• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Economcs commentary - Title: Euro Zone Posts Current Account Deficit

Extracts from this document...

Introduction

Euro Zone Posts Current Account Deficit in August By GEOFFREY T. SMITH OCTOBER 22, 2009, 5:32 A.M. ET FRANKFURT -- The euro zone's current account swung back into a deficit in August, as the economy's export-led recovery paused for breath after a strong run over the late spring and early summer. The current account posted a seasonally and calendar-adjusted deficit of �1.3 billion ($1.95 billion) from a revised surplus of �3.7 billion in July, according to data released Thursday by the European Central Bank. Exports fell 2.7% to �105.5 billion, after rising in each of the three previous months, while imports edged up 0.5% to �99.5 billion. The figures were in line with analysts' expectations, which had been primed by earlier national data, especially from Germany, which accounts for over half of total euro-zone exports. Carsten Brzeski, an economist with ING Bank in Brussels, said he expects the setback to be temporary, and that exports should continue to recover as global demand picks up, irrespective of the sharp rise of the euro on the foreign exchange markets in the last month and a half. ...read more.

Middle

Balance of trade is the difference between the value of visible exports and the value of visible imports.2 Therefore a deficit trade balance means that the value of total imports exceeds the value of total exports. In the case of Euro-Zone "Exports fell 2.7% to �105.5 billion while imports edged up 0.5% to �99.5 billion" leading to a deficit of �6 billion. Since exports are falling at a higher pace than imports, and imports are increasing at a higher pace, Euro-zone's balance of trade is seeing further deterioration. The European Single currency Euro (�) is the official currency for 16 states thus, Euro zone has suffered a total current account deficit of �106.5 billion over 12months. As being members of EU the 16 countries are not able to depreciate or devaluate their currency to ease the current account, also they have to adopt the interest rate set by ECB. Germany, which accounts for over half of total euro-zone exports, is at loss being a member of euro-zone because even after having high exports it accounts a current deficit. AD= C+ I+G+(X-M), with the decrease in exports and increase in imports Aggregate demand decreases. ...read more.

Conclusion

There would be improvement in current account as export revenue rises and import expenditure decreases. However, current account will come out of deficit only if it meets the Marshall-Lerner condition of elasticity: PED export + PED import > 1. "The euro rose above $1.50 but fell back slightly recently trading at $1.4950." The Euro has shown a slight depreciation in its currency which is good news for the economy. Protectionist Measures: Imposing protection on Imports could increase domestic production. However this is not a long term solution. If EU imposes protectionism its relations with other countries might be affected. Expenditure-Reducing Policies: are policies implemented by the government that attempt to reduce overall expenditure in the economy, so shifting AD to the left.6 Deflationary Fiscal Policy: This policy would increase the direct tax on people. There is likely to be a fall in domestic employment due to this policy. Deflationary Monetary Policy: Currently the ECB is following this policy, increasing interest rates thus increasing capital inflow. However, the Euro Zone's current account deficit is not set off by this because "the financial account data aren't adjusted for seasonal effects". 1 Blink, Jocleyn and Dorton, Ian. 289 2 Glanville,Alan.618 3 Glanville,Allan.621 4 Glanville,Allan.618 5 Blink, Jocleyn and Dorton, Ian. 296 6 Blink, Jocleyn and Dorton, Ian. 297 ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Economics IA Commentary - Protectionism. Title of Extract: China Expands Export Quotas with ...

    for rare earth metal to move from China to any other country worldwide thereby reducing the flow across the Chinese border, indicated by (QFOREIGN TRADE). Eventually, this higher price will reduce worldwide import demand and will shift supply back to the Chinese market thereby inducing a reduction in the local rare earth price indicated by (P LOCAL TRADE).

  2. The structure of the EU budget and its allocation

    progressing much better than was predicted, and therefore it was possible to make payments of EUR 522 million more than entered in the budget. The discipline imposed by the "n+2 rule" continues to encourage Member States to submit payment claims regularly, and the simplifications introduced in the current programming period lead to more rapid payments.

  1. Mutual Funds vs ETFs

    How one should choose the mutual fund or the ETF As a matter of fact both of the funds are working to earn money. But the debate on their selection is very sarcastic and controversial. As all of the individual investors do not belong to the same financial background, hence

  2. Economics Commentary on Foreign Capital Shuns India

    overall foreign investing activities in India stem from the government intervention, or let's say, their inefficiency. However, if we put ourselves into the government's shoes, we might find arguments for the government. Since India is a developing country with a very high annual economic growth rate, the government does not

  1. Current account surplus/deficit - problems and solutions

    Expenditure-reducing policies are policies aimed to reduce current account deficits. ERP is based on the idea that a current account deficit would be met with austerity measures stemming from contractionary fiscal and monetary policies which will reduce rate of economic growth and lower marginal propensity to import.

  2. International Trade Economics Commentary. In hope of shifting the Eurozone economy closer to ...

    The influx of loanable funds into these economies (rise in the supply of loanable funds from to )

  1. What has happened to Canada's demographic over the past 50 years? What are ...

    have shown that there is no relationship between age and work performance. Physical Issues ________________ There are various physical changes that people undergo as they age, and it can also affect their work: Maximum muscular strength, range of joint movement From 20 to 60, people generally lose 15 to 20% of their strength.

  2. 15 Historical Economic Questions on Mercatilism and the Development of European Countries.

    what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle the product distribution and the prices that are beneficial to all the individual members of a community.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work