Transcript The eurozone - Global economy, world economy

The European Monetary Union
(the eurozone)
www.theglobaleconomy.com
About the slides
The presentation is part of an open source project with free
resources on the global economy. For more information visit:
www.theglobaleconomy.com
Please modify and use the slides as you see fit. They can be used
along with the complete guide to the eurozone available here:
Practical guide: PDF and interactive version
www.theglobaleconomy.com
Contents
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Basic facts about the EMU … slides 3-7
The dollar-euro exchange rate … 8
Indicators of the member countries … 9
The economic benefits of the EMU … 10-11
The economic costs of the EMU … 12-14
When does a monetary union work well … 15-18
Should Europe have a monetary union … 19-20
The current crisis … 21-26
Integration road map … 27
Further exploration … 28
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What is the EMU
• The European Monetary Union (the eurozone)
is a group of 17 countries that use the same
currency called the euro.
• They have the same central bank that
conducts monetary policy. It manages the
interest rates and the rate of inflation for the
entire union.
www.theglobaleconomy.com
The 17 eurozone members on a map
(Kosovo and Montenegro, in light blue, use the euro but are not EMU members)
www.theglobaleconomy.com
Quick facts about the eurozone
• Headquarters of the European Central Bank: Frankfurt,
Germany
• The President of the European Central Bank: Mario Draghi
• Members of the eurozone: 17
• Members of the EU that are not in the eurozone: 10
• Introduction of the euro: 1999 as “virtual currency”; 2001
physical implementation
• Population of the eurozone in 2011: 334 million
• Gross Domestic Product in 2011: 13.1 trillion dollars
• Unemployment rate in 2010: 10.0 percent
• GDP per capita in 2011: 39,267 dollars
• Public debt in 2009: 64.7 percent of GDP
www.theglobaleconomy.com
What the euro currency looks like
www.theglobaleconomy.com
How big is the eurozone economy?
The GDP of the eurozone was about 12 trillion dollars in 2010,
compared to 16 trillion dollars for the entire European Union
and 14 trillion dollars for the U.S.
www.theglobaleconomy.com
The euro-dollar exchange rate
The euro has appreciated against the dollar since 2001; that
trend was somewhat reversed during the financial crisis.
Euro per one U.S. dollar
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Economic indicators of the member
countries
Click on the link below to see the following indicators for
the 17 member countries, the U.S., the EU, the EMU, and
world averages.
- GDP
- GDP per capita
- population
- unemployment rate and
- government debt
Economic indicators
www.theglobaleconomy.com
The economic benefits of the EMU
Having the same money eliminates currency conversion costs
and currency risks. As a results, international trade and
investment increase.
Exports as percent of GDP
www.theglobaleconomy.com
Economic benefits continued…
As monetary policy is handled at a central level, some
countries with traditionally high inflation rates now enjoy
lower inflation.
The inflation rate in Greece
www.theglobaleconomy.com
Economic costs of the EMU
With the same currency and common monetary
policy, the interest rates on deposits and credits
become similar.
Interest rates on bank credit in Italy and the Netherlands
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Having similar interest rates
could be a problem
Rapidly growing countries need higher interest rates and
countries that grow slowly need low interest rates.
Notice how different the economic growth rates across the
eurozone are .
GDP growth rates
www.theglobaleconomy.com
The one-size-fit-all policy
On the chart it is clear that Germany and Spain have been
affected differently by the crisis. Should the European Central
Bank base its policy on what is happening in Spain or in
Germany? It cannot appease both.
Unemployment rate
www.theglobaleconomy.com
A one-size-fit-all policy
does not fit anyone
• How can the union function then?
- Labor mobility between the countries.
- Wages are flexible
- Fiscal union
• We look at each separately
www.theglobaleconomy.com
Labor mobility (example)
• Spaniards move to Germany.
• The unemployment rate in Spain declines and
it may increase somewhat in Germany.
• The unemployment rates in the two countries
become similar.
• The one-size-fit-all policy is then not a
problem.
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Wage flexibility (example)
• Wages in Spain drastically decline.
• Then, Spanish goods and services become
more competitive and Spanish exports to
Germany and other countries increase.
• That leads to lower unemployment in Spain.
www.theglobaleconomy.com
Fiscal union (example)
• German taxpayers make payments to
unemployed people in Spain.
• That gives a boost to the Spanish economy
while the extra tax burden slows down the
German economy.
• The economic conditions in Spain and
Germany become similar and the one-size-fitall policy is not a problem.
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Do these conditions hold in Europe?
• Generally no.
• There is limited labor mobility because of
language and cultural barriers.
• Wages are not very flexible because of longterm contracts and collective bargaining.
• The member countries have decided not to
coordinate tax collections and expenditures.
www.theglobaleconomy.com
Why was the EMU formed then?
• A political decision.
• The euro is supposed to foster further
economic, political and fiscal integration.
• Over time, that integration could create the
conditions necessary for a monetary union.
www.theglobaleconomy.com
The current crisis
Imagine the following scenario:
• One of the member countries of the EMU cannot pay its
international debts.
• The banks that lent money to that country take losses.
• Other governments are pressured to spend money to support
the banks.
• These other governments also go into fiscal trouble and may
stop paying their international debt.
• And so on, more and more governments and banks become
insolvent and the EMU economy collapses.
www.theglobaleconomy.com
Maastricht treaty
To avoid that scenario, the EMU member
states have to comply with the fiscal
requirements set out in the Maastricht treaty:
• Budget deficits no greater than 3 percent of
GDP
• Government debt no greater than 60 percent
of GDP
www.theglobaleconomy.com
Too much government debt in Greece
Greece had high debt (much higher than the Maastricht treaty
requirement) even before its entry into the eurozone. During
the crisis its debt increased even more and could not be paid.
Government debt as percent of GDP
www.theglobaleconomy.com
Too much bank credit in Spain
Spain had low public debt but its banks gave too many credits
too fast. The credits were backed by property. When real
estate prices fell, banks were in trouble.
Bank credit to the private sector as percent of GDP
www.theglobaleconomy.com
Lack of competitiveness
The two countries also lack international competitiveness,
evident in the large trade deficits. They would have devalued
their currencies to gain competitiveness.
Being in the eurozone, however, that option is not available.
Trade balance as percent of GDP
www.theglobaleconomy.com
Other problem countries
Explore the economic indicators of the other
problem counties in the eurozone:
• Italy
• Ireland
• Portugal
You can also use this tool to compare them to
other countries:
• Compare countries
www.theglobaleconomy.com
Integration or collapse
• To survive, the eurozone countries have to
take further integration steps in terms of
fiscal, economic, and political union.
• Indeed, they are trying to do that. Here is the
new proposed road map (June 2012):
Integration road map
www.theglobaleconomy.com
Further exploration
Answer the following questions, based on the
practical guide, individual research, and data
from www.thegobaleconomy.com:
• Why does the UK stay out of the eurozone?
• Will the business cycles (the economic ups and
downs) of the EMU countries become more
similar over time?
• Should all East Europeans countries join the
eurozone?
www.theglobaleconomy.com