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But now, I think Europe is not as rich as I think in general as countries like Greece and Spain are in recession as they experience high unemployment rate and low and unsustainable GDP growth rate.

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But now, I understand that even though Europe has a large economy, European countries still face their own problems in maintaining their economy due to the large multiplier size it has. This is because once there is a drop in consumption, people will have less purchasing power and will spend less, causing the income of another individual to drop. This makes it extremely hard for the countries to ensure that there is a comfortable general price level as there will be large shifts in AD and when AD increases too much, there will be inflation whereas if AD decreases too much, there will be cyclical unemployment and the country will spend more on unemployment benefits, leading to the country not being able to invest in things such as infrastructure which will benefit it in the future

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Whether the use of policies chosen in Task 3 (Monetary Policy) will be effective in addressing the macroeconomic problems stated in Task 1 (Cyclical unemployment) depends on the nature of the economy and the time period.

As mentioned in Task 2, Europe's economy is one of the world's largest economies as it is made up of many of the world's richest countries. This means that it will have a large multiplier effect and the implementation of the monetary policy will cause a multiple rise in national income. Furthermore, the answer in Task 2 also states that Europe's economy is highly dependent on exports. This makes the Monetary Policy even more effective as the devaluation of exchange rates will increase the export competitiveness of goods and services provided by Europe, further increasing aggregate demand in the European economy

In the short-run, Europe's economy is still recovering from the global recession and cyclical unemployment. The use of demand management policies will only stimulate economic growth in the short run by increasing consumption. But, in the long run, consumption-led growth alone will not increase productive capacity and the lack of potential growth could result in higher inflation instead. It thus needs to be supplemented by supply side policies to ensure the long term sustainability and competitiveness of the economy.

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But now, I think that Europe has the potential to become a very strong economic force in the world today with Germany being one of the worlds biggest earners. As long as the European Union have stricter rules and work together, countries can come back from deficits

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After reading through some European countries' macroeconomic problems, i realise that they have huge income disparity. The rich nations are SUPER rich, while the less-richer countries are facing severe unemployment issues that are very difficult to be resolved. I think that if the European Unions work together to help resolve this economic issues, it can certainly ease unemployment rates and recession. Some of European countries have had great economic improvement (for eg. Spain has seen the biggest turnaround – with growth picking up to 3.4pc and unemployment falling by 500,000 over the past year. There has been a more modest improvement in Portugal. Italy has also seen a big fall in unemployment, and business surveys there are becoming more positive.) Hence, this shows that if the richer and improved countries work together to help solve Europe's economic problems, it can definitely solve it's macroeconomic problems to a large extent and dominate the global market.

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Macro probs

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Large countries in Europe like Spain will typically have a large multiplier effect. Demand-managedment policies work through the multiplier effect to bring about a multiple increase in national income. For countries with a large multiplier size, just like Spain, demand-management policies can help to solve recession to a large extent.

The root causes of the recession must also be considered. For example, if the underlying problem is due to a loss of export competitiveness, then supply-side policies to improve productivity and lower unit cost is needed to address the underlying problem. But, demand-management policies may still be adopted to try to address the recession problem in the short-term as a temporary measure since supply-side policies need a longer time to take effect.

In the short run, for economies that are still recovering from the global recession and unemployment, it may not be wrong to be using demand management policies to stimulate economic growth for example by increasing internal demand such as consumption to tackle the immediate problem. In the long run, consumption-led growth alone will not increase productive capacity and the lack of potential growth could result in higher inflation instead. It thus needs to be supplemented by supply-side policies to ensure the long term sustainability and competitiveness of the economy.
Also, for the government to decide on the best policy to use, it depends on whether the benefits outweighs the costs;

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Another top macro economic problem Europe is facing is its  very low and unsustainable GDP growth rate.

Real GDP measures the inflation adjusted value of final goods and services produced within the geographical boundaries of the country in a year. From the statistics above, 2013, GDP 0.4% ,Jan 2016 GDP 0.3% .This indicates low rate of economic growth. This implies the lesser G&S are produced in Europe. AD& AS are decreasing. If this is sustained, Economy outlook will be very bleak. AS no sustained EG is acheived, there will be no actual and potential growth. Actual growth refers to the increase in national output actually produced for a given period of time. Potential Growth refers to the increase in the productive capacity of an economy for a given period of time. There will be a decrease per capita in income. Lower income means that there is lower std of living. As consumer's disposable income decreases, there are not able to buy more goods and services. Reduces business confidence, as the expected rate of returns projected by firms are bleak. Decreases investments, both AD&AS would fall. Actual and potiential growth is not achieved.

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I used to think that Europe has a very stable economy due to it being a very large economy

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I realised that Europe is not that affluent and has many hidden problems like unemployment and inflation which could slow their economy down.

