Archive for February, 2015

Brief Glimpse of Exchange Rates

Sunday, February 22nd, 2015

It’s been a while since we talked about exchange rate, so here is a helpful timeline refresher of the types of exchange rate systems EU members have had dating back to the 70’s. It summarizes everything nicely since you can see when each country became a member of the EU and when they joined the EMU.

The EuroFrat

Friday, February 20th, 2015

In today’s blog post, we ponder what a fraternity consisting of the EU members would look like…

Meet the members!

SUPER Fun Interactive

Friday, February 20th, 2015

We discussed the timeline of Greece’s debt payoffs in class the other day, and now the Wall Street Journal has put it into this convenient interactive timeline that gives a great idea of what they’ve gotten themselves into and for how long.

http://graphics.wsj.com/greece-debt-timeline/

 

 

Is Greece Experiencing a Humanitarian Crisis?

Thursday, February 19th, 2015

While sifting through information on Greek politics, I came across an article by Alex Politaki, a journalist for the Guardian who is currently reporting on Greece. Alex believes that Greece may be undergoing a humanitarian crisis due to an increase in the populations risk to poverty. Alex also states that Greece’s supposed crisis may be due to the austerity measures put in place by the EU.

Nokotas Kanakis, head of Greece’s largest NGO Médcins du Monde, was among the first to declare a humanitarian crisis in Greece. One of Greece’s largest public organizations, the Medical Society of Athens, has gone as far as to send a formal letter to the United Nations asking for an intervention. As I stated earlier, Alex believes that the political reasoning for not admitting to the rising humanitarian crisis is that admitting to the crisis would threaten the European Union. This would raise questions over the economic “rescue” of Greece being the cause of austerity implementation.

Alex states that based on criteria and data of the EU, Greece is a country in serious poverty. In 2011, 31.4 percent of the population, or 3.4 million people, lived on an income below 60 percent of the national median disposable income. 27.3 percent of the population, or 1.3 million people were at risk of poverty. While this data is aged, numbers have likely gotten worse due to the continuing economic stagnation of Greece’s economy. According to EU indicators large proportions of Greek housing live in conditions of “material deprivation” and 11 percent live in extreme material deprivation. What this means is people are living without sufficient heating, electricity, and use of either a car or telephone. These people would also exhibit a poor diet, an inability to meet emergency expenses, or make rent payments.

To make matters worse, Alex believes that the already staggering 26.8 percent Greek unemployment rate, as recorded in 2012, does not sufficiently represent the totality of Greek poverty. 13 percent of the working population cannot afford basic necessities. Also, at 13 percent, Greece has the highest working poor percentage in the Eurozone. Alex outlines 3 indicators of a possible humanitarian crisis in Greece. First, Alex states that the number of homeless in Greece has reached unprecedented levels for a country in the EU. Unofficial estimates put the number of homeless Greeks around 40,000. Second, the proportion of Greek beneficiaries of NGO medical services in some urban areas was recorded at 60 percent of the total in 2012. This is alarming due to medical services by NGOs were typically provided to immigrants not citizens. Lastly, there has been an explosive growth in poverty relief missions, like soup kitchens and food distributions. The Greek government has ordered for municipal rations to be expanded due to rising incidents of children fainting in school due to a low calorie intake. Greece has also experienced an increase in humanitarian aid missions.

The possibility of a humanitarian crisis is more severe given the information noted above. If the EU does not promote growth, or a greater extension of aid to Greece, the likelihood of future Greek suffering is apparent. The political ramifications of such a crisis in an EU country are disastrous and a stain on the credibility of the EU’s image of prestige. The possibility of an influx of Greek refugees to other EU countries could alone cause an outreaching economic and security crisis.

Source: http://www.theguardian.com/commentisfree/2013/feb/11/greece-humanitarian-crisis-eu 

Is the Euro Zone an Optimum Currency Area?

Saturday, February 14th, 2015

This video talks about why the Euro Zone does not meet the criteria for an optimum currency area.

Infographic: The EU’s Response to the Eurocrisis

Wednesday, February 11th, 2015

The Euro Crisis Infographic_Flat

Problems with the Euro from the start

Monday, February 9th, 2015

The fourth chapter of The Euro Crisis and Its Aftermath talks about how the European leaders who set the Euro project in motion knew that there could be problems in the future, but knew that no plan would provide for all contingencies.

