The claimant count is one method of measuring unemployed, simply by counting the number of people claiming unemployment benefits. However the major problem with such figures is that many people would consider themselves unemployed but would not be allowed to claim benefits, or others maybe simply would not claim benefits for one reason or another. Many people also saw the claimant count as been rather open to government manipulation.
The labour force survey measure is comprised of the percentage of 15-64 year olds who are in paid employment excluding those who live in ‘collective households’ (such as halls of residence). Due to this the actual figures quoted are the employment rates in each country. To be officially classed as unemployed, people must have actively sought work in the 4 weeks previous to the survey being carried out and must be ‘currently’ available to take a job (Economics Update 2001, 7).
The data I have is based on the Labour Force Survey
The Euro Zone consists of the 12 countries who had adopted the currency by 31 December 2005 which were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain and Greece.
For comparison, I have included figures for the full Euro area, the EU25, which incorporates the 12 Euro Zone countries as well as The Czech Republic, Denmark, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, Slovakia, Sweden, The UK and Bulgaria.
As the graph on the previous page indicates, the unemployment rate for the Euro zone does drop, (as the employment rate on the graphs rise) but how much of this drop can we attribute to the Euro? As the unemployment rate also drops in the EU25 as a whole. From the graph, it is clear to see though that unemployment drops furthest in those countries that did adopt the Euro. To emphasise this point I calculated the change in employment rate in all those countries that had adopted the Euro and then in the countries that haven’t adopted the Euro.
The above table illustrates how the employment rate rose by an average of 2.71% in all those countries making up the Euro zone, however some individual countries did rather better than others, such as Spain with a 9.5% rise compared to Germany with only a 0.2 increase and Austria’s that was unchanged over the period as a whole. This data would seem to point towards the Euro having a positive impact on unemployment rates, especially when we consider the table on the following page, showing the average changes in employment rates for the EU25 countries that did not adopt the Euro. Here we find an average change of only 0.98% in employment rates over the same 7 year period (although data is only available for 6 years for a few countries). Some countries, Czech Republic, Denmark, Malta, Poland and Slovakia, even register negative growth over the period.
This data overall would tend to suggest that the Euro is indeed responsible in some extent for the fall in unemployment witnessed in the EU since its introduction in 1999.
(All tables and figures adapted from epp.eurostat.ec.europa.eu)
Chapter 2
Gross Domestic Product Growth since 1999
The European Union economy does fluctuate over time as a result of internal and external factors (later analysis). GDP (Gross Domestic Product) also known as economic growth is the increase in value of the goods and services produced by an economy. GDP is calculated by adding Consumption +Investment +Government Expenditure +Net Exports. GDP=C+I+G+(X-M). GDP apart from stating the economic growth it also indicates the standard of living and Economic Welfare.
On January 1st 2007 the European Union expanded to twenty-seven countries. The EU’s gross domestic product (GDP) - i.e. the economy’s output of goods and services
are steadily growing. With its enlargement from 15 to 27 countries, the EU’s GDP is now about the same as that of the United States. The diagram below illustrates that the EU and the USA economies are very similar in size. This is a clear indication that the economy of Europe is in a very healthy position.
The single market has been the key to releasing large amounts of Europe’s economic potential. In the ten years between 1992 and 2002, the single market added 1.8 percentage points to GDP growth in the EU as a whole. The European Union Annual Reports. Available: [Accessed March 2, 2007]
In addition, the diagram above shows that Europe has the second biggest world trade share for goods and the biggest for services.
Even with the different fluctuations that the European Union economy has gone through it is still one of the top two economies in the world. Still there are issues to be considered and improved upon. More detailed explanations of the fluctuation of GDP in the Euro area since the introduction of the Euro in 1999 are given below.
GDP Fluctuation
Over the 10-year period here, we can see that GDP increases overall by 50%, however there are a number of major fluctuations within the period. The graph also shows the period of 1999 to 2006, which from when the Euro was introduced up to the present day. From this information alone it is very difficult to tell how responsible the euro has been on the changes in GDP. Certainly, the formation of the EU and the trading bloc will have had a positive influence on GDP. With the elimination of tariffs, there will be increased trade between the countries in the trading bloc, which will in turn improve overall net exports. This in turn increases overall GDP. In addition, the formation of the EU means that countries can “share” resources, benefiting from economies of scale, and find the most efficient way to produce across the whole of the EU rather than just in individual countries. This can also be said for labour, as workers within EU countries have become more mobile. All these factors will contribute to an increasing GDP.
Since the introduction of the single currency in 1999, the economy of the euro area has continued to grow steadily. From 1999 to the first half of 2000, Europe reached it’s highest level of GDP for more than a decade. Private sectors continued to expand rapidly and this eventually led the economy to produce more goods and services. In addition, external environments strengthened, such as the Asian market and the USA. Europe, especially big economy countries such as United Kingdom and Germany, imports goods from these countries and they expand their business into these countries. This makes the companies more competitive and as a result, investment increases, with capital also increasing.
