Essay about Integration in the EU and Monetary Policy

As of 2012, only seventeen of members of the European Union have decided to use Euros as their currency. In order for the members that adopted the Euro as their currency to successfully help their economic problems, the Eurozone members had to follow strict instructions put into place the European Union. The strict policies included strict control over inflation, government debt, and long-term interest rates (Mckee 525). The union put these strict policies into place to give the union the tools that it needed to take in order to help fix the economic crisis in each country participating in the Eurozone. Without the full cooperation of each country, it could cause the plans to fix the economic crisis within each country to fail because of the different interests by each individual country.

M2: Analyse the effects of fiscal and monetary policies for a selected business in terms of the market in which it operates

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.

This paper was prepared for GD530 Economics and the International System, taught by Professor Snow

A common currency also minimizes uncertainty about exchange rate fluctuations among member nations. However, as is often the case in economics, there exist tradeoffs that policymakers must recognize. The most notable is that by joining the Eurozone, a nation is relinquishing its abilities to operate their own central bank and easily enact desired monetary policy. Obstfeld warned in 1998 that “nationally asymmetric real shocks” could make transitioning to the Euro difficult for nations (4). Maurer notes that today the EMU has resulted in convergence of nominal interest rates but divergence of real interest rates due to differences in business cycles (5). If business cycles among Eurozone members were to converge however, it might make sense to have a unified central bank and monetary policy. Massmann and Mitchell report that depending on how one measures this convergence, one can get drastically different results (16). These results yield a weak argument that the cycles have converged and suggest centralized monetary policy might be inappropriate at times for some members.

(i) Briefly, what is the issue? What impact does it have on different regions’ GDP, prices, exchange rates and Interest rates?

“If the Euro fails, then not only the currency fails… Europe will fail, and, with it, the idea of European unity.” Merkel’s words preclude the diminishing consensus within European Union, no matter the attempts to solidify support within Europe. The 2008 Eurozone crisis has lead to distrust and unease in Europe. The Treaty of Lisbon (2009) was the re-organisation of the European Union policy-making structure after the pillar formation of the Treaty of Maastricht (1993). The Treaty of Lisbon, no matter how triumphantly proclaimed to the people, has given increasing control to the European Parliament and other intergovernmental bodies, and less in the hands of the states or the people. This, coupled with dissatisfaction of the EU and an

Recently, the president of European Central Bank (ECB), Mr Mario Draghi, announced that he is thinking of applying Quantitative Easing (QE) within the Eurozone. Quantitative Easing is a monetary

Europe may not have the luxury of experimenting for many years before finding workable arrangements for modern economies, and of politics in the independent democracies that comprise the eurozone. Popular calls for public goods, social insurance, financial stability, and countercyclical macroeconomic policy cannot be brushed aside so easily as in the less-democratic era of the nineteenth-century classical gold standard. Furthermore, the fact that the score of the eurozone is so poor on optimal currency area grounds that it suggests a need for mechanisms allowing smoother and more symmetric adjustment between its member countries.

Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) controlling money in the economy so as to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest so as to attain a set of objectives aiming towards growth and stability of the economy.

After the horrific aftermath that was created by World War II, Europe worked towards economic and political integration. The economic integration began in 1958, with the creation of the European Economic Community (EEC), which included Germany, France, Belgium, Italy, Luxembourg and the Netherlands. The EEC removed tariffs on goods produced within those six countries, in order to promote trade and reconstruction after the war. In 1993 the EEC was renamed to the European Union (EU), when the focus of just economic integration began to include policies of “climate, environment and health to external relations and security, justice and migration” in Europe (Europa). In 1981, Greece became a member of the EU. Twenty years later, Greece adopted the Euro as its currency. Recently, Greece has been experiencing many economic problems, that threaten the overall stability of the Euro. Although Greece is still part of the Eurozone today, its inability to pay off debt, lack of effective reform, and its negative effect on the European Union as a whole, will eventually lead to its exit from the Eurozone.

An introduction of the new common currency in the Europe was announced on the first day of January 1999. At the first time, there were eleven countries, which decided to join the European Union (EU) and replace their own currency with a new one, the Euro. The Euro has been adopted as a official currency of the country members including Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxemburg, Netherlands, Portugal and Spain. In order to be accepted to join the Euro, these countries had to agree with the agreement about the price stability, long-term interest rate, government budget deficits, total

The intricacy of European sovereign debt crisis is about the euro system. In 1991, there was a proposal among European countries (ECM) for common currency in order to benefit the entire development of these countries and even compete with the increasingly powerful America. Finally in 1999, 11 euro area countries adopted a single currency—the Euro, which means the birth of Euro system.

The European Central Bank (ECB) is the central bank for Europe’s single currency, the euro. The ECB’s main objective is to maintain the euro’s purchasing power, and therefore price stability, in the euro area, which comprises of the nineteen European Union countries that have introduced the euro currency since 1999 (ECB, 2015d). The ECB and the national central banks of the Member States, whose currency is the euro, together constitute the Eurosystem; the monetary authority of the euro area. In order to maintain price stability, the Eurosystem undertakes the necessary economic and monetary analyses and adopts and implements appropriate policies in order to respond to monetary and financial developments (ECB, 2015e). This essay will analyse the possible impacts of quantitative easing (QE), recently introduced by the European Central Bank. Firstly, I will look at the European Central Bank’s use of interest rates in controlling the growth of the economy. Secondly, I will look at the meaning and purpose of QE, and finally, I will analyse the impact of the programme of QE recently launched by the European Central Bank.

Greece is a member of the Eurosystem, a collection of 19 European countries. Together, the Eurosystem is the third largest economic system in the world, falling just behind the United States and China (https://www.ecb.europa.eu/mopo/eaec/html/index.en.html). The European Central Bank (ECB) acts as the head of the Eurosystem, providing the citizens of 19 European nations with a single currency (ECB WEBSITE). The area that is within the jurisdiction of the ECB is collectively known as the Eurozone. Due to the dependent nature of European countries on the ECB, monetary policy is implemented across the Eurozone, with attempts at achieving price stability. In most economic areas, the central bank is in control of only one nation. The ECB states that their goal is to maintain inflation rates around 2.00%. The ECB is responsible for the economic welfare of 19 nations; this sometimes means that the ECB may have to turn their back on one nation (Martin, 2015).This standard of inflexibility has proven to be overall successful, as many European nations maintain stable economies. Smaller countries, however, have suffered due to the rigid system.