As many of you already know, most of Europe is under one currency. The Euro is the currency that the nations in the Eurozone use in their economies. It is guided by the monetary policy decisions of European Central Bank (ECB), meaning that the nations in the Eurozone (ex. Italy, Germany, France, etc.) have given up their nation’s ability to use monetary policy as a tool to guide their own national economies. Certainly, these countries have representatives on the board of the ECB however, its decisions are made based on what is best for all member countries. Having a single currency has its benefits but as you can already see, it has it consequences as well. We will investigate the decision to have a single currency further as we move on.
The Eurozone is a trade bloc that is known as a economic and monetary union. Other countries in Europe that do not have the Euro as a currency are part of other levels of economic integration in Europe. For example there is the European Union (EU) which is a common market. All member countries of the Eurozone are part of the EU along with countries like the United Kingdom, who do not use the Euro but have free trade with all the member nations, along with common barriers to trade. The European Union also allows for workers, and other factors of production to move freely from one member nation to another.
Why did the U.K., along with other nations such as Denmark and Sweden, opt out of the Eurozone? The U.K. opted out of the Eurozone, as they did not want to give up the British Pound and the ability to use monetary policy to guide their economy. We will look at the importance of such a macro tool move forward.
Recently, several countries in Europe, including Greece, Portugal, Spain, Italy and Ireland, have found themselves amidsteconomic downturns in their economies. However, at the same time we have had countries like the Germany doing quite well for themselves. Take a look at the map of Europe and their level of youth unemployment to get a sense of the situation.
Step 1- Consider what type of policies you might use to deal with such unemployment if you you were the leader of a country like Greece or Spain. Let me also say that these countries also have a significant amount of debt and so increasing government spending is really out of the question as banks are unwilling to assist. What are your options? What would you do? In small groups come up with some advise for these nations. Use a AD/ AS Diagram to support you answer.
Step 2- Use the following sources to find out what the ECB did to support these countries. Draw anExchange Rate Diagram to demonstrate how ECB policy will affect the exchange rate. Explain why this would occur. Then draw a AD/AS diagram for countries in the Eurozone. Explain how this would impact their economies.
Source 1, Source 2
Source 3 (below)
Step 3- Consider how this this policy move might impact Germany? How will this affect their economy? Reference the information on youth unemployment above to support your answer. Use an AD/ AS Diagram to help explain your answer.
Step 4- Lastly, it seems that a monetary union such as the Eurozone creates a number of different policy making issues for some countries, as one policy may benefit some while hurting others. These type of issues could lead to the break up of the Eurozone, which would be a catastrophe for Europe. Listen to the Planet Money Podcast on how the Eurozone could make a few changes to alleviate the problems a single currency creates. What suggestions do they have? How will it help Europe? Do you see it as a viable solution? Explain.
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