SW7: The Euro Zone

Question 1

Euro Facts

Answer 1

• Second most traded currency in the world
• Formed the euro area and the Economic and Monetary Union (EMU)
• Is used by 341mio. people every day
• Is used in 19 of 28 national currencies

Question 2

Pro’s of Eurozone

Answer 2

• Increased Stability
• Lower transaction costs
• Essential component to create a single market

Question 3

Con’s of Eurozone

Answer 3

• Individual currency devaluation is no longer possible
• Transparency of wages/pries
• Loss of independence

Question 4

Maastricht Critera (Convergence Criteria)

Answer 4

1. inflation is not higher than 1.5% than the 3 best countires
2. Government deficit is no more than 3% of GDP
3. Government Debt is no more than 60% of GDP
4. Long term interest rate is not more than 2% higher than the 3 best countries’
5. Exchange rate stability: At least 2y without severe tensions

Question 5

How to join the Eurozone

Answer 5

• Fulfil Maastricht criteria
• EC and ECB publish their respective reports
• Both are evaluated by the ECOFIN
• Approval of Parliament (Majority)
• Approval of European Council (Qualified Majority)

Question 6

Responsibilities of ECOFIN council

Answer 6

• Economic Policy
• Taxation
• Financial Markets
• Capital Movements
• Economic Relations
• Annual EU budget

It coordinates the member state’s economic policies, the convergence of their performance and monitors their budgetary policies

Question 7

Economic Automatic Stabilizers

Answer 7

• Mechanism that stabilizes the real GDP without any government action
• in recession taxes fall, transfers rise ,deficit grows
• in expansion taxes rise, transfers fall, deficit shrinks

Question 8

Crowding out

Answer 8

Government buys up a lot of financial debt to finance its deficit.
Therefore private households and businesses don’t have this opportunity anymore. It leads to a fall in investments.