The European Union

A2 Economics Unit 4

Aims and Objectives

Aim: Understand the euro crisis. Objectives: Explain the benefits and costs of EU expansion Describe the benefits and costs of a single currency Analyse the euro crisis Evaluate the euro crisis

EU Expansion
http://www.youtube.co m/watch?v=P0H_lRnX9z U&feature=related

Decide in groups on the benefits and drawbacks of EU expansion.

EU Expansion Analysis

 A single currency Operates in the FOREX market managed float Independent central bank monetary policy Stability & Growth Pact limits public sector borrowing of participating countries to 3% of GDP (Portugal, Italy, France & Germany broken pact!)

The EMU (European Monetary Union)

Single Currency Analysis

Reduced transaction costs Reduced exchange rate uncertainty Increased competition Increased FDI Lower interest rates Loss of an independent monetary policy Interest rates are rarely optimal for all countries Different countries mean implementing the same monetary policies will have inconsistent effects

Optimal Currency Area (OCA)

An optimal currency zone occurs when:
1. Countries have achieved real convergence 2. They respond in similar ways to economic shocks 3. They have flexibility to deal with these shocks including high mobility of labour 4. Countries are ultimately prepared to use fiscal policy to even out economic imbalances within the currency union

Euro Zone Crisis

Semipermanent recession

Jobs Crisis

Debt crisis

Divergent economies

Euro Zone Macro Indicators Real GDP (% change) Consumer spending (% change) Capital investment spending (% change) Unemployment rate (% of labour force)

2009 -4.2 -1.1 -12.1 9.4

2010 1.8 0.8 -0.6 9.9

2011 1.6 0.4 2.1 10.0

1. Key point here is the weak growth after the 2009 recession 2. Consumption and investment have barely recovered 3. Unemployment rate rising to 10% in 2011 (mass unemployment)

Economic Growth (%) Germany Greece Spain Ireland Italy

2009 -5.1 -3.2 -3.7 -7.0 -5.1

2010 3.6 -3.5 -0.1 -0.4 1.5

2011 3.0 -6.1 0.7 1.2 0.7

1. Greece suffering her fifth year of recession in 2012 2. Output of other PIGS countries well below the 2008 peak 3. But stronger growth in Germany Europes biggest economy

EU Growth Rates

Unemployment rates in the EU

EU and UK Unemployment

Budget Deficits
Budget Balance (% of GDP) Germany Greece 2009 -3.2 -15.8 2010 -4.3 -10.8 2011 -1.2 -9.0

Spain Ireland
Italy

-11.2 -14.2
-5.4

-9.3 -31.3
-4.5

-6.2 -10.3
-3.6

Gross Government Debt

EU and UK Economic Cycles

?
Fairly close alignment between UK and Euro Zone economic cycles

Assess the importance to the UK economy of a recession in the Euro Area

UK Exports Jobs and Real Incomes

Sterling and Interest Rates

FDI Flows

UK Bank Debts

UK Exports to the Euro Zone

Reliant for economic growth?

Evaluation Points ..It depends on..

Scale /direction of currency fluctuations
Adaptability of UK businesses Exposure of UK banks to Euro Orderly / disorderly defaults Speed of any Euro Zone rebound