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But now, I think that the EU crisis is very difficult to solve because the EU consists of several countries which face their own unique economic problems, and countries cannot come to an agreement over which kinds of polices they should use to counter the crisis. Germany is doing relatively better than most other EU countries, and they prioritise cutting the budget deficit over raising the inflation rates, unlike most other countries.

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Task 4

Quantitative Easing & Fiscal Policy:

Due to low rates of inflation and weak demand, consumers and firms reduce borrowing from banks, causing short-term interest rates to be close to 0 in many economies, therefore banks cannot cut them further to boost spending. Hence, the policy of Quantitative Easing may prove to be rather ineffective in the short term. However, should German Chancellor Angela Merkel allow countries such as France and Italy to reduce their rates of fiscal cuts, consumers' purchasing power would fall to a lesser extent and firms would have greater MEI, encouraging them to increase spending on big ticket items and invest more, resulting in more consumers and firms taking loans from banks, raising the interest rates. In this case, quantitative easing could be implemented to keep the interest rates low, which would further boost C and I. This would raise AD and have expansionary effects on the economy.

Supply-Side Policy:

As mentioned earlier, Europe is heavily dependent on the service sector which makes up 73.9% of its GDP. Therefore, if governments spend on education and training to improve labour quality, services can become more competent and revenue earned from this important sector will rise and consumers spend more on the higher quality services. As well as increasing employment, this also increases AD and raises the inflation rate, tackling the root causes of the EU crisis.
Net exports of goods and services currently only contribute to 3.2% of GDP. If governments invested in R&D, they could improve export competitiveness and raise AD.

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Fiscal Policy:

Germany is strongly insistent that all EU countries reduce budget deficit by implementing contractionary fiscal policy (fiscal austerity) and reduce public spending. However, this reduction in public expenditure and raise in taxes means that consumer spending will fall, leading to falling AD and contractionary effects on the economy.

Therefore, it would be helpful if Germany's chancellor Angela Merkel allows France and Italy to slow the pace of their fiscal cuts. In return, they can accelerate structural reforms to increase LRAS and potential growth.

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But now, I think that Europe has a very high unemployment rate especially for the youths (aged 15-24) as there is about 48% of youths in Greece that are unemployed. Majority parts of Europe is also in a budget deficit except certain parts like Germany.

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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. 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. The euro zone is particularly vulnerable to deflation because of Germany’s insistence on too much fiscal austerity and the European Central Bank's (ECB) 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 (ECB President), has done far less than other big central banks in terms of quantitative easing

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I used to think that Europe had a rather well-to-do economy due to it being a large country with a large population as well as it having a rather high exchange rate relative to singapore dollars. With their high exchange rate relative to sgd, i thought their economy was a rather strong economy.

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Quantitative Easing
To combat problem no.2
An increase in supply of money would cause financial institutes to buy bonds, hence there will be more money supply in the banks, leading to an increase in loanable funds. Hence, there will be a decrease in interest rate. This would lead to a decrease in the cost of borrowing for households, and they will hence buy more big ticket items such as cars and houses, increasing C. A decrease in interest rate would also result in a decrease in MEI, investors will find it more profitable to invest, hence I increases.

Supply-side policy
To combat no. 1
Since there has been rising unemployment, the Government can spend on education and training to improve labour productivity, or in the case of Europe, are experiencing structural reforms hence are facing unemployment that are structural in nature. Hence, education and training would help them gain new skills to move to a new sector for a job. This will increase productive capacity of the economy, increase in AS will lead to potential economic growth. Since many are unemployed, and have been unemployed for quite a while, they may be eager to training and learing new skills. However, there is long gestation period and takes time for training to materialise.

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I used to think that Europe was in heavy debt of money due to the Eurozone crisis which led to high rates of unemployment. On top of that the banks took a portion of the citizen's money, which led to a lot of anger in the people hence they were facing social unrest. It is because of Europe borrowing money from the IMF funded by the EU that caused the economy of Europe to be controlled by them, which led to the debt crisis. I think they are experiencing stagflation.

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But now, I think that Europe has a large and much more closed economy. The contractionary fiscal policy has curbed the consumption expenditure and the investment by firms and this is undesirable for the Europe economy because they are heavily dependent on their domestic market. In addition, the strong Euro worsens their BOT and BOP which further worsens the impacts of recession where there is a fall in output, national income and employment rates. Their unemployment rate is high at 8.9% as of February 2016.

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Introduction to the main economic and financial structures of the euro area economy.

