The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices, but this impression was not confirmed by general indices of inflation and other studies. A study of this paradox found that this was due to an asymmetric effect of the introduction of the euro on prices: while it had no effect on most goods, it had an effect on cheap goods which have seen their price round up after the introduction of the euro.
Inflation
Euro
Euro | Inflation
In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices, but this impression was not confirmed by general indices of inflation and other studies. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices, but this impression was not confirmed by general indices of inflation and other studies. Yes. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices, but this impression was not confirmed by general indices of inflation and other studies.
when did the euro come out in spain
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2002
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what is this ?
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The euro (symbol: €; code: EUR) is the official currency of 19 of the member states of the European Union.
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are there any inflation risk associated with it ?
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A credible commitment to low levels of inflation and a stable debt reduces the risk that the value of the debt will be eroded by higher levels of inflation or default in the future, allowing debt to be issued at a lower nominal interest rate. Unfortunately, there is also a cost in structurally keeping inflation lower than in the United States, UK, and China. The result is that seen from those countries, the euro has become expensive, making European products increasingly expensive for its largest importers. Hence export from the eurozone becomes more difficult.
Euro | Macroeconomic stability
The introduction of the euro has led to extensive discussion about its possible effect on inflation. In the short term, there was a widespread impression in the population of the eurozone that the introduction of the euro had led to an increase in prices, but this impression was not confirmed by general indices of inflation and other studies. A study of this paradox found that this was due to an asymmetric effect of the introduction of the euro on prices: while it had no effect on most goods, it had an effect on cheap goods which have seen their price round up after the introduction of the euro.
Euro | Inflation
The study found that consumers based their beliefs on inflation of those cheap goods which are frequently purchased. It has also been suggested that the jump in small prices may be because prior to the introduction, retailers made fewer upward adjustments and waited for the introduction of the euro to do so.
Euro | Inflation
These variations of exchange rates can be a source of instability. For the countries who recently joined euro zone, most of them are small and very open economies. Exports account for a significant share of the GDP and international trade, the trade with EU countries playing an essential role. As emerging countries, when the currency value becomes volatile they are prone to sudden shifts of investments and capital flows (perhaps by foreign investor "animal spirits" and this is similar to sudden flow stops in Latin American countries).
Fear of floating | In favor of monetary union
Inflation slowed down to 2.2% in 2006. However, after the austerity measures it was much higher than the criteria until the crisis. The crisis slowed it down to 2.9%, but in the end it was above the Maastricht criteria in 2009. The annual inflation was 0.9% in October 2013.
Hungary and the euro | Inflation
The compliance check above was conducted in June 2014, with the HICP and interest rate reference values specifically applying for the last assessment month with available data (April 2014). As reference values for HICP and interest rates are subject for monthly changes, any EU member state with a euro derogation has the right to ask for a renewed compliance check at any time during the year. For this potential extra assessment, the table below feature Eurostat's monthly publication of values being used in the calculation process to determine the reference value (upper limit) for HICP inflation and long-term interest rates, where a certain fixed buffer value is added to the moving unweighted arithmetic average of the three EU Member States with the lowest HICP inflation rates (ignoring states classified as "outliers").
Enlargement of the eurozone | Convergence criteria
HICP figures from the ECB, taken from May of each year:
Eurozone | Inflation
Inflation risk is the risk that the value of the currency a bond pays out will decline over time. Investors expect some amount of inflation, so the risk is that the inflation rate will be higher than expected. Many governments issue inflation-indexed bonds, which protect investors against inflation risk by linking both interest payments and maturity payments to a consumer price index. In the UK these bonds are called Index-linked bonds.
Government bond | Inflation risk
At the American Economic Association's annual meeting of 2015, Berkeley University economic historian Barry Eichengreen predicted that the withdrawal of a member state, such as Greece, from the Eurozone, would "set off [a] devastating turmoil in financial markets." At the same event, Harvard professor of Public Policy and professor of Economics Kenneth Rogoff characterised the overall common-currency project in Europe a "historic disaster", while Harvard professor of Economics and NBER president emeritus Martin Feldstein opined that "there may be no way to end to [the] euro crisis," and suggested that to avoid a break-up and "ensure the Euro's survival," the best way forward "would be for each individual Eurozone member-state to enact its own tax policies to spur demand, including cutting the value-added tax for the next five years to increase consumer spending." Specifically for Greece, a 2015 PwC study expected the "new drachma" to depreciate "almost immediately" and inflation in the country to rise "sharply" to around 6% on average.
