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Will the Single Euro Currency Zone Fail?
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| occrider |
What do all of you think? Some people are criticizing the UK for not joining the Euro but I think it's a smart decision. Perhaps if the the economies of the EU were much more integrated I would be an advocate, but as of right now, taking one set of monetary policies and applying them across 6 or 7 very different economies seems disastrous and inefficient. Just look at what it's doing to Germany ...
http://www.economist.com/finance/di...tory_id=1842183
Germany has already exceeded the limits of deficit spending set by the ECB ... I think it's only a matter of time before it deviates more and more from ECB policies. |
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| Revolution |
| quote: | Originally posted by occrider
What do all of you think? Some people are criticizing the UK for not joining the Euro but I think it's a smart decision. Perhaps if the the economies of the EU were much more integrated I would be an advocate, but as of right now, taking one set of monetary policies and applying them across 6 or 7 very different economies seems disastrous and inefficient. Just look at what it's doing to Germany ...
http://www.economist.com/finance/di...tory_id=1842183
Germany has already exceeded the limits of deficit spending set by the ECB ... I think it's only a matter of time before it deviates more and more from ECB policies. |
I think it's wrong to say that the Euro Zone will fail. I think that hitherto it has been doing very well. One must factor in the fact that almos the entire continent had to change their currency, meaning their fiscal policies/practices would have to somewhat change to adapt to the new environment.
Correct me if I'm wrong, but isn't the Euro as strong, or stronger than the Dollar in the Global Market?
I believe that with time, as the Euro matures, it will prove to be a very effective move on the part of the EU. I also think that eventually, the UK will be pressured to give up the Pound. |
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| occrider |
| quote: | Originally posted by Revolution
I think it's wrong to say that the Euro Zone will fail. I think that hitherto it has been doing very well. One must factor in the fact that almos the entire continent had to change their currency, meaning their fiscal policies/practices would have to somewhat change to adapt to the new environment.
Correct me if I'm wrong, but isn't the Euro as strong, or stronger than the Dollar in the Global Market?
I believe that with time, as the Euro matures, it will prove to be a very effective move on the part of the EU. I also think that eventually, the UK will be pressured to give up the Pound. |
Hehe that's the problem for Germany! Yes the Euro is strong but that doesn't necessarily reflect on the condition of the economy. The strong Euro has actually hurt the German economy and only just recentely has the ECB cut interest rates to increase investment and reduce the value of the Euro. The problem is that many economists see this cut as being too little too late to save the German economy from recession. Furthermore, different countries are experiencing different economic woes. Whereas deflation seems to be creeping up on Germany, inflation seems to be plaguing Ireland. What is the ECB to do then? A solution to one would hurt the other. There is no cookie cutter monetary policy that benefits every country. Monetary policy must be made to combat specific problems. That is the problem I see with the Eurozone. The economies of each country are simply not integrated enough for monetary policies to be fully effective. |
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| marcus82 |
i can not speculate the outcome of euro currency zone...but i can say that strong currency values can be detrimental to exporting economics (just like occrider said). case and point, strong gains in the canadian dollar have caused our export surplus to the US to shrink and cause a recession in canada...which evidently happened to the germans as well.
monetary polices suck ass! |
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| Renegade |
I think the problems facing the implementation of a common currency between economically disparate nations were known before the Euro was introduced. The stronger economies were always going to be "tugged back" slightly, and the smaller economies were always likely to benefit from the introduction of a strong, stable currency. I'm not sure anyone would have been suprised 5 years ago if you'd told them that the implementation of the Euro would slow German economic growth (they're the biggest economy in Europe aren't they?) while Europe on the whole experienced increasing demand (which, I presume, translates into real economic growth).
Nonetheless, I'm a bit skeptical about whether Germany's problems can actually be attributed solely to the introduction of the Euro. For instance, take this passage from the article you gave:
| quote: | | For all the recent talk of reform, the labour market remains sclerotic. Levies on wages to finance social security, health care and pensions are painfully high. There are strict laws controlling the firing of workers, and wages are rigid. |
It's interesting to note that Japan suffers from exactly the same problem. It's been stuck in recession for the past several years and has also suffered from deflation (or devaluation as Dubya put it :D). It's reluctance to introduce sweeping supply-side reform reduces its effeciency and thus its global competitiveness and comparitive advantage in its areas of production. Is it any coincidence that Germany suffers from the same supply-side problems and is currently undergoing similar economic strain?