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Europe has a large but much more closed economy. The large economy is due to the large domestic market, even more so with the creation of the European Union. However, it has a much more closed economy because the net export of goods and services only make up 3.2% of the GDP. Europe is less vulnerable to fluctuations in the world economy and is not heavily dependent on trade.   However, Europe is heavily dependent on the service sector which makes up 73.9% of its GDP. (The tertiary or service sector includes a great variety of economic activities, including: trade, hotels and catering, transport, storage, communications, finance, insurance, services for companies, and community, social and personal services.)
https://www.ecb.europa.eu/mopo/eaec/html/index.en.html

Structural Reforms
The implementation of service sector reform jointly with labour market reform allows faster and more balanced economic expansion. When service sector reform is combined with labour market reform the rise in economic activity is significantly accelerated, while downward pressure on inflation remains strong. Labour market reform pushes down wages by increasing labour supply.
https://www.ecb.europa.eu/pub/pdf/other/art01_eb201502.en.pdf

Structural Change
Europe is moving towards a knowledge-based. The lower productivity records that European companies have experienced in comparison with their main competitors, namely US firms. Recent communications on European industrial policy emphasized that it is essential to increase R&D investments and knowledge diffusion to foster productivity in manufacturing industry and associated services and therefore to underpin the recovery of growth and jobs in a “knowledge based” EU economy (European Commission, 2010a and 2010b).
http://publications.jrc.ec.europa.eu/repository/bitstream/JRC87000/jrc87000_wp3_structural%20change%20report.pdf

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But now, I think that to escape from stagnation / inflation, policy makers must come up with an effective idea as it is not an easy issue. My idea has changed about how Europe is undergoing deflation and high unemployment rates amongst youth.

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3. RELATIVELY STRONG EURO
Because the ECB are taking a hawkish view on inflation and being reluctant to take more aggressive monetary action, the Euro is strengthening. The approach of the ECB contrasts with the UK, US and Japan, who have all taken action to increase their money supply – which has the side-effect of reducing their currencies. It means that the Euro has attracted capital flows. This strengthens the Euro and makes Euro exports relatively more expensive. This shows that Europe is losing her export competitiveness that will further cause a fall in net exports (X-M) assuming ceteris paribus. Thus AD can fall further, leading to falling inflation rates i.e deflation and recession.
WHY DEFLATION IS UNDESRIABLE
As prices fall, consumers wait for prices to fall further to buy the good at a cheaper price. However, this will lead to a recession and it is a vicious cycle of reduced spending. AD further contracts due to weak demand and it is very difficult to escape from deflation. All countries avoid deflation and aim for mild inflation ( 1-4%) as it stimulates production when the rise in costs of production lags behind the rise in prices.

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One of the top macroeconomic problems EU is facing is low rate of inflation and the risk of deflation. Sources of this deflation is due to falling Aggregate Demand (AD). Factors that contributed to this falling AD are unemployment, weak demand and relatively strong Euro.
1. UNEMPLOYMENT
Unemployment in Europe has increased significantly since 2008, with the unemployment rate now reaching 12.2%. High rates of unemployment put downward pressure on wages, as the unemployed are more likely to accept lower wages. This lower wage shows that the country is facing deflation as 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.
2.WEAK DEMAND
Firstly, several Eurozone economies are pursuing fiscal austerity ( CONTRACTIONARY FISCAL POLICY) to try and reduce fiscal deficits. These spending cuts and tax increases are causing a significant drop in demand. Because of the relatively tight monetary policy, and strong Euro, demand is not coming from other sectors of the economy. This rise in income tax reduces the purchasing power of households, hence domestic consumption (C) falls. When corporate tax rises, profitability of investment falls i.e MEI falls. Hence firms will not invest, leading to a fall in (I) and (C), thus a multiple decrease in national income and output. This fall in AD can be illustrated by the AD AS model.

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I used to think that Europe is facing a recession due to many economic crisis like the " GREXIT" referendum. The debt to GDP ratio is also considerably high for many EU countries. Also, there is a constant depreciation of the Euro, showing that Europe's export competitiveness is slowly being eroded and the current account of most EU countries are in a deficit.

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I used to think that Europe is facing a recession due to many European Union (EU) countries such as Spain and Greece struggling to pay off their debts. Many of these countries also have unsustainable welfare policies, resulting in government expenditure exceeding tax revenue collected, and the countries are continually living beyond their means.

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I used to think that Europe is in a recession for a decade or more as well as problems with financing a debt. I used to think that their currency has to be strong. I used to think that they had a large labour force and an open economy.

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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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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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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.

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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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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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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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 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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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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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.