Tag Archives: eurozone

General Picture of European Monetary Unification

On March 10, EU and US pressed to drop dispute-settlement rule from trade deal.  After reading the news, I did a research on European Monetary Unification(EMU) and the euro to better understand it.

1. What is EU and EMU?

EMU is the move to a common currency for a group of countries of Europe, originally with 12 countries and now increased to 18. The purpose is to further the economic integration of Europe that began with the European Economic Community and is today called the European Union (EU). The currency is shared by all 18 countries and is not controlled by any one of them – it is controlled by the European Central Bank (ECB), based in Frankfurt, Germany. This group of countries is called the Economic and Monetary Union (EMU), or informally, the Eurozone.

2. Difficulties of Adopting Common Currency

There was need for convergence but there were also difficulties of adopting common currency. First of all, if countries have different rates of inflation, the high-inflation countries will lose markets to low-inflation countries so that the exchange rates won’t adjust to correct for differences. Secondly, if countries have different interest rates, capital will flow to high-interest rate countries seeking higher return. In addition, the uncertainty about exchange rate will not offset this. Thirdly, the unification of currency brings the temptation to run budget deficits when one country is able to borrow from other countries.

From the above three aspect, we can conclude that the success with a common currency requires countries to have similar inflation rates, interest rates, budget deficits, and government debts – achieving these is “convergence”.

3. Pros and Cons of Unification

The proponents believe that the unification will hep complete the internal market and improve competition efficiency. Countries will face a very open market that there are various players from different countries. Also, there would be arbitrage across national borders. The survival of the fittest keeps the market moving forward. The market efficiency could also bring the stability of prices of goods that would benefit the consumers across countries. Considered from the financial market, the unification will lower the interest rate and therefore bring higher investments which will ultimately lead to a stronger growth.

The opponents have negative voices that the unification will lead to the loss of sovereignty. This is controversial because some people worry that the countries may not be able to make their own decisions independently. Secondly, there are difficulties of adjustment to asymmetric shocks. As had happened before, German unification and discovery of North Sea Oil are the sources.

Positives Signs in Europe

Recently, multiple economies in the Eurozone experienced serious downturns. One the most troubled economies was Greece. In fact, Greece was the origin of this economic crisis in Europe. This can be seen with a decrease in yield for Greek bonds. According to a chart in the Wall Street Journal, Greek bond yields have dropped to 6.828%. During the peak of Greece’s economic problems, which were in 2012, the yields were very close to 35%. In the near future, there will be a €8 billion, or $11 billion buyout to pay back bonds that are maturing. The country is also feeling optimistic. Alpha Bank expects the economy to grow 1.1% this year.

Greece’s silver linings could be attributed to the positive outlooks for the rest of the Eurozone. There is an article by David Jolly in the New York Times about this. Part of this economic growth is the unexpected improvement in the French economy. The article discusses Markit’s composit index of economic activity, which is based on a survey of purchasing managers. If this survey were to generate a reading of 50 or higher, then this would mean that there is economic growth. Anything below 50 would represent contraction. The reading for this month was 53.2, which means that there is growth. Last month’s reading was 53.3, which is the highest reading in the last 32 months.

An article in the Washington Post from about a month ago explores growth in various countries in the Eurozone. The GDP grew by about .3% from October to December, which contributes to an analyzed rate of 1.2%. According to this article, growth in the third quarter was a little slow, but it picked up in the fourth quarter. Part of the reason for this was activity that was higher than expected in Germany, France and Italy, some of the Eurozone’s biggest economies. These fourth quarter growths were .4%, .3% and .1%, respectively. The Netherlands achieved growth rates of .7%, and two other troubled economies, Spain and Portugal grew by .3% and by .4%, respectively.

In a previous post, I mentioned that there is more than what meets the eye in economic data. Mankiel confirms this in his book. Previous trends are not always the best way about making investment decisions because an investment moves in a random pattern. There is no way to be sure if it will go up, down, sideways or back and forth. The same can be said about an economy. Recent figures have shown that Europe is seeing economic recovery. Even some of the troubled countries, such as Greece, Spain and Portugal are recovering. The Markit index for France is showing a reading above 50, so we know that its economy is growing. However, we do not know what will happen in the future. Some event, such as another liquidity crisis, could happen that could have a large impact on the Eurozone. If this were to happen, a lot of economies would tank. We have no way of predicting this, much like how we have no way of predicting where an investment will go in the future.