Withdrawal from the eurozone | Economic considerations
Flassbeck views a currency union primarily as an "inflation community". This means that all member countries of a monetary union had to show the same price change rate. That could only be achieved by equalisation of growth of unit labour costs, with the aim to maintain the price competitiveness of all countries and to avoid high current account surpluses as well as deficits. As consequence for the eurozone he requests that all euro states had to comply with the Central Bank's target inflation rate. Because Germany had seriously undershot this target inflation rate through its concept of "wage restraint" since introduction of the monetary union, while other countries have met or slightly exceeded it, the German industry had gained market share on a large scale to the expense of the other countries in the eurozone.
Heiner Flassbeck | European Monetary Union and crisis
These criteria include: complying with the debt and deficit criteria outlined by the Stability and Growth Pact, keeping inflation and long-term governmental interest rates below reference values, and stabilising their currency's exchange rate versus the euro. Generally, it is expected that the last point will be demonstrated by two consecutive years of participation in the European Exchange Rate Mechanism (ERM II), though according to the Commission "exchange rate stability during a period of non-participation before entering ERM II can be taken into account." The country must also ensure that their national laws are compliant with the ECB statute, ESCB statute and of the Treaty on the Functioning of the European Union.
Enlargement of the eurozone | Accession procedure
In light of the threat of a further fall in inflation and possibly even of a protracted period of deflation, on 7 November 2013 the CNB declared an immediate commitment to weaken the exchange rate to the level of 27 Czech korunas per 1 euro (day-on-day weakening by about 5 percent) and to keep the exchange rate from getting stronger than this value until at least the end of 2014 (later on this was changed to the second half of 2016). The CNB thus decided to use the exchange rate as a supplementary tool to make sure that inflation returns to the 2 percent target level.
Inflation targeting | Czech Republic
Another effect of the common European currency is that differences in prices—in particular in price levels—should decrease because of the law of one price. Differences in prices can trigger arbitrage, i.e., speculative trade in a commodity across borders purely to exploit the price differential. Therefore, prices on commonly traded goods are likely to converge, causing inflation in some regions and deflation in others during the transition. Some evidence of this has been observed in specific eurozone markets.
Euro | Price parity
This would drive up inflation, and reduce the purchasing power of the average Greek. At the same time, the country's economic output would drop, putting more people out of work where one in five is already unemployed. The prices of imported goods would skyrocket, putting them out of reach for many. Analyst Vangelis Agapitos estimated that inflation under the new drachma would quickly reach 40 to 50 per cent to catch up with the fall in the new currency's value. To stop the falling value of the drachma, interest rates would have to be increased to as high as 30 to 40 per cent, according to Agapitos.
Greek withdrawal from the eurozone | Immediate economic fallout inside Greece
What European policymakers do not want to face the world's excessive saving funds is flowing in to Europe and it makes Euro more valuable. Because it means that Europe's product lower position in the world's market. The dollar is still an essential commodity for the commodity, currency, and derivatives of the world. The value of the dollar, which reflects inflation, is too high compared to other Asian currencies. It is necessary to implement coordinated efforts to resolve the exchange rate gap. But if the U.S. financial system fails to restore trust or if the Federal fails to respond to inflation expectations, the debate will end and the dollar will fall into turmoil.
The World Is Curved | Danger of tremendous financial resources
Indeed, inflation rates continued to differ widely within EMS. For example, Inflation rates of the nine members of the European Community vary 3 percent in Germany and 13 percent in only Italy.