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I used to think that Europe has many  affluent countries due to where they are located and have very high GDP per year

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One of the top macroeconomic problems Europe is facing is cyclical unemployment. In many European countries, unemployment rate has risen sharply due to the credit crunch and global recession. The worst hit countries include Spain (ES) and Greece (EL), who both have unemployment rates of over 24%. Moreover, youth unemployment rates in the EU 27 is 21.8% (July 2014).
Unemployment happens when people who are willing and able to work do not have any jobs. Cyclical unemployment is demand-deficient unemployment as workers get retrenched due to economic decline. High and continuous unemployment rate will cause real national income of countries to fall and government will also receive lesser tax revenues. This will lead to the material standard of living of people to fall due to lesser purchasing power. Low purchasing power will decrease consumption, and aggregate demand (AD) of the country will fall.

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Expansionary fiscal policy involves the government manipulating the level of expenditure & taxation so as to influence the level of AD. This in turn affects the pattern of employment.  Expansionary fiscal policy causes a fall in taxes - corporate and income. A fall in corporate tax would mean that investment become more profitable for firms and therefore leading to a rise in investment expenditure (I).  A fall in personal income tax allows for higher disposable income and therefore leading to a rise in consumption expenditure (C). Expansionary fiscal policy also allows government to increase its expenditure (G), causing AD to rise, assuming economy is operating at Keynesian Range. This will signal the firms to employ more workers so as to step up production. The multiplier effect is triggered off leading to a multiple increase in production, output and national income. A rise in national output would also raise demand for factors of production, thus reducing cyclical unemployment. However, fiscal policies may not be viable for countries having budget deficit, and if they have implementing austerity drives to cut down public debt.

Expansionary monetary policy refers to the deliberate action by the central bank to influence the availability and cost of money and credit so as to influence the level of AD. A fall in interest rate would mean that the cost of borrowing is now cheaper for firms, thus increasing the number of profitable investment projects, raising investment (I).  A fall in interest rate given by the banks could lead to a fall in savings and a rise in consumption expenditure (C). Rise in investment and consumption would lead to a rise in AD and national income via the multiplier effect. A rise in national output would again raise demand for factors of production, thus reducing cyclic unemployment. However, expansionary monetary policy may not be effective when C & I are interest-inelastic due to pessimistic outlook or foreign investors have their own source of funding. The policy could also be ineffective as it it limited to how much central bank can reduce interest rate.

Supply-side policies are policies aim to improve the supply-side potential of an economy, make markets and industries operate more efficiently and thereby contribute to a faster rate growth of real national output. Market-oriented supply-side policies can resolve classical unemployment. More flexible and less segmented labour market would encourage firms to hire more workers, and to give them more opportunities. Hence, there is a need for liberalisation of labour rules for permanent workers. Government should remove the high taxes on hiring which makes it easier for the firms to hire youths in Greece to join the firm. Rules about firing and high minimum wages should also not be abolished, thus giving employers the chance to keep only the most efficient workers ensuring high efficiency and productivity. However, the existence of strong trade unions might hamper the effectiveness of this policy because the workers wills strongly oppose against the idea of abolishing minimum wage to prevent their wages from falling. Hence, the will appeal to trade unions for help. If the power of trade unions is huge, then the reforming of labour markets may not be successful.

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Europe's economy is made up of many countries called the European Union (EU). It has one of the world's largest economies and is highly dependent on export trading. This is seen from Luxemborg and Ireland which are part of the world's top 10 countries leading in exports as a % of Gross Domestic Product (GDP).
Structural reforms have been implemented to make labour markets more adaptable and responsive . Efforts have been made by the EU liberalise service sectors, boost competition in product and service markets or improve the overall business environment and encourage innovation.
There are policies in place such as the Excessive Deficit Procedure whereby member states which run excessive budget deficits of more than 3% of GDP, or which fail to reduce their excessive debts (above 60% of GDP) at a sufficient pace, follow a particular set of rules known as the Excessive Deficit Procedure (EDP). Under the EDP, Member States commit to targets to bring their excessive deficits or debts back to safe levels. They also face the possibility of warnings and ultimately sanctions, such as fines that can reach 0.2% of their GDP, if they persistently fail to take adequate action to address their deficits or debts. Regional subsidies from the EU’s ‘cohesion fund’ may also be withheld.
There is also the Excessive Imbalance Procedure. Member States with excessive imbalances have to submit corrective action plans with a clear roadmap and deadlines. Euro area Member States can also be fined 0.1% of GDP for failing to address serious macroeconomic imbalances, such as extreme, persistent trade deficits or surpluses, if these are determined to be harmful and a threat to other Member States. The decision to fine a Member State is proposed by the Commission and can only be blocked if a large majority of governments oppose the measure.

http://ec.europa.eu/economy_finance/structural_reforms/index_en.htm
https://www.weforum.org/agenda/2015/07/which-economies-export-the-most/
http://ec.europa.eu/economy_finance/economic_governance/index_en.htm

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I used to think that Europe has countries with enormously high GDP (for eg. Norway, Monaco and Luxembourg which are considered to be one of the world's richest countries.