The reason western economies around the world were able to boom throughout the 90s without the usual inflationary pressures (even if currency devaluation - particularly in Australia :( - couldn't be a avoided) had to do with a new approach to supply-side management. Throughout the 80s, despite high growth, high interest rates and inflation were massive problems. Throughout this period, in defiance of much of the rest of the world, Germany and Japan were able to acheive massive budget surplusses. When recessions began to hit many economies in the early 90's though, and the glut of economic growth was halted, many nations began to rethink their approach to supply side economics. In Australia at least (and thus, I can only presume, in many other western economies) government services were privitized, wage structures were radically decentralized and general supply-side effeciency became as important a consideration - for the first time ever - as the focus on demand-side factors. Through this "revolution" of sorts, economic growth without negative consequence became possible for many nations. Germany and Japan, however, seemed to miss this boat.
Have a read of these reports and see how growth in Germany (and France - another moderately "socialistic" economy) increased strongly up until the early 1990s, but then dropped off after that (when other nations started promoting greater supply-side efficiency):
http://www.mckinsey.com/knowledge/mgi/europe/index.asp
| quote: | For nearly 50 years, France and Germany steadily narrowed the labor productivity gap with the United States. In the early '90s, both countries were in a position to equal or even better U.S. productivity levels. Then, the trend reversed itself.
[...]
The McKinsey Global Institute analyzed drivers of, and barriers to, productivity growth in France and Germany. [...] [T]he MGI report shows innovation is the key to higher productivity growth. The adoption and effective use of innovation, however, is often constrained by an inappropriate regulatory environment. |
Now perhaps without the introduction of the Euro, Germany may be able to hold off this recession by implementing demand-side stimuli such as the reduction of interest rates (which obviously they have no control of under the Euro) but still, from what I understand, their problems are primarily supply-side. Thus I'm not suggesting that the implementation of the Euro has nothing to do with Germany's current woes, but - drawing upon my wealth of experience in economics :rolleyes: - I think that attributing all of Germany's problems to the Euro is a slightly simplistic synopsis.
So, er, there you go. |
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| rupert |
The current appreciation of the Euro is in large part because of the overvaluation of the US dollar against all the major currencies. In time all things revert to the mean, which means that the US dollar is reverting to fair value. The US dollar will probably claw back its recent depreciation against the major currencies and then continue its down trend.
As to whether the Euro lasts, I just dont know. That depends as much on politics as economic factors. Its hard to really put money on it either way. Deflation in Germany many have potential adverse affects on the value of the currency, if German deflation also affects other EuroZone countries. |
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| occrider |
| quote: | Originally posted by Renegade
I think the problems facing the implementation of a common currency between economically disparate nations were known before the Euro was introduced. The stronger economies were always going to be "tugged back" slightly, and the smaller economies were always likely to benefit from the introduction of a strong, stable currency. I'm not sure anyone would have been suprised 5 years ago if you'd told them that the implementation of the Euro would slow German economic growth (they're the biggest economy in Europe aren't they?) while Europe on the whole experienced increasing demand (which, I presume, translates into real economic growth).
Nonetheless, I'm a bit skeptical about whether Germany's problems can actually be attributed solely to the introduction of the Euro. For instance, take this passage from the article you gave:
It's interesting to note that Japan suffers from exactly the same problem. It's been stuck in recession for the past several years and has also suffered from deflation (or devaluation as Dubya put it :D). It's reluctance to introduce sweeping supply-side reform reduces its effeciency and thus its global competitiveness and comparitive advantage in its areas of production. Is it any coincidence that Germany suffers from the same supply-side problems and is currently undergoing similar economic strain?
The reason western economies around the world were able to boom throughout the 90s without the usual inflationary pressures (even if currency devaluation - particularly in Australia :( - couldn't be a avoided) had to do with a new approach to supply-side management. Throughout the 80s, despite high growth, high interest rates and inflation were massive problems. Throughout this period, in defiance of much of the rest of the world, Germany and Japan were able to acheive massive budget surplusses. When recessions began to hit many economies in the early 90's though, and the glut of economic growth was halted, many nations began to rethink their approach to supply side economics. In Australia at least (and thus, I can only presume, in many other western economies) government services were privitized, wage structures were radically decentralized and general supply-side effeciency became as important a consideration - for the first time ever - as the focus on demand-side factors. Through this "revolution" of sorts, economic growth without negative consequence became possible for many nations. Germany and Japan, however, seemed to miss this boat.
