You are on page 1of 1

Reasons why the Eurozone went into recession Lack of convergence For the countries to be accepted into the

single currency they must meet the four convergence criteria points. They are: 1. Stable prices: The inflation rate must not be more that 1.5% higher than the average of the three members with the best price stability (lowest inflation)/ 2. Stable exchange rate: The country’s currency must have been stable relative to other Eurozone countries for a period of two years to enter the monetary union. 3. Sound government finances: a. Gross government debt must not exceed 60% of GDP b. The annual budget deficit must not be higher than 3% of GDP. 4. Low interest rates: The 5-year government bond rate must not be more that 2% higher than the three members where inflation is the lowest. The ECB have the role to set a nominal policy interest rate and a clear target for price stability and this may have affected each economy in a different way. Setting one interest rate played a part in affecting the convergence of the euro area. The euro member will not be allowed to manipulate the interest rate to best suit the situation for their economy, if the inflation is too high and the ECB set the target interest rate lower than what the member needed it could worsen the problem. This in turn affected the business cycle for the whole Euro Area as each economy were in different stages and not in sync. Structure of the economy Some EU countries have high dependence on high volume manufacturing industries such as primary commodities, textiles and car manufacturing. This high dependency may have put economies in recession as they solely depend on other economies to provide them with goods and services their economy does not specialise in. Euro members may receive their income from injections such as tourism and construction work. Demand decreased for holidays during recession and economies that highly depend on tourism such as Greece experienced negative growth leading. The Spanish economy that depended on their revenue to generate from construction work experienced negative growth due to their reliance on construction. This also affected unemployment rates as 50% of youths were unemployed as they believed that they will earn more of a wage by working in the construction sector. Openness to trade The openness to trade may have also caused the recession because the euro member may generate their national income by trade inflows and outflows. The more open an economy the more they are at risk of sudden changes in the world trade. This can have a direct effect on the economies balance of payments and economic growth.