  • Sharing a currency with others means sharing the benefits of a medium of exchange. There are also risks to sharing a common currency.
  • Germany did not just see their currency as an economic instrument, but as a way of expressing their national pride
  • Currency unification would open the door to economic and social integration between the countries that adopted the Euro.
  • They did agree that to create a lasting and viable currency there would need to be more than an independent central bank and a mechanism to enforce budgetary discipline. They believed something else was necessary, but could not agree on what this thing missing was.
  • Political union and economic government were both what the French and Germans believed were missing from the Euro.
  •  Economic government: creation of the Euro group, which was a council of finance ministers of the euro area. This group never reached its full potential and was just a “ghost of an absent government.”
    • This meant that the Euro was created without any meaningful political foundations.
  •  An important issue that had to be dealt with was the idea of solidarity in the case of “natural disasters” or “exceptional occurrences beyond a country’s control”, and if it was justified to grant financial assistance to a member state. (Article 122)
  • To invoke this article there has to unanimity among the member states.
  • The euro-area governments set up an ad hoc financial vehicle.
  • It was legally and politically unclear if sovereign debt crises could qualify as an “exceptional events beyond the control of Member states”

The no-bail out clause was put in the treaty to serve as a warning to investors that lending to sovereigns was risky and that they could not count on bailouts from other member states if something was to go wrong.

  • An important question that has come up is whether or not this provision applied to loans between member states.
    • The ambiguity of this provision caused disputes.

The conclusion that was made by the creators of the Euro was that since there was no proper “community” or a European state all of the member states would face the challenges and risks that came with being a part of this common currency on their own.

  • This same debate about the sovereign debt crisis is still going on two decades later.
  • The issues that are brought to the forefront once again are:
    • The incompleteness of the Euro
    • The importance of being a community
    • The concepts of political union and economic government.

#TotallyRelevant

Sunday, February 8th, 2015

Keynes: Useful Economics for the World Economy

Sunday, February 8th, 2015

The first three chapters of Keynes: Useful Economics for the World Economy, focuses on Keynes view of the world economy during the 20th century, and his various theories that the author argues are relevant to today’s uncertain economic climate.

Economics before Keynes, 1: Hume

Keynes gathered the ideas and thoughts of many other economists  to create theory that has remained central to economists and policy makers to this day. David Hume provided one of those economic insights into international economics, specifically the price-specie flow mechanism. Simply put, as net exports increased, more money would flow into that country while raising the price of goods and services; an increase in the flow of money into a country did not necessarily mean that that countries wealth grew. As domestic prices increased, exports would be discouraged while boosting imports. This idea that the overall price level is determined by the amount of money would later be known as the Quantity Theory of Money.

Keynes at Versailles

Keynes was completely opposed to the economic burdens placed on Germany by the Treaty of Versailles. In The Economic Consequences of the Peace, Keynes criticized the war reparations that were being introduced. Europe’s economic growth and prosperity was supported by international trade; Germany would represent a missed market of exchange. “Trade improved prosperity by allowing countries to exploit their comparative advantages.” Growth starts when the technological advancement in one country results in an increase in productive capacity, but living standards do not increase at the same pace. A slow growth in living standards causes firms to look for other markets abroad, increasing export led growth. Therefore, domestic prosperity cannot be attained without foreign success in the markets.

Keynes and the Macmillan Committee

In 1929 unemployment was high and economic growth was stagnat. At the Macmillan Committee, set up to address the depressed economy, Keynes’ proposed a devaluation of the pound; the pound would buy less foreign currency while foreigners would be able to purchase more pounds with their own money. The price of British goods would fall and allow for an increase in exports. Imports would be too expensive for citizens, so they would purchase domestic goods. This idea was not accepted as many leaders did not wish to leave the gold standard. His next proposal suggested some protectionist measures (by placing tariffs on imports), but that would only lead to a decrease in imports and not an increase in exports. Finally, Keynes proposed a large increase in government spending and decrease in taxes; higher public spending would lead to an increase in incomes which would theoretically in turn increase domestic spending. This is known today as Keynesian Economics.

An interactive timeline

Sunday, February 8th, 2015

I found a pretty useful timeline of events that have impacted the Eurozone Crisis, unfortunately it only goes up to August 2013, but I still think it’s worth taking a look at.

http://www.theguardian.com/business/interactive/2012/oct/17/eurozone-crisis-interactive-timeline-three-years