As previously mentioned, GDP increases because of more goods and services being produced or because of higher inflation. The first half of the year 2000 was characterised with high oil prices and exchange rate depreciation until the beginning of May. Another factor that led to an increase in GDP during the first half of the year was higher import prices, leading to a rise in producer prices. There was an increase in employment, which directly contributes towards more disposable income creating higher demand for goods and services. High demand for goods and services in a market force the producers to increase their production level.
External factors also have a direct effect on the economy, for example the effects of terror war, changing oil prices, and environmental disasters. During 2001, when the monetary policy was conducted, Europe was going through a challenging time. Food and oil prices elevated and therefore the companies struggled to keep their costs down and produce the same quantity. Reducing the production level and cutting down on other costs such as labour and investment in technology resulted in a decrease in GDP. Also to be mentioned is the fact that consumers are really affected by uncertainty and a good example was the terrorist attack on 11th September 2001, when the global stock market became volatile and people stopped investing in the market and put their money in banks as it was the safer option. In addition, financial institutions cut down the level of loans to the private sector.
The beginning of the year 2002 was slightly more stable and the economy of Europe recovered since than there has been a moderate growth. However, the war in the Middle East was the main factor behind the escalating oil prices and the uncertainty that arose from this affected the level of investment and expansion. This was directly related to the households and the businesses themselves. In the more stable global environment the benefits of having monetary union began to show and exports increased.
As the years progressed the price stability policy, inflation, and the exchange rate improved. The European Central Bank was taking very careful decisions to enhance the Euro Area’s economic growth. In addition, the labour market reforms were key in the keeping the European economy healthy.
The benefits of the Euro zone include being able to use other countries resources and being able to invest in these countries. With the single currency there are no transaction costs such as currency conversions, and with the elimination of tariffs and other barriers to trade, trade becomes much easier. Also with greater mobility of labour, employment efficiency has the potential to increase. All of these factors will lead to a higher level of GDP which is shown in the graph.
Benefits of monetary unions and openness the euro area can be illustrated clearly with diagram shown below. (De Grauwe, 2005, p.83)
Benefits (% of GDP)
Trade (% of GDP)
Europe now has more opportunity to boost their economy and become a leading economy in the world with the new expansion that happened on 1st of January 2007. Romania and Bulgaria joined the EU and this brings positive and negative affects. Cheaper labour, less tax, and less complicated legislation is a potential for western companies to expand. No exchange rate and the same currency is another reason for German, English, and Italian (leading economies) to invest on capital and transfer their business to these countries. These would simply increase the production level of goods and services available to the market plus the business saves on costs.
Conclusion
The costs of a common currency have much to do with the macroeconomic management of the economy, the benefits are mostly situated at the microeconomic level. Eliminating national currencies and moving to a common currency can lead to gains in economic efficiency. The efficiencies would result from the elimination of transaction costs and exchange rates. Direct gains from the elimination of transaction costs represent one-quarter to one-half 1% of community GDP.
Single currency is not the only factor that affects the GDP. Other important factors are necessary to be mentioned such as; Oil prices, War, Weather Conditions, Net Import level. Europe as a continent has a lot of natural resources that do contribute towards the success of its own healthy state. This shows clearly that as a business progress investment on technology or production could be done efficiently and effectively between union members.
What happened in the world is vital towards the economic state of Europe. Europe is really linked with other continent especially Asia and USA. If for some reason the economies of those countries decrease or the government policies change Europe would face difficulties.
That is what happened with EU GDP in 2001, there was a steep decrease in GDP, and this was because of terrorist attack on USA, which increased the level of uncertainty between countries.
When talking about the exchange rate it is quite important to mention the link between exchange rate and banks. Banks gains revenue from different sources but one of them is commission paid to the banks in exchanging national currencies. Statistics show that 5% of bank revenue is the commission paid. Eventually this revenue has disappeared with monetary union. As the bank revenue decreases this could bring negative affect businesses who are trying to expand and invest. There is less profit made from building societies and less money given away to companies therefore businesses investments are smaller for example on technology. So in general any reduction of money injection into the production process (with out making it any more efficient) can result in a lowering of GDP
When it comes to analysis of economy growth is really important to mention that GDP is not always the perfect measurement. There are some other factors to be included. It neglects quality improvement therefore inflation is overstated and growth understated a clear example would be the increase in car prices, this is as a result of quality improvement but reality is that it is counted as inflation.
Household production is not included, lots of people these days do produce at home and DIY has increased. Volunteer service and illegal work are not taken into account when the government works out the economic growth.
