Macro Economics

Assignment 1

Case based analysis

Submitted To- Dr vijay srivastava

Submitted by- Group 5

Registration no Name Roll number Peer rating

11611712 Rahul patal RQ1620A22
11612015 Ritu kumari RQ1620A23
11612381 Naveen kumar RQ1620A24
11613764 Nisha Yadav RQ1620A25
 Acknowledgement

We would like to express our great sense of gratitute to our

teacher Dr Vijay Shrivastava sir for giving us such a generous
oppertunity of making this project and we are very thankful for
his guidance and suggesion .

We also wish to extend my thanks to sir for their insightful

comments and constructive suggestion to improve the quality of
this research work.
 Introduction

European union introduced the euro currency on 1 january 1999 .

Initially there was only 11 European countries who adopted the
euro who were Austria, Belgium, Finland, Germany, Ireland,
Italy, Luxemburg, Netherlands, Portugal and Spain. The eleven
countries had joined the group and the new currency was valued
at par with US dollar i.e $1=1 Euro. After the two years Greece
joined the group in 2001 and currencies of all member remain in
circulation until end of 2001 euro replaced all currencies in early
2002 , European central bank was established to issue notes and
control the monetary policy. Currently 19 out of 28 European
union countries using the Euro and more than 340 million
people are daily using the Euro.

In this case we will discuss the how adopting the euro affect the
European countries and how it lead to Euro crisis and this case
also provided the various causes how the Euro has declined:-
Objectives of the assignment:-

-Objective of this case is to defining the Euro crisis due to

adoption of common currency (Euro) and we has taken different
aspects to elaborating the topic-

-Facts about the Euro

-Impact of Euro in the union countries

~ Positive impact

~Problems\Negative impact

-Global impact of Euro

-Monetary policy tool of quantitative easing for stimulating the

recession.
Facts about the Euro:-

1)The euro was launched in 11 countries as a virtual

currencyused only for non-cash and electronic
transactionson Jan. 1, 1999.

2)Euro banknotes and coins, for public use, weren't introduced

until Jan. 1, 2002.

3) The idea for establishing a single currency in Europe was

approved upon the signing of the Maastricht Treaty, formally
titled the Treaty on European Union, on Feb. 7, 1992

4) Denmark and the United Kingdom are the only European

Union member states to opt out of using the euro as currency

5)To date, 16 EU member countries, and approximately 340

million people, use the euro. Nine EU member countries have
not yet met the requirements for its adoption.
Impact of Euro in European union
*Positive impact

Economic benefits
1.EU is one of strongest economic areas in the world. With
500 million people, it has 7.3% of the world's population
but accounts for 23% of nominal global GDP.

2.Free trade and removal of non-tariff barriers have helped

reduce costs and prices for consumers. Increased trade
with the EU creates jobs and higher income. Over 52% of
UK exports are to the EU. Trade within the EU has
increased 30% .

3.Over the ten years (1993-2003), the Single Market has

boosted the EUs GDP by 877 billion [588 billion]. This
represents 5,700 [3,819] of extra income per
household.

4.Removal of customs barriers mean 60 million customs

clearance documents per year no longer need to be
completed, cutting bureaucracy and reducing costs and
delivery times.

5.Countries in the EU, are amongst the highest positions in

the Human Development index(HDI).
*Problems/Negative impacts

1.Unemployment. Unemployment in the EU has reached a

critical point. In Spain, unemployment has increased to over
25%, and youth unemployment rates have reached 50%. The
recent rise in EU unemployment is primarily due to the
prolonged recession. Long term structural unemployment is also
a problem.

2.The ECB is too concerned with low inflation The ECB has
been accused of giving too much priority to the goal of low
inflation. It is argued they have sought to maintain low inflation
at the expense of lower growth. The ECB have rigidly stuck to
an inflation target of 2%, despite the rise in unemployment and
poor performance of nominal GDP.

3.Stability and Growth Pact. This is a constraint on

expansionary fiscal policy because in theory it limits
governments borrowing to 3% of GDP. In a recession a
European government is unable to use monetary policy (ECB
set rates for whole Euro zone) but also they are unable to reflate
the economy through higher spending and borrowing.

4.Competitiveness Problem. The Euro has caused a divergence

in competitiveness. Prices become uncompetitive, leading to
lower domestic demand, and high current account deficits. Since
2011, current account deficits have fallen in countries like
Ireland and Spain, but it has been at the high cost of reducing
domestic demand and rising unemployment.