Have a read of these reports and see how growth in Germany (and France - another moderately "socialistic" economy) increased strongly up until the early 1990s, but then dropped off after that (when other nations started promoting greater supply-side efficiency):
http://www.mckinsey.com/knowledge/mgi/europe/index.asp
Now perhaps without the introduction of the Euro, Germany may be able to hold off this recession by implementing demand-side stimuli such as the reduction of interest rates (which obviously they have no control of under the Euro) but still, from what I understand, their problems are primarily supply-side. Thus I'm not suggesting that the implementation of the Euro has nothing to do with Germany's current woes, but - drawing upon my wealth of experience in economics :rolleyes: - I think that attributing all of Germany's problems to the Euro is a slightly simplistic synopsis.
So, er, there you go. |
Well actually I wasn't attributing any blame of Germany's economic woes upon the adoption of the Euro. The high value of the Euro is not enough to account for the recessionary trend that Germany is experiencing. What I was getting at, is that in order to stimulate economic recovery, or even as a method of combatting inflation or deflation, monetary policy has been advocated as being moderately successful given enough time and early action. So with an institution set up such as the ECB, which sets a single monetary policy across 10 different countries rather than a single country, can it be effective in reducing the risk of inflation, deflation, recession, etc.? What if Germany or France experiences a serious bout of inflation or deflation? The ECB also has limits on a country's fiscal policies such as caps on deficit spending. So my question is whether this one size fits all approach can succeed given the fact that the Euro Zone economy is perhaps not as integrated enough such that the ECB is an effective institution. I suppose time will tell. |
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| mr_stamper |
| quote: | Originally posted by Renegade
I think the problems facing the implementation of a common currency between economically disparate nations were known before the Euro was introduced. The stronger economies were always going to be "tugged back" slightly, and the smaller economies were always likely to benefit from the introduction of a strong, stable currency. I'm not sure anyone would have been suprised 5 years ago if you'd told them that the implementation of the Euro would slow German economic growth (they're the biggest economy in Europe aren't they?) while Europe on the whole experienced increasing demand (which, I presume, translates into real economic growth).
Nonetheless, I'm a bit skeptical about whether Germany's problems can actually be attributed solely to the introduction of the Euro. For instance, take this passage from the article you gave:
It's interesting to note that Japan suffers from exactly the same problem. It's been stuck in recession for the past several years and has also suffered from deflation (or devaluation as Dubya put it :D). It's reluctance to introduce sweeping supply-side reform reduces its effeciency and thus its global competitiveness and comparitive advantage in its areas of production. Is it any coincidence that Germany suffers from the same supply-side problems and is currently undergoing similar economic strain?
The reason western economies around the world were able to boom throughout the 90s without the usual inflationary pressures (even if currency devaluation - particularly in Australia :( - couldn't be a avoided) had to do with a new approach to supply-side management. Throughout the 80s, despite high growth, high interest rates and inflation were massive problems. Throughout this period, in defiance of much of the rest of the world, Germany and Japan were able to acheive massive budget surplusses. When recessions began to hit many economies in the early 90's though, and the glut of economic growth was halted, many nations began to rethink their approach to supply side economics. In Australia at least (and thus, I can only presume, in many other western economies) government services were privitized, wage structures were radically decentralized and general supply-side effeciency became as important a consideration - for the first time ever - as the focus on demand-side factors. Through this "revolution" of sorts, economic growth without negative consequence became possible for many nations. Germany and Japan, however, seemed to miss this boat.
Have a read of these reports and see how growth in Germany (and France - another moderately "socialistic" economy) increased strongly up until the early 1990s, but then dropped off after that (when other nations started promoting greater supply-side efficiency):
http://www.mckinsey.com/knowledge/mgi/europe/index.asp
Now perhaps without the introduction of the Euro, Germany may be able to hold off this recession by implementing demand-side stimuli such as the reduction of interest rates (which obviously they have no control of under the Euro) but still, from what I understand, their problems are primarily supply-side. Thus I'm not suggesting that the implementation of the Euro has nothing to do with Germany's current woes, but - drawing upon my wealth of experience in economics :rolleyes: - I think that attributing all of Germany's problems to the Euro is a slightly simplistic synopsis.