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I used to think that Europe had one of the most stable economies in the world.

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I used to think that Europe is a large economy with many rich countries in terms of their GDP.

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I used to think Europe had a very strong economy.

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Now, I want you to think about how your ideas about Europe's economy has changed as a result of what your team has been discussing whilst completing the task above. Again in just a few sentences write down what you now think about  Europe's economy. Start your sentences with,

“But now, I think…”

Each of you must post your response in the space below this box.

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Task 3: Based on the findings from Task 1, One of your team members will need to address the policies to solve this problem.

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Task 3: Based on the findings from Task 1, One of your team members will need to address the policies to solve this problem.

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Explain and evaluate the use of 3 policies

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Task 2: One of your team member will also need to find out the current nature or structure of your economy, supported with research (eg news paper articles or video)

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Task 2: One of your team member will also need to find out the current nature or structure of your economy, supported with research (eg news paper articles or video)

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For example, is it a small and open economy? Is it a large economy? Is the economy an export-driven economy? Is it undergoing any structural changes? Please upload the links here too.

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 Task 1: Two of your team members in your cabinet need to identify the top macroeconomic problems your country is facing. Other than the video clip and newspaper provided in this page, you will need to do research (eg news  paper articles) and thereafter post in this wall.  Explain the potential sources of these macroeconomic problems your country is facing.

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 Task 1: Two of your team members in your cabinet need to identify the top macroeconomic problems your country is facing. Other than the video clip and newspaper provided in this page, you will need to do research (eg news  paper articles) and thereafter post in this wall.  Explain the potential sources of these macroeconomic problems your country is facing.

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Please write your response here, or you may just add new post. Use economic analysis (for example ADAS analysis) in your answers where possible.

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THE world economy is not in good shape. The news from America and Britain has been reasonably positive, but Japan's economy is struggling and China's growth is now slower than at any time since 2009. Unpredictable dangers abound, particularly from the Ebola epidemic, which has killed thousands in West Africa and jangled nerves far beyond. But the biggest economic threat, by far, comes from continental Europe.

Now that German growth has stumbled, the euro area is on the verge of tipping into its third recession in six years. Its leaders have squandered two years of respite, granted by the pledge of Mario Draghi, the European Central Bank's president, to do "whatever it takes" to save the single currency. The French and the Italians have dodged structural reforms, while the Germans have insisted on too much austerity. Prices are falling in eight European countries. The zone's overall inflation rate has slipped to 0.3% and may well go into outright decline next year. A region that makes up almost a fifth of world output is marching towards stagnation and deflation.

Optimists, both inside and outside Europe, often cite the example of Japan. It fell into deflation in the late-1990s, with unpleasant but not apocalyptic consequences for both itself and the world economy. But the euro zone poses far greater risks. Unlike Japan, the euro zone is not an isolated case: from China to America inflation is worryingly low, and slipping. And, unlike Japan, which has a homogenous, stoic society, the euro area cannot hang together through years of economic sclerosis and falling prices. As debt burdens soar from Italy to Greece, investors will take fright, populist politicians will gain ground, and-sooner rather than later-the euro will collapse.

This parrot has ceased to be

Although many Europeans, especially the Germans, have been brought up to fear inflation, deflation can be still more savage (see article). If people and firms expect prices to fall, they stop spending, and as demand sinks, loan defaults rise. That was what happened in the Great Depression, with especially dire consequences in Germany in the early 1930s.

So it is worrying that, of the 46 countries whose central banks target inflation, 30 are below their target. Some price falls are welcome. Tumbling oil prices, in particular, have given consumers' incomes a boost (see article). But slowing prices and stagnant wages owe more to weak demand in the economy and roughly 45m workers are jobless in the rich OECD countries. Investors are starting to expect lower inflation even in economies, such as America's, that are growing at reasonable rates. Worse, short-term interest rates are close to zero in many economies, so central banks cannot cut them to boost spending. The only ammunition comes from quantitative easing and other forms of printing money.

The global lowflation threat is a good reason for most central banks to keep monetary policy loose. It is also, in the longer term, a prompt to look at revising inflation targets a shade upwards. But the immediate problem is the euro area.