European Monetary System | Criticism
Before the introduction of the euro, some countries had successfully contained inflation, which was then seen as a major economic problem, by establishing largely independent central banks. One such bank was the Bundesbank in Germany; the European Central Bank was modelled on the Bundesbank. The euro has come under criticism due to its regulation, lack of flexibility and rigidity towards sharing member States on issues such as nominal interest rates. Many national and corporate bonds denominated in euro are significantly more liquid and have lower interest rates than was historically the case when denominated in national currencies. While increased liquidity may lower the nominal interest rate on the bond, denominating the bond in a currency with low levels of inflation arguably plays a much larger role.
Euro | Macroeconomic stability
On that occasion, the Governing Council clarified that "in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term". Since then, the numerical target of 2% has become common for major developed economies, including the United States (since January 2012) and Japan (since January 2013).
Inflation targeting | European Central Bank
The study predicted that "the [new currency's] depreciation would lead to a high inflationary environment with a medium-term inflation rate of around 4%, more than double the expected rate in the Eurozone." German ordoliberal economist and president of the Ifo Institute for Economic Research Hans-Werner Sinn, on the other hand, argued for the economic benefits for Greece if the country were to withdraw from the Eurozone. In 2015, German finance minister Wolfgang Schäuble reportedly proposed that Greece "temporarily" exits the Eurozone for 5 years and re-introduces a national currency. The "informal" proposal contained a provision whereby Athens would transfer state assets worth €50 billion into a trust fund located in Luxembourg and controlled by the European Stability Mechanism, in order for the assets to be sold off and the proceeds to pay off part of the Greek debt.
Withdrawal from the eurozone | Economic considerations
After the crash of the common market and simultaneous outbreaks of war in two former Yugoslav republics, the monthly inflation rate in Serbia and Montenegro was 50% in February 1992, reaching 100% in June the same year. This caused severe and prolonged hyperinflation, which has led to a devastation of the region. The Yugoslav dinar has been considered one of the worst-performing currencies of the world.
Montenegro and the euro | Yugoslav Dinar
High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving. Inflation can also impose hidden tax increases. For instance, inflated earnings push taxpayers into higher income tax rates unless the tax brackets are indexed to inflation. With high inflation, purchasing power is redistributed from those on fixed nominal incomes, such as some pensioners whose pensions are not indexed to the price level, towards those with variable incomes whose earnings may better keep pace with the inflation.
Inflation | Negative
The result is that GDP per inhabitant appears to be overestimated in these regions and underestimated in regions with commuter outflows.". Another example of artificial inflation is Groningen. The calculated GDP per capita is very high because of the large natural gas reserves in this region, but Groningen is one of the poorest parts in the Netherlands. Among the 19 NUTS-2 regions exceeding the 150% level, five were in Germany, two in each Ireland, Austria and the Netherlands and one each in Belgium, the Czech Republic, Denmark, France, Italy, Poland, Romania, Slovakia, and Sweden, as well as in the single region Grand Duchy of Luxembourg.
Economy of the European Union | NUTS-1 and NUTS-2 regions
In practical terms, any non-euro EU member state can become an ERM II member whenever they want, as this mechanism does not define any criteria to comply with. Economists however consider it to be more desirable for "unstable countries", to maintain their flexibility of having a floating currency, rather than getting an inflexible and partly fixed currency as an ERM II member. Only at the time of being considered fully "stable", the member states will be encouraged to enter into ERM II, in which they need to stay for a minimum of two years without presence of "severe tensions" for their currency, while at the same time also ensuring compliance with the other four convergence criteria, before finally being approved to adopt the euro.
Enlargement of the eurozone | Convergence criteria
One theory is that these problems are caused by a structural contradiction within the euro system, the theory is that there is a monetary union (common currency) without a fiscal union (e.g., common taxation, pension, and treasury functions). In the Eurozone system, the countries are required to follow a similar fiscal path, but they do not have common treasury to enforce it. That is, countries with the same monetary system have freedom in fiscal policies in taxation and expenditure. So, even though there are some agreements on monetary policy and through the European Central Bank, countries may not be able to or would simply choose not to follow it.