5.Inflexible Labour Markets. This is frequently held up as a

constraint on economic growth and a cause of structural
unemployment. In particular rigidities in the labour market
discourage investment from abroad. For example in France there
are laws which makes it difficult to fire workers once they are
hired.
Global impact of Euro

*The main benefit of trading in the common currency in the

European single market. It is the largest international single
market in the world, which has lead to:
1. Greater competition in services - which is good for
businesses and consumers
2. Removal of trade barriers
3. Reduction of business costs
4. Greater business efficiency
5. Elimination of anti-competitive practices

*The EU has taken measures to reform and make it even easier

for countries to trade with each other, such as:
1. Reducing paperwork
2. Harmonising standards - eg technical and safety standards
3. Enforcing the movement of people - allowing member state
citizens to move freely between other countries

*To help the European single market, the EU has also

introduced measures to harmonise company law across Europe.
This has helped to ensure:
1. Easier access to funding
2. Clearer and more effective legislation
3. Protection for shareholders, creditors and employees
4. Reduction in the administrative burden on businesses
Monetary policy tool of quantitative easing for
stimulating a recession
What is quantitative easing?

QE is a policy tool central banks use to indirectly encourage

consumer and business spending in an economy. A central bank,
such as the European central bank, creates money to buy
financial assets. The increased demand for those assets . The
theory follows that commercial interest rates are subsequently
pushed downward, which encourages people and businesses to
borrow, and subsequently spend.
The eurozone began its programme of QE in January 2015 and
has so far pumped in $600bn of extra money. Originally the
programme was set to run until September 2016, but it has now
been extended until at least March 2017.

Countries like Greece, Italy and Spain desperately need some

form of monetary easing. Increasing the money supply (through
some form of quantitative easing) should help to alleviate some
of the problems associated with deflation and falling nominal
GDP. (Greece recorded an inflation rate of -0.4% in June 2013)
Amongst other things, they need an increase in the money
supply to try and target higher nominal GDP. At the moment,
several Euro countries are caught in a deflationary trap with
falling GDP and simultaneously seeing an increase in their debt
to GDP burden.
If a country like Greece was not in the Euro, but had their own
currency then the Greek Central Bank could decide to create
money and purchase bonds. They could buy government bonds
or corporate bonds; the important thing is that it would increase
the money supply, reduce bond yields and help to reduce
deflationary pressures and stem the fall in nominal GDP. It
would also cause a large depreciation in the Greek currency,
which is something they needed to restore competitiveness.
Central banks resort to quantitative easing when the normal
monetary policy tool of lowering the short-term interest rate is
constrained. This constraint typically arises from the zero-lower
bound, ie the reluctance to cut nominal rates below zero. This
can result in a real interest rate that, while negative, is still too
high for an economy to quickly find its way back to full
employment and equilibrium. Many indicators such as the low
inflation rate, high unemployment rates, the current account
surplus and high savings compared to weak investment suggest
that the euro area is in such a situation.
 Conclusion

By using the common currency risk of foreign exchange has

avoided within the region and its not only used helpful for
traders but very benificial for general public also cause now they
can easily migrate from one country to another for the sake of
employement and government of different countries can
establish a direct impactful policy within union.

After the unveiling of euro currency few years was very

challenging for some countries and it longs till the post
recession but now economy of europe is flourishing and after
the journey from 2002 now Euro is second largest traded
currency and second biggest reserve in the world .

Currenty countries like Greece, Spain, Portugal, Italy are not

performing well GDP of these countries are very less and some
are in the negative growth rate unemployement level is around
20% and it is very alarming sitiution but now with the help of
quantitative easing Europe central bank trying to pull out these
economies from these situation and make them better.
References

http://www.bbc.com/news/business-15198789

https://en.wikipedia.org/wiki/Causes_of_the_European_debt_cri
sis

http://bruegel.org/2016/06/the-effectiveness-of-the-european-ce
ntral-banks-asset-purchase-programme/

https://www.economicshelp.org/europe/benefits-euro/

https://www.reuters.com/article/us-ecb-policy/exclusive-ecb-wa
ry-of-putting-end-date-on-quantitative-easing-sources-idUSKB
N19Z0UW