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There is a definite need for Europe to implement policies to tackle macro economic problems such as a weakening exchange rate, high unemployment and weak growth.

Engaging in quantitative easing (QE) should be a very last resort, since while it increase the availability of loanable funds in the economy, the increased supply of Euro will further drive its depreciation. The existing poor economic outlook would also mean that financial speculators are likely to use these funds and invest in other countries or regions that are more economically attractive. QE would therefore be harmful if used recklessly and for too long, hence it is only effective if used as an absolute last resort and for a short period of time.

Hence, implementing a combination of short run expansionary fiscal policy and long run supply side policies would theoretically yield a more favourable outcome, albeit with the downside of eating into a countries reserves.

However, with Europe's financial climate as it is, while this may be the best option for the region, it may not be a feasible one for some countries. Countries that are stricken with debt like Greece may not be capable of carrying out such a proposal, either due their lack of finances or because they are bound by contract from their creditors. Even countries that are doing well, such as Germany, may find themselves unable to carry out such policies to their full potential since the country's funds may be diverted elsewhere (eg. paying bail or to tackle the effects of ISIS terror attacks).

Thus, while it is important that Europe carries out policies to improve its current economic climate, such actions will not be easy and will be time consuming ergo limiting their overall effectiveness.

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The ECB estimates that a 10 percent depreciation in the value of the euro gives annual gross domestic product (GDP) in the euro zone a roughly 0.4 percent boost and raises inflation by 0.6 percent. This suggests that there is n economic growth. That's good news for a region that has suffered lackluster growth for years and been at risk of deflation in recent months. UBS last week lifted its 2015 euro zone GDP growth forecasts to 1.6 percent from 1.2 percent.Meanwhile, data on Tuesday showed consumer prices in the euro area rose 0.6 percent on the month and fell 0.3 percent on the year in February—a decline less sharp than the 0.6 percent year-on-year fall seen in January.
Still, economists say there are some important caveats to consider when assessing the soft euro's impact.
Jonathan Loynes, chief European economist at Capital Economics, added that just because the euro was falling did not mean exports from the euro zone would rise. He points out that a fall in the euro in 2009 and 2012 did not prevent exports from slowing or falling, because demand globally was generally weak.

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Reasons for high unemployment in Eurozone

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Reasons for high unemployment in Eurozone

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Unemployment in the eurozone remained high in August, highlighting the fragile nature of the economic recovery that the 17-country bloc has enjoyed over the past few months.

Joblessness stayed at 12 per cent in August, but rose from a year earlier when the rate was 11.5 per cent, according to Eurostat, the EU's statistical office.

Improving manufacturing activity since June has helped to leave the overall number of people out of work unchanged at 19.2m in August compared with July.

But compared with a year earlier, the data showed an additional 882,000 people were jobless, highlighting the human cost that the sovereign debt crisis continues to have across the bloc.

"The August 2013 unemployment figures remind us that a robust economic recovery is not yet a reality," said László Andor, European commissioner for employment.

"Employment data available so far show that job creation is not yet picking up. The nascent economic recovery is very fragile and certainly not job-rich yet."

The European Commission, the EU's executive arm, will on Wednesday present a series of measures aimed at providing greater assistance to EU member states struggling to boost employment levels, Mr Andor said.

A growing number of policy makers fear that unless concrete action is taken to stimulate job creation, the eurozone will experience a "jobless recovery" - economic growth with high unemployment.

Separately, a survey released on Tuesday showed eurozone manufacturing activity expanded for the third consecutive month in September but at a slower pace than in August.

The Markit purchasing managers' index, a survey of factory activity across Europe, fell to 51.1 last month from 51.4 in August owing to a slightly worse than expected performance in key economies, including Germany and Italy.

Europeans are braced for a new age of austerity as governments across the region take action to eliminate unsustainable budget deficits

Although the latest figure is above the 50 mark, which indicates that the sector is growing, economists remained cautious about the eurozone's growth prospects.

"An improvement in eurozone manufacturing business conditions for a third straight month in September sends a reassuring signal that the sector is providing an all-important lift for a region that has been besieged by recession," said Chris Williamson, Markit's chief economist.

"But we must not get too carried away. Although signalling the best performance for over two years in recent months, the PMI slipped slightly compared with August and remains only just above the 50 'no change' level, indicating that this is still early days in what looks like a fragile recovery."

Analysts said that despite the general improvement in economic activity, particularly in the US, the eurozone's largest trade partner, a number of drags remained, including an expected correction of the housing market.

"Although the worst is probably over this is going to be a slow recovery," said Nick Kounis, an economists at ABN Amro. "Although there is greater stability it will take a long time for a return to strong growth . . . the negative impact of austerity . . . and high unemployment will slowdown the pace of the recovery."

Policy makers also fear that unexpected events could derail the tentative recovery that the bloc has experienced over the past few months.

Italy's political crisis, for example, poses a systemic risk to the entire bloc as it's large debt - the third biggest in the world - could bring down the entire eurozone if investors lose confidence in its ability to manage its debts.