So, er, there you go. |
I agree. |
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| DrummeRaver86 |
| quote: | Originally posted by Renegade
I think the problems facing the implementation of a common currency between economically disparate nations were known before the Euro was introduced. The stronger economies were always going to be "tugged back" slightly, and the smaller economies were always likely to benefit from the introduction of a strong, stable currency. I'm not sure anyone would have been suprised 5 years ago if you'd told them that the implementation of the Euro would slow German economic growth (they're the biggest economy in Europe aren't they?) while Europe on the whole experienced increasing demand (which, I presume, translates into real economic growth).
Nonetheless, I'm a bit skeptical about whether Germany's problems can actually be attributed solely to the introduction of the Euro. For instance, take this passage from the article you gave:
It's interesting to note that Japan suffers from exactly the same problem. It's been stuck in recession for the past several years and has also suffered from deflation (or devaluation as Dubya put it :D). It's reluctance to introduce sweeping supply-side reform reduces its effeciency and thus its global competitiveness and comparitive advantage in its areas of production. Is it any coincidence that Germany suffers from the same supply-side problems and is currently undergoing similar economic strain?
The reason western economies around the world were able to boom throughout the 90s without the usual inflationary pressures (even if currency devaluation - particularly in Australia :( - couldn't be a avoided) had to do with a new approach to supply-side management. Throughout the 80s, despite high growth, high interest rates and inflation were massive problems. Throughout this period, in defiance of much of the rest of the world, Germany and Japan were able to acheive massive budget surplusses. When recessions began to hit many economies in the early 90's though, and the glut of economic growth was halted, many nations began to rethink their approach to supply side economics. In Australia at least (and thus, I can only presume, in many other western economies) government services were privitized, wage structures were radically decentralized and general supply-side effeciency became as important a consideration - for the first time ever - as the focus on demand-side factors. Through this "revolution" of sorts, economic growth without negative consequence became possible for many nations. Germany and Japan, however, seemed to miss this boat.
Have a read of these reports and see how growth in Germany (and France - another moderately "socialistic" economy) increased strongly up until the early 1990s, but then dropped off after that (when other nations started promoting greater supply-side efficiency):
http://www.mckinsey.com/knowledge/mgi/europe/index.asp
Now perhaps without the introduction of the Euro, Germany may be able to hold off this recession by implementing demand-side stimuli such as the reduction of interest rates (which obviously they have no control of under the Euro) but still, from what I understand, their problems are primarily supply-side. Thus I'm not suggesting that the implementation of the Euro has nothing to do with Germany's current woes, but - drawing upon my wealth of experience in economics :rolleyes: - I think that attributing all of Germany's problems to the Euro is a slightly simplistic synopsis.
So, er, there you go. |
I also agree with you. The EuroZone created the Euro to try and help the unification of Europe. Such a move does not come without considerable loss, yet there is also gain as you mentioned. I thyink that in time, balance will come back, and Germany's economy will be back on it's feet. |
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| occrider |
How Low Will Europe's Rates Go?
The ECB's cuts may not provide the stimulus it wants
It was a dramatic move. As concern mounted across Europe over deflation, recession, and joblessness, the European Central Bank cut interest rates on June 5 a full 50 basis points, from 2.5% to 2.0%. Note for history buffs: The last time rates were at this level in Europe, Otto von Bismarck was Chancellor of Germany, and Italy had just been unified. Just two years ago, rates were 4.75%. So what do Europe's businesses want now? Cheaper money. "We need more cuts to get people investing and spending again," declares Wolfgang Leese, CEO of Salzgitter, Germany's second-largest steelmaker. Even some members of the ECB governing council may want to get radical. At the June 5 meeting, insiders report, two council members raised the possibility of cutting rates by 75 basis points.
Cut rates. Cut them lower. Keep cutting. It's hard to believe this is happening in Europe, where, well into the latest downturn, the ECB under President Wim Duisenberg kept rates relatively high. That was in line with the bank's legal mandate to maintain price stability rather than keep the economy growing. But now Duisenberg, once the biggest monetary hawk on the planet, may not be finished with the scalpel. "If the U.S. has room to maneuver with an even lower interest rate level than we have, then you can imagine we have not exhausted our room to maneuver," he said at the June 5 meeting. Analysts now expect the ECB to slash rates to 1.75% or even 1.50% as soon as its meeting in September. "We're heading into a new environment of unprecedentedly low rates," says Karsten Junius, a central bank watcher at DekaBank in Frankfurt.
