EUROZONE OVERVIEW

Aditya Bansal

THE EUROPEAN UNION & THE EUROZONE

The European is a politico-economic union of 28 European countries

The Maastricht Treaty established the European Union under its current name in 1993 and introduced European citizenship

The Eurozone consists of those Member States of the European Union that have adopted the euro as their currency(currently 19 countries)

Other EU states except Denmark and UK are obliged to join the Eurozone once they fulfil the criteria

Andorra, Monaco, San Marino and Vatican City are not part of the European Union but they use Euro as their currency.

EURO CONVERGENCE CRITERIA

The euro convergence criteria (also known as the Maastricht criteria) are the criteria which European Union member states are required to adopt the euro as their currency. 

5 Euro Convergence Criterion

HICP inflation: Shall not exceed the HICP inflation rates in the 3 EU member states with the lowest HICP inflation plus 1.5%

Government budget deficit: Must not exceed 3%  Government debt-to-GDP ratio: Must not exceed 60%Exchange rate stability: Applicant countries should not have

devalued the central rate of their euro pegged currencyLong-term interest rates: Shall be no more than 2.0% higher

MONETARY POLICY IN THE EUROZONE

By adopting the euro, the economies of the Eurozone members become more integrated. 

Monetary policy in the euro area is in the hands of the independent Euro-system, comprising the European Central Bank (ECB), which is based in Frankfurt, Germany, and the national central banks of the euro-area Member States.

The ECB defines the monetary policy for the whole Eurozone – a single monetary authority with a single monetary policy and the primary objective is to maintain price stability

FISCAL POLICY IN THE EUROZONE

Fiscal policy remains largely the responsibility of the Member States, but national governments must coordinate their respective economic policies in order to attain the common objectives of stability, growth and employment.

Coordination is achieved through a number of structures and instruments, the Stability and Growth Pact (SGP) being a central one. The SGP contains agreed rules for fiscal discipline, such as limits on government deficits and on national debt, which must be respected by all EU Member States

The Pact set a limit of 3% of GDP for the yearly deficit of all the Eurozone member states in 1997; with fines for any state which exceeded this amount

WAS THE PACT FOLLOWED?

Germany - along with Italy - was the first big country to break the 3% rule

After that, France followed

Italy was the worst offender. It regularly broke the 3% annual borrowing limit

The Spain government stayed within the 3% limit every year from the euro's creation in 1999 until 2007

Greece never stuck to the 3% target, but manipulated its borrowing statistics to look good, which allowed it to get into the euro in the first place

TYPICAL PROBLEMS WITH GREECE

Greece forged balance sheets to enter Eurozone

Main industry of Greece – tourism – suffered

Structural weakness of the Greek economy, administrative weakness and rampant tax evasion in key sectors

Greeks have a perception that corruption, tax evasion, and cheating should be not only tolerated but even rewarded.

Instead of adhering to virtues such as meritocracy and social justice, Greeks began to pursue easy money.

In parallel, governments showed irrational fiscal irresponsibility and populism to gain sympathy with voters, while the population turned a blind eye as this was a win-win situation for everyone.