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Eurozone unemployment remains stubbornly high

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Unemployment in the eurozone remained high in August, highlighting the fragile nature of the economic recovery that the 17-country bloc has enjoyed over the past few months. Joblessness stayed at 12 per cent in August, but rose from a year earlier when the rate was 11.5 per cent, according to Eurostat, the EU's statistical office.

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The euro is approaching parity with the U.S. dollar, something the world hasn't seen since 2002. The eurozone's official currency has tumbled 12 percent since the start of 2015, hitting a 12-year low of $1.0495 against the greenback Thursday.

Here are the four main factors driving the euro's steep decline this week:
1. The ECB's QE Launch
The European Central Bank launched its massive quantitative easing program Monday. The effort will pump 1 trillion euros ($1.1 trillion) into Europe's economy. That means 60 billion euros ($66.3 billion) will be injected each month over the next 18 months in an effort to restore the inflation rate to a targeted level of 2 percent and help boost economic growth in the troubled region. The ECB expects the bond-buying program to end in September 2016.

The QE will continue to have a significant effect on the euro as the ECB pumps more money into Europe's economy, said Lennon Sweeting, corporate dealer at USForex Inc. By increasing the money supply, the ECB will weaken the euro against other major currencies. That will then help boost the continent's exports and inflation. A cheaper euro can boost its economy by making it easier for it to sell goods to other countries.

The QE program includes buying government bonds in order to push down their yields. With interest rates at record lows, investors are looking to move cash overseas into places such as the United States, where they are likely to get a better return. As money flows out of Europe, the euro is depreciating.

2. Looming Rate Hikes From U.S. Fed

The divergence of global central bank monetary policies is also hurting the euro. At the same time that the ECB is taking steps that weaken the euro, the U.S. Federal Reserve is adhering to policies that boost the dollar. The Fed is considering tightening its monetary policy by raising interest rates in 2015. Speculation over the timing of the Fed's action is adding to the volatility in the euro this week as the U.S. dollar continues to surge on the prospect of higher rates.

There was a similar depreciation in the U.S. dollar when the Fed started its own QE program following the 2007-2009 financial crisis.During the first year of the Fed's 17-month initial round of QE, which began in November 2008, the dollar declined 16 percent against the euro. The greenback remained weak up until the Fed's asset-purchasing program ended in October. Since the Fed ended QE, the U.S. dollar has gained 20 percent against the euro.
3. ECB's Record-Low Interest Rates
A third factor economists attribute to the euro's decline is Europe's record-low interest rates. The ECB cut rates to a historic low of 0.05 percent in September as a way to fight the eurozone's creeping deflation.

One of the main goals of the ECB's policy is to encourage eurozone banks and lenders to make more funds available to business and household borrowers at lower interest rates, aiming to boost private spending by lifting investment and consumption. But because the ECB policy reduces eurozone interest rates compared with interest rates in the U.S., it also increases the relative attractiveness of holding higher-interest dollar-denominated debt as opposed to lower-interest euro-denominated debt, said Gary Burtless, senior fellow and labor economist for the Brookings Institution.

When market participants sell their euro-denominated assets in order to buy the now-more-attractive dollar-denominated assets they must buy U.S. dollars to complete the purchases, increasing the value of the dollar compared with the euro because the demand for dollars has increased compared with the demand for euros, Burtless explained.

This helps achieve a second goal of the ECB policy, which is to boost the demand for goods and services produced in the eurozone. The lower value of the euro helps European exporters become more competitive by making goods less expensive for overseas customers.
4. Greece Crisis Adds To Euro Volatility
Eurozone finance ministers granted Greece's government a four-month extension to the country's bailout program last month amid its ongoing debt negotiations. But as Greece creeps back into the headlines, reigniting concerns about its possible exit from the eurozone, it adds more downward pressure on the euro.

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Why Is The Euro Falling? Here Are Four Factors Driving The Currency's Slide

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The euro is approaching parity with the U.S. dollar, something the world hasn't seen since 2002. The eurozone's official currency has tumbled 12 percent since the start of 2015, hitting a 12-year low of $1.0495 against the greenback Thursday. Here are the four main factors driving the euro's steep decline this week: 1.

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But now, I think that if the countries remain divided in their efforts to strengthen or weaken the Euro, the exchange rate of the Euro would remain unstable and deter foreign direct investments and investments, which would be harmful to Europe.

In addition, I think that Europe should continue to implement more policies to address the macroeconomic issues they are facing so as to ensure a stronger growth in future.

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But now i think that a rich country would not necessarily mean that it would have a stable economic growth. They are still prone to recession if there is a large outflow of hot money and when effective policies are not implemented.

However, it is possible that the Eurozone is able to pull itself out of the crisis it is in.  Effective policies are needed to curb this problem or else they would still face these problems in the long run and are unable to have a sustainable economic growth.

