The Euro

Question 1

Why should the Uk join the euro?

Answer 1

Question 2

Why shouldn’t the Uk join the Euro?

Answer 2

Question 3

What is an optimal currency area?

Answer 3

An optimal currency area is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency

• 3 characteristics:

I. Considerable trade between them. Rules out competitive devaluations

II. Similarity of economic and industrial structures of potential partners,

III. Flexible labour markets

IV. Synchronous business cycles

• Politically important: A readiness to make at least some fiscal transfers to partner countries. In practice, a cultural and political identity may be at least as important as economic criteria for success.

Question 4

Is europe an optmial currency area?

Answer 4

Europe is quite, but not very, integrated.

• There is a clear inner core of countries – France, Germany, Netherlands, Belgium, Luxembourg, and perhaps Austria - more closely integrated than the rest.
• However, the act of joining EMU changes the degree of integration, possibly quite substantially.
• Even so, a decade of the eurozone was not sufficient to prepare all its members for the severe strain that would be imparted by the financial crash and its fiscal aftermath.
• Partly asynchronous business cycles

Question 5

What is the single European Market?

Answer 5

The removal of barriers to trade

• Physical Barriers - customs formalities etc.
• Technical Barriers - standard specifications; open public procurement; no state subsidies.
• Fiscal Barriers - tax harmonisation
• …so that all countries could exploit to the full the gains from comparative advantage

Question 6

What happens if business cyles are not synchronised?

Answer 6

Interest rate set for the whole OCA

• If a member is suffering from lower growth than the other members of the group it would prefer lower interest rate
• If a member is suffering from higher inflation than the other members of the group it would prefer higher interest rate
• Therefore cost of loss of monetary policy flexibility

Question 7

What were the debt problems in greece?

Answer 7

– Rising govt debt, revelations that Greece misreported its finances in earlier years

– Greek bonds downgraded, prices fell, interest rates shot up as markets worried that Greece might default

Question 8

What were the repercussions throuout europe due to the debt problems in Greece?

Answer 8

– Many European banks held Greek bonds, whose falling values pushed them toward bankruptcy.

– Policymakers worried that banks would fail, causing a credit crunch and economic downturn.

Question 9

How did greece get bailed out?

Answer 9

The ECB and healthier countries in Europe made loans to Greece to prevent an immediate default.

The loans came with conditions that Greece enact austerity measures to improve its finances

. – Taxpayers in countries providing the funds resented the bailouts. Greek citizens resented the austerity measures and rioting ensued.