Reference
Paul De Grauwe (2005) Economics of Monetary Union, Sixth Edition, Oxford University Press Inc. New York
Alberto Giovannini and Colin Mayer (1991) European Financial Integration, First Edition, Cambridge University Press, Great Britain.
The European Union Annual Reports. Available: [Accessed March 2, 2007]
Chapter 3
Inflation in Europe from 1999 – present
One of the ECB’s main targets is that of price stability which it defines as a year on year increase in the harmonized index of consumer prices (HICP). This is the further defined for the Euro area as near to 2% as possible. The ECB’s aim is to maintain this over the medium term in order to fight deflation. If convergence is not complete then this can compromise the success of the union.
The presence of these differentials still exists within the Euro area although not very significant when looking at Euro area as a whole the extent of convergence is significant when determining monetary policy. The differentials are mainly attributed to differences in internal factors within the countries such as labour costs and taxes. Germany has a very different internal structure than Belgium in terms of labour costs. France has low tax rates these can all in the great scheme of things affect inflation in the Euro area as a whole.
The role of monetary policy therefore is to maintain the 2% inflation target despite these differentials, which it aims to do by maintaining price stability, making sure that peoples expectation are anchored and maintaining a transparent market situation so that relative prices can be adjusted for across the Euro-zone in the presence of asymmetric shocks.
The following is a year by year analysis of inflation levels its causes and monetary policy in response to these: (see graph below)
(euro stat website)
1999 when the Euro was introduced the inflation rate was initially very low, below 1%. This is most likely to have been caused by weak external demand stemming from the Asian Crisis of 1997 and the Russian Crisis of 1998. Following these crises, there was a drop in consumer confidence, therefore less spending and so inflation remained low. However, after starting low, inflation rose rapidly throughout 1999 to reach and then exceed the 2% target set down by the ECB. This could have been a direct result of the introduction of the Euro however other factors may have also have effected it.
Between January 1999 and September 2000, world oil prices rose by 200%. (Roeger, 2005). The increase in price of one of the most used raw materials in the world would suggest that the general price level would rise due to increase in costs. However a study done by Roeger using a model called QUEST to judge the impact of a rise in oil prices suggests that an increase in oil prices will lower GDP in the long run, but central banks should be able to control inflation via interest rates. However as the ECB controls interest rates for the whole of the Euro area, if the effect of the oil price rises are asymmetric across Europe then this may prove problematic for the ECB as they must consider all the countries when changing the interest rate. There were also problems in 1999 of expected inflation which may have been a result of the introduction of the single currency. As people expected the prices to rise then wages would rise as a result and leading to inflation anyway.
2000 stock markets fell worldwide, leading to a recession in the US and the EU followed. This meant a cut in interest rates to promote spending and so inflation was still allowed to rise. According to Baldwin and Wyplosz (2006) the combination of the recession and oil price hikes mean bad luck for the ECB and posed them a serious policy dilemma. They were faced with the decision whether to try to maintain their target of 2% inflation at the cost of a deeper and longer lasting slowdown, or focusing on limiting the contractionary effect of the oil shock and take the risk of missing their inflation target.
This would suggest that it was this combination of external events that caused the increases in inflation and not the Euro. However, the fact that the introduction of the Euro means that only one bank controls monetary policy for the whole Euro area, suggests that although the single currency may not have directly caused the inflation, the ‘one size fits all policy’ that the ECB must adopt could compound the problem and make it harder for the individual countries to cope with the external events, as their governments cannot control what happens.
2001 In May 2001, inflation peaked at 3.1% the highest level since the Euro had been introduced in 1999. This would have rendered the ECB unlikely to cut interest rates for fear of worsening the inflation situation. (bbc.co.uk/news) However at the same time, Germany, the largest economy in the Euro area was going through a recession. This meant that the European Central Bank was facing the dilemma of trying to keep inflation down without worsening the economic health of Germany. The UK inflation rate at this point, measured using the EU’s HICP was a mere 1.7%. As the UK is part of the EU, the factors affecting the EU would also affect the UK economy. However it is clear that the inflation problems felt by the Euro area are much worse than in the UK. This would suggest that although the reasons for inflation may not be the Euro itself, the effect is worsened by the Euro as the monetary policy implemented to cope with inflation is now used across a much wider area and differences within these areas will limit the usage of interest rates as the effect of increasing them could have major impact such as worsening the German recession.
After this peak in May 2001, inflation fell rapidly. This is likely to be as a result of the global effect of September the 11th, as people’s confidence fell and investment decreased because it was perceived to have become more risky.