Continental Europe's economy has plenty of big underlying weaknesses, from poor demography to heavy debt and sclerotic labour markets. But it has also made enormous policy mistakes. France, Italy and Germany have all eschewed growth-enhancing structural reforms. The euro zone is particularly vulnerable to deflation because of Germany's insistence on too much fiscal austerity and the ECB's timidity. Even now, with economies contracting, Germany is still obsessed with deficit reduction for all governments, while its opposition to monetary easing has meant that the ECB, to the obvious despair of Mr Draghi, has done far less than other big central banks in terms of quantitative easing (notwithstanding this week's move to start buying "covered bonds").

If there was ever logic to this incrementalism, it has run out. As budgets shrink and the ECB struggles to convince people that it can stop prices slipping, a descent into deflation seems all too probable. Signs of stress are beginning to appear in both the markets and politics. Bond yields in Greece have risen sharply, as support for the left-wing Syriza party has surged (see article). France and Germany are trading rhetorical blows over a new budget proposal coming out of Paris.

Joining the bleedin' choir invisible

If Europe is to stop its economy getting worse, it will have to stop its self-destructive behaviour. The ECB needs to start buying sovereign bonds. Germany's chancellor, Angela Merkel, should allow France and Italy to slow the pace of their fiscal cuts; in return, those countries should accelerate structural reforms. Germany, which can borrow money at negative real interest rates, could spend more building infrastructure at home.

That would help, but not be enough. It is a bit like the early years of the euro debacle, before Mr Draghi's whatever-it-takes pledge, when half-solutions only fed the crisis. Something radical is needed. The hitch is that European law bans many textbook solutions, such as ECB purchases of newly issued government bonds. The best legal option is to couple a dramatic increase in infrastructure spending with bond-buying by the ECB. Thus the European Investment Bank could launch a big (say €300 billion, or $383 billion) expansion in investments such as faster cross-border rail links or more integrated electricity grids-and raise the money by issuing bonds, which the ECB could buy in the secondary market. Another possibility would be to redefine the EU's deficit rules to exclude investment spending, which would allow governments to run bigger deficits, again with the ECB providing a backstop.

Behind all this sits a problem of political will (see article). Mrs Merkel and the Germans seem prepared to take action only when the single currency is on the verge of catastrophe. Throughout Europe people are hurting-in Italy and Spain youth unemployment is above 40%. Voters vented their fury with the established order in the EU's parliamentary elections earlier this summer, and got very little change. Another descent into the abyss will test their patience. And once deflation has an economy in its jaws, it is very hard to shake off. Europe's leaders are running out of time.

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THE world economy is not in good shape. The news from America and Britain has been reasonably positive, but Japan's economy is struggling and China's growth is now slower than at any time since 2009. Unpredictable dangers abound, particularly from the Ebola epidemic, which has killed thousands in West Africa and jangled nerves far beyond.

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Video Clip on Eurozone economy: Italy

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How did Italy become more sceptical about membership in the EU? FT Rome bureau chief James Politi visits Parma in northern Italy and asks students, shop owners, the mayor and business people about the matter.

Transcript

See our accessibility page for more information about transcripts

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How did Italy become more sceptical about membership in the EU? FT Rome bureau chief James Politi visits Parma in northern Italy and asks students, shop owners, the mayor and business people about the matter. See our accessibility page for more information about transcripts

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Videoclip on the Eurozone Economy

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The European Central Bank has jolted investors with a bold package designed to stimulate the eurozone's economy, cutting interest rates to a new low and expanding QE. FT economics editor Chris Giles talks to FT editor Lionel Barber about whether it will be enough.

Transcript

See our accessibility page for more information about transcripts

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The European Central Bank has jolted investors with a bold package designed to stimulate the eurozone's economy, cutting interest rates to a new low and expanding QE. FT economics editor Chris Giles talks to FT editor Lionel Barber about whether it will be enough.

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Task 4: Based on the findings from Task 1,2 & 3, the group leader will evaluate and synthesize (similar to writing evaluative conclusion) whether the use of these policies will be effective in addressing these macroeconomic problems. 

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Task 4: Based on the findings from Task 1,2 & 3, the group leader will evaluate and synthesize (similar to writing evaluative conclusion) whether the use of these policies will be effective in addressing these macroeconomic problems. 

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You may wish to use specific judging criteria to assess the suitability of these policies.

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As an economic advisor (group leader), your role is to recommend and justify whether the use of policies have been effective in tackling recent macroeconomic problems faced by your country. Your job is to discuss with a panel of ministers (your team members) to do research and to propose solutions (policies) to solve these problems. Thereafter, you need to evaluate if the use of these policies  are effective or appropriate for your country.

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Before commencing the activities (Task 1 to 4 below) spend 3 minutes to think of this question:

You may have some initial ideas about Eurozone economy. In just a few sentences, I want you to write what it is that you used to think about Eurozone economy. Take a minute to think back and then post your response in the following format:

“ I used to think that Europe is ..........................

Each of you must post your response in the space below this box.