Causes of the European debt crisis | Structural problem of Eurozone system
Euro short-term rate (€STR) is a reference rate for the currency euro. The €STR is calculated by the European Central Bank (ECB) and is based on the money market statistical reporting of the Eurosystem. The working group on euro risk-free rates has recommended €STR as a replacement for the EMMI Euro Overnight Index Average (EONIA) as the Euro risk-free rate for all products and contracts.
€STR | Introduction
Although the ECB does not consider itself to be an inflation-targeting central bank, after the inception of the euro in January 1999, the objective of the European Central Bank (ECB) has been to maintain price stability within the Eurozone. The Governing Council of the ECB in October 1998 defined price stability as inflation of under 2%, "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%" and added that price stability "was to be maintained over the medium term". The Governing Council confirmed this definition in May 2003 following a thorough evaluation of the ECB's monetary policy strategy.
Inflation targeting | European Central Bank
Jürgen von Hagen has also published extensively on the macroeconomics of European integration and the Eurozone. Before the Eurozone's conception, in the mid-1990s, von Hagen (and Manfred Neumann) supported the vision of a "Europe of Two Speeds", with a monetary union including Germany, France, Benelux, Sweden and Austria that would allow the remaining economies within the EU to converge more quickly with this core union; failing that, he cautioned against the creation of a monetary union before such adjustments would have occurred. Moreover, he already emphasized in the 1990s the risk that excessive budget deficits in the Eurozone may pressure the European Central Bank to violate its fiscal restrictions and bail out excessively indebted governments ex post (by monetizing the government's debt) or ex ante (by keeping interest rates very low), thus in turn priming the Eurozone for high inflation (with Barry Eichengreen).
Jürgen von Hagen | European monetary economics and the macroeconomics of European integration
In Belgium, many wages, pensions, property rental costs, insurance premiums, unemployment benefits, health insurance payments, etc. are by law tied to the Health Index. Some wages and benefits are adapted to the Index after a rise of the Index above a certain threshold. Other adjustments, like house rent or insurance premiums, are carried through on a yearly basis. Thus, the income of the average Belgian closely tracks overall inflation - which makes it different from the rest of the eurozone. Government cabinets can decide to "jump" the index, i.e. knowingly skip the automatic adaptation of all wages and benefits tied to the index.
Consumer price index (Belgium) | Compensation for inflation
In 2009, he said he was in favor of accelerating the introduction of the euro, adding: "The euro must be a key issue for any future government. When the crown rate jumps up and down, you can't plan anything. I do not understand why politicians do not finally understand. When all the countries around us adopt the euro, speculative capital will only play with our koruna. And we can't stand that. Now the exchange rate is 27.50 per euro. When it was 22.90 and subsequently the koruna weakened, most of it secured the level of 24 to 25 CZK. Analysts have previously claimed that the euro will go below twenty crowns.
Andrej Babiš | Political views
A similar criticism has been directed at fair value accounting rules. The effect of the single Eurozone interest rate on the relatively high-inflation countries in the Eurozone periphery is also pro-cyclical, leading to very low or even negative real interest rates during an upturn which magnifies the boom (e.g. 'Celtic Tiger' upturn in Ireland) and property and asset price bubbles whose subsequent bust magnifies the downturns.
Procyclical and countercyclical variables | Procyclical
Romania has managed floating exchange rates and it is in line with using inflation targets as a nominal anchor for monetary policy and allowing for a flexible policy response to unpredictable shocks likely to affect the economy. Reasons for not entering the euro area are complex, covering national problems, in particular the insufficient economic convergence over a lacking perceived attractiveness of euro membership, to an unresolved institutional reform agenda (Backé and Dvorsky 2018).
Romania and the euro | Monetary and exchange rate policies
The ECB targets interest rates rather than exchange rates and in general does not intervene on the foreign exchange rate markets. This is because of the implications of the Mundell–Fleming model, which implies a central bank cannot (without capital controls) maintain interest rate and exchange rate targets simultaneously, because increasing the money supply results in a depreciation of the currency. In the years following the Single European Act, the EU has liberalised its capital markets and, as the ECB has inflation targeting as its monetary policy, the exchange-rate regime of the euro is floating.