 

(Revised) Ukraine: The Economic Benefits to EU Integration

Since November 12th of 2013, Ukrainians have been taking to the streets in droves to protest the authoritarian government led by President Yanukovych. As with other similar episodes of civil unrest, such as the Arab Spring, Ukranian protesters have utilized social media, hash tagging “Euromaidan”, which has become the unofficial name of the movement. As the AP explains in “Ukraine’s Euromaiden: What’s in a name?” the name refers both to the physical location of the protests, which have centered around Maidan Nezalezhnosti or Independence Square in Kiev, the capital of Ukraine, and also to the demonstrators’ demand for the country to integrate more closely with Europe.

Euromaiden has become even more relevant over the last week as protesters have clashed violently with police and at least two deaths have occurred according to the Wall Street Journal. While the protests still remain relatively small, the escalation to violence does bring about the potential for Ukraine to collapse into all out revolt. As the Economist points out, “Opponents of the government believe the new laws introduce Russian-style authoritarianism, and see them as part of a plan by Vladimir Putin, Russia’s president, to lock Ukraine into Russia’s orbit.” Essentially the conflict has been framed on two sides: the pro-European demonstrators and the pro-Russian institution. Many believe that a pivot towards Europe is the only way to bring democracy and rule of law to Ukraine, and indeed there is likely a great deal of truth to this. From purely a civil rights perspective, there is much to be gained from European integration.

From an economic perspective, however, the case for European integration is slightly more ambiguous. Ukraine is a former Soviet state and has retained very close ties with Russia after gaining independence. The country has been faced with a dilemma in modern times – whether to retain ties with the Russian Customs Union – an economic alliance between former Soviet states, led by Russia – or join with the EU in a free trade agreement. According to the Kyiv Post, maintaining ties with Russia over the EU, have several significant negative impacts on the Ukranian economy:

  1. The Customs Union is seen by many as a way for Russia to exert an inordinate amount of control over former Soviet states and the agreements typically force members countries to become reliant on Russia.
  2. Corruption and bribery is wide-spread across the Customs Union states and this limits the attractiveness of foreign direct investment in Ukraine.
  3. Ukraine’s trade with Russia has been steadily decreasing, while trade with the EU has been rising.

However, as the Economist explains, there is one clear cut advantage to remaining with Russia in that the country provides Ukraine’s single largest export market. Russian alignment also comes with the promise of cheaper gas and debt relief. And from a political perspective, the Russians would not demand better human rights, an issue which the current regime has made clear they have no respect for as they have cracked down on protesters in recent weeks.

While Russia provides clear near term benefits, Europe provides both economic and political benefits to Ukraine over the long term and the spread of the pro-European protests shows that citizens want these benefits. While the conflict has been framed as a civil rights fight up to this point, the economic impact could be huge if Ukraine were to ultimately enter an agreement with the EU. This could modernize their domestic industry as they would have a huge trading partner next door and help boost national income, which according to the World Bank is relatively poor compared to Europe and Central Asia as shown in the chart below.

Ukraine GNI

For now, Ukraine’s hesitation to pivot towards closer EU integration rests solely with the country’s leaders. They have too much to gain personally from remaining aligned with Russia. The people are the ones demanding the economic growth and freedom that European integration could bring and they are showing it to the world by taking to the streets in mass to protest their government’s actions. It remains to be seen whether the protesters will see their demands met, if the country will be thrown into an all out revolution, or if the current regime will stamp out the revolt but it is something to see people, in our modern time, fighting for their liberty.

Ukraine: The Economic Benefit to EU Integration

Since November 12th of 2013, Ukrainians have been taking to the streets in droves to protest the authoritarian government led by President Yanukovych. As with other similar episodes of civil unrest, such as the Arab Spring, Ukranian protesters have utilized social media, hash tagging “Euromaidan”, which has become the unofficial name of the movement. As the AP explains in “Ukraine’s Euromaiden: What’s in a name?” the name refers both to the physical location of the protests, which have centered around Maidan Nezalezhnosti or Independence Square in Kiev, the capital of Ukraine, and also to the demonstrators’ demand for the country to integrate more closely with Europe.

