the sovereign bodies within the EU and the power of the euro as a whole, not trying to combat supply issues in Italy that affect their real GDP or the disasters in London that might have led to a decline in expenditures by citizens. Looking at Graph 1 we can see the sporadic spread of government bonds in the different countries within the EU. The graph shows the instability of the Euro because the government bonds of each state fluctuated when Italy was rumored to be leaving the EU, to return to their economy. This shows that the monetary policy actions of the ECB cannot really benefit all of the EU equally. It has been noted that France and Germany have flourished best under the euro, which is where the ECB and other bodies of the euro exist (Sheridan). Sheridan

It is not vey clear if indeed the ECB favours the German economy when conducting monetary policy or not. In 2006, one year prior to the French elections, a popular topic during the political debate in France was the increase in interest rates by the ECB. Both French oppositions were criticizing the ECB for focusing too much on low inflation and disregarding the negative effects on growth. The French were trying to propose for more political influence in monetary policy. The German officials rejected this idea in defence of the proper functioning of the ECB. Of course at the time, the German economy was set to grow by 2,5% the upcoming year. We forward to the present (April, 2017) and find that in the past months it is Germany that has continuously been criticising the ECB for having a Euro that is “too low for Germany” as stated by Germany’s Finance Minister. The governor of central bank of France supported the ECB’s decision by saying that the actions were justified by the objective to maintain steady but low inflation rates for the whole

The Eurozone looks more vulnerable than ever before. In this climate of debt default, investors have shown preference for government bonds outside the Eurozone, where there is less risk of liquidity shortages. The Eurozone’s troubles have led to weakening of the Euro and making Sterling relatively more attractive. This appreciation in the sterling pound will reflect upon the price competitiveness on exports which will decrease therefore lowering demand for our goods domestically and abroad by foreigners which will decrease our net exports (a component of AD) and so shifts the AD curve inwards from AD-AD1 resulting in a decrease in inflationary pressure but at the expense of economic growth as the AD curve recedes. Further consequences are that the current account deficit increases therefore weakening the balance of payments. Also due to the negative growth in AD businesses and consumers may lose confidence in the economy, therefore demand for goods and services decrease and businessed do not invest in capital or labour so contributes to a higher rate of unemployment/redundancy.

Inflation is significant in an economy as it in a large part relates to the price stability within the U.S. If the inflation rate within the U.S is high, variable, or both, it can greatly interfere with an economies ability to efficiently operate and, in turn, can reduce or prolong economic growth. The Committee has specified the long-run goal for inflation to be at two percent. This measure of inflation in the economy is determined by the PCE index of personal expenditures. The Federal Reserve’s statutory mandate of a two percent long-term goal of PCE inflation is consistent with the ability of the committee to foster price stability and maximum unemployment in the long run.

Inflation means value for money is decreasing, the prices of goods are increasing so people prefer to buy goods

On November 1, 1993 the fate of our economy was decided. After one half of a century of waiting, the Eurozone came to a solemn existence. The once great powers of the world, the European nations, had completed a risky, and perhaps foolish, task. The world’s first regional economic system was successfully created. Now, almost two decades later, the world’s economies are on the verge of collapse, and it seems that no economy, other than the Eurozone, is at fault, due to its recent and quite careless economic endeavors. As the rest of the world continues to force the blame upon the Eurozone and its twenty-five member states-including the United Kingdom of Great Britain and Northern Ireland, France, Spain, Portugal, Italy, and Germany, we

In the past decade the world has witnessed a collapse of the world financial system, the Euro-zone crisis, an imploding Middle East, conflicts in Ukraine and natural disasters that have rocked global stock markets and investor confidence.

TheoryThe European Central Bank (ECB) has several instruments in order to affect the inflation in the Eurozone. The interest rates at which regional central banks can lend or deposit their money is one of these instruments (De Haan, Oosterloo, & Schoenmaker, 2012). According to De Haan et al. (2012), changes in the central bank’s interest rate may affect the supply of credit through at least four channels, of which the first three are part of the credit channel:

The genesis of the euro zone crisis has a stark difference from that of the crisis in US that gripped the global economy. The euro zone was characterized by greater social housing facilities and lower subprimes lending. According to Connor et al., 2010, even Ireland did not experience trouble with subprime mortgages despite the affect of higher-end speculation, including in commercial property, on property price bubble. European financial institutions were not so actively engaged in the issuance of CDOs and derivative instruments. As a bloc, the euro zone had not seen high capital inflows and did not have an external payments deficit, several euro zone countries, however, saw an in increase in house prices and current account deficits.

Looking at the development of the Eurozone almost 15 years after the Euro introduction, the gross domestic product (GDP) of the Eurozone has only minimally (0.6%) increased in 2015 compared to 2007. Further, a pattern of divergence can be observed across the Eurozone. There are some countries which have experienced modest growth (i.e. Germany) and others that show a rather constant decline (i.e. Greece). The overall productivity has developed worse than expected, and is with an increase of only 0.6% from 2007 to 2015 fairly low. Another important indicator of the well-being of a country is the standard of living, measured by GDP per capita. This figure has been decreasing by almost 2% in the last 7 years. In terms of economic security, population still suffers under the crisis, shown in the increasing rates of unemployment and the decrease in government spending especially for social expenditures (i.e. Greece: 22% by 2015). A high standard of living also implicates a certain “connectedness” with family members, through the high youth unemployment rates in Spain, Italy etc. many young people leave their families in order to seek better opportunities in other countries (Stiglitz, 2016). Unemployment was on average 11% across the Eurozone and youth unemployment is levelled at twice that size, which will have enduring/long-lasting effects on future income and pension scheme. … “The euro has deepened the divide (…) weaker countries are becoming weaker and stronger are becoming

The European Central bank in Frankfurt, Germany defines the monetary policy for the entire Euro area. It is a single monetary authority with a single monetary policy and primary objective to maintain price stability. The ECB sets interest rates at which it lends to commercial banks in the Eurozone. This controls money supply and inflation. It manages the Eurozones foreign currency reserves and the buying or selling currencies to balance exchange rates. It ensures that financial markets and institutions are well supervised. This makes sure the payments systems work well. It produces Euro’s banknotes by Eurozone countries. Last, the ECB monitors price trends and risks to price stability. There are three decision-making bodies: Governing Council, Executive Board, and General council. Governing Council is the main decision-making body that assesses economic and monetary developments. The Executive Board implements monetary policy and manages day-to-day operations. The General Council has more of an advisory and coordination role to help prepare for new countries joining the euro. The ECB works with the national central banks of all EU countries. Together they are the European System of Central Banks. This helps with cooperation between central banks and the Eurozone. The ECB chose a quantitative definition of price stability with three main reasons: to make monetary policy more transparent, provide a yardstick against what the public can hold the ECB accountable, and is