Euro Z one & EU: GDP & Unemp . 2011

Euro Zone & EU:

GDP & Unemp.

2011

Saturday, April 22, 2023 1

Euro-Austerity: 1


Euro- Austerity: 2

www.imf.org/external/pubs/ft/weo/2013/01/index.htm

http://www.imf.org/external/pubs/ft/weo/2013/01/index.htm

http://www.imf.org/external/pubs/ft/weo/2013/01/index.htm

Euro- Austerity: 3

IMF World Economic Outlook and IMF Fiscal Monitor, Oct. 2012

Inflation Convergence, EMS


Goals of Euro-Zone


Krugman et. al. (2012):1. Unified market: the belief that greater market

integration and economic growth would occur.2. Political stability: the belief that a common

currency would make political interests more uniform.

3. The belief that German influence under the EMS would be moderated under a European System of Central Banks.

4. Elimination of the possibility of devaluations/ revaluations: with free flows of financial assets, capital flight and speculation could occur in an EMS with separate currencies, but it would be more difficult for them to occur in an EMS with a single currency.

Theory of Optimum Currency Area


Joining fixed exchange rate system would be beneficial for a country if1. trade is extensive between it and

member countries, because transaction costs would be greatly reduced.

2. financial assets flow freely between it and member countries, because the uncertainty about rates of return would be greatly reduced.

3. people migrate freely between it and member countries, because the uncertainty about the purchasing power of wages would be greatly reduced.

Theory of Optimum Currency Area


After joining a fixed exchange rate system, economic integration losses not so great from country’s own fall in aggregate demand, if integration greater, since1. Relative prices will tend to fall, which will lead

other members to increase aggregate demand greatly if economic integration is extensive.

2. Financial assets and labor will migrate to areas with higher returns or wages if economic integration is extensive, so that the economic loss is not as great.

3. Therefore, the loss of the automatic adjustment of flexible exchange rates is not as great if goods and services markets are integrated.

Deciding when to Peg Rate


If GDP Variability Goes Up …


Economic Variability Up?


US much more integrated


• Most EU members export from 10% to 20% of GDP to other EU members

• US exports 14% of GDP to rest of the world (World Bank, 2011).

Big Gaps in Labor Mobility


Little ∆ in Intra-Euro Trade

Saturday, April 22, 2023 14Krugman et. al, Fig. 20-7

Financial Integration?

Conclusion: Eurozone not an Optimal Currency Area


• Trade Integration in US ≈ 2 x Greater• Labor Mobility in US > 3 x Greater• Financial Integration is minimal due

to lack of Euro-zone Bonds• Solution => Stronger European

Governance

Barriers to Further Integration:


www.pewglobal.org/files/2013/05/Pew-Research-Center-Global-Attitudes-Project-European-Union-Report-FINAL-FOR-PRINT-May-13-2013.pdf

http://www.pewglobal.org/files/2013/05/Pew-Research-Center-Global-Attitudes-Project-European-Union-Report-FINAL-FOR-PRINT-May-13-2013.pdf



www.pewglobal.org/files/2013/05/Pew-Research-Center-Global-Attitudes-Project-European-Union-Report-FINAL-FOR-PRINT-May-13-2013.pdf



Documents

Euro Z one & EU: GDP & Unemp . 2011