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But now I think that the European countries are likely to face even more severe macro economic challenges if the countries do not implement sound and effective policies. This is likely to be problematic as all countries in the European region are autonomous and are also facing their own problems. Domestic problems will undoubtedly be more pressing to the governments rather than regional issues since they would affect their citizens far more prominently.

Hence, while it is certainly possible for the Eurozone to pull itself out of the crisis it is in, it will be difficult for  countries to cooperate with each other to benefit the region.

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But now, I think and am more convinced that the Eurozone may continue to face deflationary fears in the near future.  This is because policies implemented may not be adopted in all member states since each state still possess some autonomy.  Since these policies can be negated, it will be a tough climb up to raise economic growth rates.

However, if the right policies are taken up by each member state, the Eurozone can pull itself up from its economic disaster eventually.

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But now i think that even the richest of countries no matter how developed they may be can face macroeconomic problems such as recessions and debt if future economic activities are not carefully planned out and the government does not spend within its means as every country is susceptible to changes in demand and preferences which can affect economies largely.

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Lowering interest rates

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To solve the issue of slow growth due to a poor outlook on the economy, Europe has adopted Quantitative Easing, a form of Expansionary Monetary Policy in hopes of stimulating the economy to bring Europe out of recession. By purchasing sovereign bonds or other financial securities using the money of the central bank, Europe has been able to increase the amount of loanable funds in the economy and as a result, lowering interest rates. With lower interest rates, cost of borrowing is not lower and hence, it is less expensive to consume big ticket items and people will choose to consume in the current time period to avoid future higher costs. The consumption component of AD will increase. Firms will also have more incentive to invest as cost of borrowing is lower and expected rate of return will increase, causing investments to rise and as such, AD will increase. Being a large economy, Europe will have a large size of multiplier k. As such, AD will increase multiple times and the economy will experience economic growth.

However, outlook on the European economy may be bad as it is in recession. Thus, the increase in C and I will not be large and firms will borrow from European banks to invest in other counties with higher rate of returns and a more stable economy.

To combat the issue of high unemployment rates due to structural failure, the government can conduct interventionist supply side policies such as research and development. Upon successful research and development, comparative advantage can be regained. Opening up a new sunrise industry can provide more jobs for the people and other policies such as retraining and education will allow more people to find jobs and be more efficient. This will cause the productive capacity to increase as the economy becomes more efficient. This may attract foreign direct investment and improve the capital and financial account, improving its balance of payment.

Supply side policies take time to be effective and do not guarantee results. Research and development may not always be successful and education and retraining may not be effective as it depends on the receptiveness of the individual. In addition, it they are not successful, the large amount of money used would be gone to waste and may cause Europe to fall into a bigger debt.

In the short run, Europe can conduct expansionary fiscal policies to stimulate AD. With more government expenditure, AD will increase, ceteris peribus. An increase in government expenditure in terms of transfer payments will increase household purchasing power and stimulate an increase in consumption. and cause AD to rise. With an increase in AD, there will be an increase in national income and falling unemployment.

Too much government expenditure will lead to a budget deficit and the standard of living of future generations will be made worse as they would have to continue to repay the increasingly large debt.

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The Euro is weakening due to insufficient economic activity. Despite cutting the interest rate to almost zero, inflation rate of the Euro zone has slipped to 0.3% and economists predict that inflation might just go into an outright decline the following year. This suggests that the outlook of the country is poor as cutting of the interest rate as a measure to stimulate AD has failed.

Although the economy in the Eurozone was said to be improving slightly, the unemployment rate in the area remains at a stunningly high rate of 12% in August 2013, 0.5%  higher than that a year before. This shows that the economy is facing structural unemployment as there is insufficient jobs in the economy. Due to structural unemployment, disposable income of households fall, leading to a fall in purchasing power of households. This causes consumption to fall, causing insufficient economic activity in the region.

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Task 2: Nature/Structure of the Eurozone

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Task 2: Nature/Structure of the Eurozone

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In terms of its share in global GDP, it is the world's third largest economy after the US and China.

The Eurozone is also one of the world’s largest economies in terms of population, with consists of an approximate of about 340 million people.

List of economic sectors with the largest share of total Eurozone output:
1. Service
2. Industrial
3. Agriculture / Fishing / Forestry

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I used to think that Europe has a rich economy as it is always consuming a large amount of imports and has a high material standard of living.

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I used to think that Europe had a stable economy and did not expect it to have such a large debt given that they comprise of many supposedly wealthy developed countries.

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I used to think that European countries are rich countries and are experiencing stable economic growth. The people living in European countries have a high standard of living and income level.

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I used to think that Europe was a thriving economy that was not straddled in dire debt.  However, I have come to realise that the economic problems they face are complex and very difficult to resolve completely.  In particular, the size of government debt acquired is rather distressing since European countries are mostly welfare states which support the citizens readily in terms of their financial needs.

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I used to think that the European countries are all dependent on each other and the current economic situation is affecting all the countries in the Eurozone due to their geographic proximity to each other and their long history of trading with each other.

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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.