Euro | Flexible exchange rates
He had however made some mistakes during the crisis, for example by: raising interest rates just after inflation topped out and just prior to the recession triggered by the Lehman Brothers collapse; also by its early timidity in buying eurozone state bonds.
President of the European Central Bank | Trichet
Buchholz's 1999 book "Market Shock" warned that the Eurozone was unstable and headed toward political turmoil. In a chapter subtitled "How European Unity Splinters," Buchholz pointed out that eventually the Mediterranean nations and Ireland would stumble because those countries required a different monetary policy than the core countries of Germany and France.
Todd G. Buchholz | Instability of the Eurozone
For example, there were still 19 CSDs operating in the euro area in 2009 and almost 40 in the 27 countries of the EU. This situation is clearly not optimal for a single currency area or for the EU, as it encourages each country's financial market to remain domestically oriented. Investors continue to invest mostly in domestic securities, and as a result, the euro-area financial market cannot fully benefit from the risk diversification and competition benefits that arise from having a single currency. These barriers which provoke a considerable competitive disadvantage for European capital markets were identified in a report by the Giovannini Group.
T2S | Origin
Since membership of the eurozone establishes a single monetary policy for the respective states, they can no longer use an isolated monetary policy, e.g. to increase their competitiveness at the cost of other eurozone members by printing money and devalue, or to print money to finance excessive government deficits or pay interest on unsustainable high government debt levels. As a consequence, if member states do not manage their economy in a way that they can show a fiscal discipline (as they were obliged by the Maastricht treaty), they will sooner or later risk a sovereign debt crisis in their country without the possibility to print money as an easy way out.
Economic and Monetary Union of the European Union | Monetary policy inflexibility
Since the end of 2017 Turkey has high inflation rates. It is speculated that the new elections took place frustrated because of the impending crisis to forestall. In October 2017, inflation was at 11.9%, the highest rate since July 2008. The Turkish lira fall from 1.503 TRY = 1 US dollar in 2010 to 5.5695 TRY = 1 US dollar in August 2018.
Hyperinflation | Turkey
Relationships to commodity indices are recognizable. A rising Euro Currency Index means a tendency of falling commodity prices. This is especially true for agricultural commodities and the price of oil. Even the prices of precious metals (gold and silver) are correlated with the index. Arithmetically weighted Euro Currency Index is comparable to the trade-weighted Euro Effective exchange rate index of the European Central Bank (ECB). The index of ECB measures much more accurately the value of the Euro, compared to the Euro Currency Index, since the competitiveness of European goods in comparison to other countries and trading partners is included in it.
Euro Currency Index | Concept
This may be because of the inclusion of the Financial crisis of 2007–2008 and ongoing integration within the EU. Furthermore, older studies accounting for time trend reflecting general cohesion policies in Europe that started before, and continue after implementing the common currency find no effect on trade. These results suggest that other policies aimed at European integration might be the source of observed increase in trade.
Euro | Trade
Due to the lack of its own resources, Spain has to import all of its fossil fuels, which in a scenario of record prices added much pressure to the inflation rate. Thus, in June 2008 the inflation rate reached a 13-year high of 5.00%. Then, with the dramatic decrease of oil prices that happened in the second half of 2008 plus the confirmed burst of the property bubble, concerns quickly shifted to the risk of deflation instead, as Spain registered in January 2009 its lowest inflation rate in 40 years which was then followed in March 2009 by a negative inflation rate for the first time ever since this statistic was recorded.
2008–2014 Spanish financial crisis | Prices
They are not always right about the dates : some anticipations were included a Euro/USD exchange rate of 1.75 by the end of the year 2008 and the inevitable default of the United States government on its treasury obligations by the summer of 2009. But they have announced the September 2008 financial breakdown and 2011 revolutions in Maghreb with high precision, among others.
Leap2020 | Introduction
Furthermore, investors have doubts about the possibilities of policy makers to quickly contain the crisis. Since countries that use the euro as their currency have fewer monetary policy choices (e.g., they cannot print money in their own currencies to pay debt holders), certain solutions require multi-national cooperation. Further, the European Central Bank has an inflation control mandate but not an employment mandate, as opposed to the U.S. Federal Reserve, which has a dual mandate. According to "The Economist", the crisis "is as much political as economic" and the result of the fact that the euro area is not supported by the institutional paraphernalia (and mutual bonds of solidarity) of a state.