Euromaiden has become even more relevant over the last week as protesters have clashed violently with police and at least two deaths have occurred according to the Wall Street Journal. While the protests still remain relatively small, the escalation to violence does bring about the potential for Ukraine to collapse into all out revolt. As the Economist points out, “Opponents of the government believe the new laws introduce Russian-style authoritarianism, and see them as part of a plan by Vladimir Putin, Russia’s president, to lock Ukraine into Russia’s orbit.” Essentially the conflict has been framed on two sides: the pro-European demonstrators and the pro-Russian institution. Many believe that a pivot towards Europe is the only way to bring democracy and rule of law to Ukraine, and indeed there is likely a great deal of truth to this. From purely a civil rights perspective, there is much to be gained from European integration.

From an economic perspective, however, the case for European integration is slightly more ambiguous. Ukraine is a former Soviet state and has retained very close ties with Russia after gaining independence. The country has been faced with a dilemma in modern times – whether to retain ties with the Russian Customs Union – an economic alliance between former Soviet states, led by Russia – or join with the EU in a free trade agreement. According to the Kyiv Post, maintaining ties with Russia over the EU, have several significant negative impacts on the Ukranian economy:

  1. The Customs Union is seen by many as a way for Russia to exert an inordinate amount of control over former Soviet states and the agreements typically force members countries to become reliant on Russia.
  2. Corruption and bribery is wide-spread across the Customs Union states and this limits the attractiveness of foreign direct investment in Ukraine.
  3. Ukraine’s trade with Russia has been steadily decreasing, while trade with the EU has been rising.

Europe provides both economic and political benefits to Ukraine and the spread of the pro-European protests shows that citizens want these benefits. While the conflict has been framed as a civil rights fight up to this point, the economic impact could be huge if Ukraine were to ultimately enter an agreement with the EU. This could modernize their domestic industry as they would have a huge trading partner next door and help boost national income, which according to the World Bank is relatively poor compared to Europe and Central Asia as shown in the chart below.

Ukraine GNI

It remains to be seen whether the protestors will see their demands met, if the country will be thrown into an all out revolution, or if the current regime will stamp out the revolt but it is something to see people, in our modern time, fighting for their liberty.

Europeans – at the verge of extinction?

So MLK Day is drawing to a close, and in keeping with Prof. Kimball’s suggestion I’ll take some time off from economics and write about civil rights (kind of). However, I won’t talk about Dr. King, or race relations, or indeed about the US at all. I’m European, and I doubt that I’d be able to make as informed or eloquent a statement about those things as probably most others in this class could. Instead, I’ll focus on the EU. I’ll simply spell out some thoughts of mine on what it means to be European, on nationalism in Europe, and on the future of that particular part of the world. If this ends up seeming somewhat incoherent, bear with me; Europe has always been an incoherent place, and not something that’s easy to understand for those who didn’t grow up right in the middle of it all (whether for better or for worse).

For most of my live, being a European was terribly easy. Two politicians shook hands a few years earlier, the Euro removed the whole hassle of having to exchange currency whenever you crossed of of the virtually non-existent borders, and things weren’t going so bad in general either:

Germans were especially happy due to the whole issue of national reunification (and whaddaya know, there’s even a little known fact about MLK connected to the Berlin Wall; this is all tying together very nicely so far). Sure, there were minor complaints about the EU’s capabilities and certain laws it passed (such as those concerned with the legally acceptable curvature of cucumbers and bananas). But in general, Europe was made out to be this inclusive, nice, sensible place, where people could overcome their arbitrary notions of divisions along nation-state lines. Sort of a humanist utopia in the eyes of those who dared to dream big.

Then came 2008, and things started looking a little less impressive; the global financial crisis obviously hit Europe as much as it hit anyone else (hence ‘global’ crisis). However, things didn’t really go down the drain until the beginning of the Eurozone crisis in 2009 (here’s all the NY Times ever published on the issue, in case you find yourself in need of a read). And if it’s true that when the going gets tough, the tough get going, then the EU failed its toughness test gloriously back then, and hasn’t made an effort to improve the result until now.

The crisis really forced people to put their cards on the table. I have firsthand experience with the German media and public opinion at the time, and it wasn’t pretty. There was talk of “lazy Greeks” (which was and is nonsense). A populist (and, sadly, the most popular) newspaper in Germany called on the Greeks to “sell their islands” (which, in desperation, they actually did). And that was just the beginning of course. Soon, there was talk of a Northern and Southern Euro. To me, this crisis brought out one thing, and it brought it out in full force. All the talk of Europe as this humanist utopia – much of it had been a front to promote something else, be it economic interests, national power or simply appealing to potential voters.