But what Duisenberg and the others haven't explored in public is a far scarier question: whether all the rate-cutting will make a difference. Cheap money spurred a boom in the Iron Chancellor's Germany, but it's hard to see that happening now. And the ECB has no tool except rate-cutting as it fights to revive growth. "In the U.S., [Federal Reserve Chairman Alan] Greenspan is talking about using unconventional methods to spur the economy," says Gwyn Hacche, an economist at HSBC (HBC ) Bank in London. "But the ECB's freedom is constrained by the Maastricht Treaty. It has less flexibility."
Given the dire state of the Continent's $8 trillion economy, pressure for further cuts is understandable. After all, euro-zone gross domestic product didn't grow at all in the first quarter of this year, and the German, Italian, and Dutch economies contracted. What's more, things aren't likely to improve anytime soon. According to the Kiel-based Institute for World Economics, the euro zone will be lucky to grow by just 0.6% over the year as a whole. If the second-quarter figures look as bad as economists think they will, the ECB will almost certainly act again. "Central banks in Europe are finally realizing that fighting recession is more important than fighting inflation," says Edgar Peters, chief investment officer of PanAgora Asset Management in Boston.
But the euro-zone economy may be so stalled that further cuts will do little good. There's even talk of a liquidity trap, in which monetary policy is rendered useless because there's more money than consumers and corporations are willing to spend -- the situation that is afflicting Japan. If a liquidity trap is set, it will be in Germany, the region's largest and sickest economy. In theory, lower rates should encourage companies and consumers there to borrow more to invest or spend. But even though the ECB has cut rates seven times since May, 2001 -- when they were at their peak of 4.75% -- German banks have boosted lending by less than 1%. With a recession, and with bankruptcies on the rise, banks are worried about being repaid. "We're caught in a credit crunch," says German Economics Minister Wolfgang Clement.
Worse, even if banks were willing to lend, companies may not be all that keen to borrow. That's because consumers, pinched by rising taxes and social-security contributions, are cutting spending and slowing corporate-revenue growth. At the same time, the euro has gained 24% on the dollar over the past 12 months, sapping the competitiveness of exporters. "In this environment, we would be reluctant to borrow no matter how low rates go," says a board member of one export-oriented company.
In fact, some critics say pushing interest rates down much further could cause as many problems as it solves. Cheaper money lightens the debt load on companies and countries. But lower rates could also persuade investors to stop buying government and other investment-grade bonds, possibly causing mayhem in the markets. Instead, they may seek higher returns in more risky plays such as junk bonds or stocks. That's especially true of institutional investors, who need to make 1% just to cover their costs. Says Len Riddell, an analyst at Irish stockbroker Goodbody: "Definitely at these levels, the squeeze is being felt."
The ECB chief will run other risks if he lets interest rates hit rock bottom. Countries on the periphery of Europe fear low rates will drive up spending, overheat their economies, and create inflation, which is already at 4.7% a year in Ireland and 3.7% in Portugal. Faster-growing nations worry that inflation could dent consumer purchasing power and hurt those who live on interest-driven fixed incomes, such as pensioners. "Because the ECB needs to look at the euro zone as a whole when setting rates, the Continent's biggest economy, Germany, will probably always end up with rates that aren't right for it," says Hacche of HSBC.
So what's a central banker to do? The ECB doesn't have a lot of options. It isn't allowed, for example, to provide funds on an unsecured basis to banks, something the Bank of Japan has tried in order to encourage more private lending -- so far unsuccessfully. And there are severe constraints under the rules of monetary union on how much liquidity national central banks, such as the Bundesbank, can pump into their countries' economies. Nor can the big nations at Europe's core do what the U.S. is doing and give themselves a fiscal boost by pouring money into public spending: They are already near or above the maximum 3% budget deficit allowed under the European Union's Stability & Growth Pact.
There are a few other options. The ECB could intervene in the currency markets to drive down the euro and give Europe Inc. a break on price competition. That seems unlikely. Another, more radical option would be to adopt officially and publicly an inflation target to bolster prices and consumer psychology. The ECB moved in that direction in May, when it declared that its definition of price stability was inflation below but close to 2%.
Few observers expect the ECB to resort to drastic tactics -- at least not yet. That's why Duisenberg keeps beating the drum about the need for governments to reform their economies themselves. "Structural reform would foster consumer and investor confidence and facilitate spending," he says. But that has been true for a decade or more in Europe. Today, that drumbeat is sounding a bit hollow.
By David Fairlamb in New York
http://www.businessweek.com/magazin...38060_mz014.htm |
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| DrummeRaver86 |
| I'm gonna take my sweet time reading this later and answer back.....:) |
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