2002 The Euro notes and coins were introduced into the area in January 2002.
‘The theory of menu costs suggests that the Euro changeover creates a synchronisation mechanism for retailers to increase prices on the same date. This synchronisation occurs because although retailers could have posted prices in Euros at almost any time they were obliged to do so by January 1st 2002 at the latest.’ (Ercolani and Dutta, 2006)
As all retailers must change their prices over, there is a possibility of increasing prices without consumers being too aware of this. This would lead to at least short run inflation. The graphs below illustrate inflation in the Euro area countries and in three EU countries that didn’t adopt the Euro between 1995 and 2005, with the shaded areas highlighting the period when the notes were introduced. From the graph there are no obvious trends in inflation at the time of the coins and notes being introduced suggesting that it did not have a unified effect on inflation.
However also early in 2002 was also an increase in oil price combined with a depreciation of the euro. As well as this (late 2002) the middle east tension saw a further increase in oil price. Also general corporate earnings continued to weigh on equity price due to the volatility in the market and thus a general downward growth in the euro area. Consequenlty the HICP inflation was significanlty above its 2% target but the euro cash change over played an overall small role in this as seen above during this time (economic slowdown) wage growth was still strong despite the rise in unemployment. The whole situation caused a subduing of economic growth which halted an upward spiral of prices. As well as this an apprectiation of the euro caused an abating of inflationary pressure.
2002-2003: the monetary growth was strong during this year but the financial markets were still highly volatile and investors preferred short term liquid low risk financial assets attributed to the relatively low interest rates of 2002. The inflationary risk and credit growth were considered to be low during this time so the governing council decided to reduce interest rates the result of which caused an adverse effect on economic activity but an improvement on the outlook for price stability.
2004-2005: during this year inflation levels remain nearer its target (price stability) defined at 2%.The low interest rates supporting economic growth and job creation. An increase in oil prices exerts pressure on increasing it above 2%. Meanwhile with the very low interest rates borrowing remains strong and the goverining council becomes concerned about price stabiltiy so it then pushes up interest rates. The result of which is a reduction in inflation due to the appreciation of the euro caused by the adjustment of interest rates but it is also impacted by a generally stronger global economy.
(Annual informatin adapted from ECB website)
Prediction for future inflation levels in 2006 the inflation level is estimated to have fluctuated from 2% in the first quarter to 2.1% in the second to 2.3% in the third and ending the year at 2.2%. It is also predicted that inflation by the end of the first quarter of 2007 will be 2%. (euro stat website)
From 1999 -2000 the euro was introduced during a time of strong economic growth in the world during this time there was also an increase in oil prices. Both of these were caused by external reasons other than the euro. However, the introduction of the euro would have caused transmission effects such affecting people’s expectation of the single currency if there was a general expectation for prices to go higher prices and wages resulting in inflationary pressure. During this time inflation rose up to its target of 2%.The ECB’s monetary policy was to increase interest rates during this time which resulted in a depreciation of the euro (theory from international economics) so the result of this the inflation rate was both a combination of the increase in oil prices and a depreciation of the euro. In 2000 inflation steadily rose and was mainly the result of the crash in the stock market the ECB’s monetary policy to this was to decrease interest rates but due to the lag time ( j curve effect) was only noticed in late 2000 early 2001. During 2001 inflation peaked at 3.1% but this was attributed to a lot of events outside the control of the ECB the foot and mouth disease caused processed food price to soar as well as this wage rate was high (early 2001) and the terror attacks late 2001 as well as the previous weakening global economy from 2000 (stock market crash). The ECB response as was similar across other main banks was to increase interest rates. Consider America’s inflation reaction to the terror attacks graph below – not a huge gap as seen in previous years the inflation levels was caused by the external economic activity however in japans case inflation further decreased.
2002 hosted a major transmission event for the euro – the notes and coins were introduced a very uncertain time for people and the ECB but this was not the major factor in the soaring inflation it was the result of an increase in oil price it was also attributed to the previous effects of monetary policy (the increase of interest rates) which depreciated the euro this was in early 2002 inflation then fell sharply fell due to the weakening European market (fall in GDP) which was due to the high wage rates of the time and the ECB appreciated the euro (resulting in this fall in inflation). In 2003 – 2004 this previous years appreciation caused the strong monetary growth seen in the first part of this year and fears for an upward spiral of inflation caused the ECB’s to reduce the interest rates and consequently inflation fell below 2%. 2004- 2005 the strong global economy and an increase in oil price are the reason for an increase in inflation early in the year but other less volatile HICP indicators played a significant role in curbing inflation, borrowing was also high during this time due to the earlier decrease in interest rates, a consequent increase in interest brought the inflation back down. 2006 – 2007 is predicted to be relatively stable.
External events primarily in the earlier years of the Euro caused the ECB to alter its monetary policy to keep inflation near to its target but the single monetary policy has been successful in maintaining inflation levels in the context of a volatile global market situation. There are still differentials in the euro-zone but these are small and only to be expected and as a whole monetary policy is still working.