And suddenly, a lot of people acted as if they’d known that all along. And not only that – I get not trusting that the reasons a politician gives you for doing something are the same as the ones that actually move him. People also acted as if it was okay to suddenly go back to this idea that if Europe wasn’t working out economically, we might as well call it quits. Call me idealistic, but having grown up in this utopian, Care Bear Europe that I’d known all my life, that came as somewhat of a shock.

I saw an economics professor from the University of Chicago talk about the Eurozone crisis. He said that he couldn’t see why the Germans should pay money to save the Greeks or the Spanish (never mind that all the austerity they were forced to impose isn’t doing too awesome a job at ‘saving’ them). I find that notion ridiculous, but I know that at this point many Europeans feel the same way. To me, it seems that whatever it is that makes someone from Michigan pay taxes to support someone from California should be sufficient to make Europeans help each other out. They’re all Europeans – isn’t that enough (actually, simply knowing that they’re fellow human beings should be enough, but then I guess not everybody can be a cosmopolitanist)?

That, I think, is what bothers me most about this ‘new’ Europe. The possibility to create a place that finally acknowledged the arbitrary nature and moral blindness of national identities was there. This crisis, awful as it was, could have been the final, cathartic coming together of the peoples of Europe as the European people. But instead, it was squandered on cheap, nationalistic power struggles (via horrible economic policies) for dominance in what’s left of Europe these days.

Running out of air? The Eurozone at the edge of deflation

Two days ago, I saw something that actually resembled good news from Europe. Naturally, I immediately became suspicious; things couldn’t really be going well for once, could they? And, sure enough, it seem they aren’t. The Eurozone is possibly facing deflation now (the German Bundesbank disputes this, of course, but then my wonderful home country doesn’t have the best track record for facing the facts and accepting economic reality when it comes to the crisis anyway). The Economist even has a four part round table on the topic. I think it’s safe to say that this could become a serious problem (which is great, because Europe doesn’t have enough of those already).

What I find most alarming about this isn’t so much that the danger exists as such. The absolute lack of expansionary fiscal policy – worse yet, the harsh austerity imposed throughout the Eurozone – left the ECB hanging in the air. Sure, Mario Draghi did what he could to stimulate the Euro-area economy (which, by the way, a lot of people don’t realize; the ECB gets criticized as much as state governments for failing to solve the crisis, when I’d argue that they were pretty much the only ones doing anything at all). But, as I probably don’t need to elaborate writing for a bunch of econ majors, when facing the ZLB, monetary policy tends to lose its bite. So a slow recovery and low inflation rates (or even deflation) were always going to be a possible issue for the Eurozone.

What’s alarming is that nothing’s being done about it. The ECB has such a weak mandate that even now, with deflation looming large on the horizon, QE still isn’t an option because certain member states – take a wild guess at who’s most vocal about it – are strictly opposed to that policy. Ironically, the head economist of Germany’s largest bank, the Deutsche Bank, has expressed support for QE. Too bad he’s head economist of the wrong bank. Hell, even the OECD is on board!

What’s also striking about this is that the ECB – much like the Fed – is aiming for an inflation target of 2% across the Eurozone, which it is currently missing by a mile (you may think it’s redundant to say that the Eurozone faces a deflation risk and that their inflation is low, and in fact you might assume most sensible people should feel that way; however, given that the Bundesbank’s economists see these same numbers and still manage to declare that there’s nothing to worry about makes me question that assumption). So even if deflation wasn’t an issue, the ECB should do what it takes to get the inflation rate back on track. The fact that its hands are bound to do the one thing (that’s right, it doesn’t even have to take responsibility for the outrageous levels of unemployment seen in many European states, because that’s not part of its mandate) it’s supposed to be doing is simply ridiculous.

My point here isn’t so much that the ECB must, must, must implement QE. In fact, I don’t care what strategy they can come up with that prevents deflation and is acceptable to its governing council (and while they’re at it, I think reducing unemployment wouldn’t hurt, even if it’s not part of their prime directive). Although QE does stick out as the most obvious choice.

My point is that simply doing nothing is absolutely unacceptable. That’s true even if you don’t believe that deflation is a real threat ; the ECB still has an inflation target, and it’s still missing that target. Beyond that, my point is that certain Eurozone countries – most prominently Germany – should start to get real about the EU and what it means to them. But that’s something I’ll talk about in my MLK Day post.