Causes of the European debt crisis | Loss of confidence
The enlargement of the eurozone is an ongoing process within the European Union (EU). All member states of the European Union, except Denmark which negotiated opt-outs from the provisions, are obliged to adopt the euro as their sole currency once they meet the criteria, which include: complying with the debt and deficit criteria outlined by the Stability and Growth Pact, keeping inflation and long-term governmental interest rates below certain reference values, stabilising their currency's exchange rate versus the euro by participating in the European Exchange Rate Mechanism (ERM II), and ensuring that their national laws comply with the ECB statute, ESCB statute and of the Treaty on the Functioning of the European Union.
Enlargement of the eurozone | Introduction
On 5 October 1992, a value of 195.98 points was determined. The increase in 1985 was 60.3 percent. On 25 October 2000, the index closed at 130.83 points, up by 33.2 percent. In 2000 began a multi-year upward movement of the Euro. On 29 December 2008, the index marked 209.65 points, an all-time high. The profit since year 2000 is 60.2 percent. In the course of the international financial crisis, from which the U.S. real estate crisis originated in the summer of 2007, the index began to decline. On 6 February 2009 a value of 187.84 points was determined. In the following eight months, the European single currency rebounded from the lows.
Euro Currency Index | Historical overview
Fig.3 describes the excess supply of dollars. This is a situation where the foreign demand for goods, services, and financial assets from the European Union exceeds the European demand for foreign goods, services, and financial assets. If the supply of dollars rises from SS to S'S', excess supply is created to the extent of "ab". The ECB will buy "ab" dollars in exchange for euros to maintain the limit within the band. Under a floating exchange rate system, equilibrium would again have been achieved at "e". When the ECB buys dollars in this manner, its official dollar reserves increase and domestic money supply expands, which may lead to inflation.
Fixed exchange rate system | Excess supply of dollars
Since then, inflation has continued to be a frequently debated political topic and there exists extensive economic literature on the phenomenon. The reason for this lies in the fact that inflation is constantly present in contemporary economies and also because of the many controversial attitudes about inflation. There are severe disputes about its causes, manifestations, consequences, and measures for its removal. The classic concepts define inflation as a situation in which, due to an increase in money circulation, there is a decrease in the value of money, which in turn causes prices to increase. The reason for this is the fact that all of the large-scale inflation at that time was related to excessive money (paper money) emissions and that the huge monetary funds that were standing against the limited commodity funds were created on the market.
Hyperinflation in Yugoslavia | The concept of inflation
In November 2011 the euro's exchange rate index – measured against currencies of the bloc's major trading partners – was trading almost two percent higher on the year, approximately at the same level as it was before the crisis kicked off in 2007.
Euro | Against other major currencies
On the other hand, a general increase in prices can also occur in cases when there is no increase in money circulation. This is due to distortions in the distribution of national income, the balance of payments and other segments where inflationary pressure arises which leads to a general increase in prices and without a rise in the money supply.
Hyperinflation in Yugoslavia | The concept of inflation
However the Greek government-debt crisis led to former British Foreign Secretary Jack Straw claiming the eurozone could not last in its current form. Part of the problem seems to be the rules that were created when the euro was set up. John Lanchester, writing for "The New Yorker", explains it:
Euro | Optimal currency area
On 13 October 2009, the index rose by 208.45 points, near its historical high point.
Euro Currency Index | Historical overview
The Euro Currency Index (EUR_I) represents the arithmetic ratio of four major currencies against the Euro: US-Dollar, British Pound, Japanese Yen and Swiss Franc. All currencies are expressed in units of currency per Euro. The index was launched in 2004 by the exchange portal Stooq.com. Underlying are 100 points on 4 January 1971. Before the introduction of the European single currency on 1 January 1999 an exchange rate of 1 Euro = 1.95583 Deutsche mark was calculated. Based on the progression, Euro Currency Index can show the strength or weakness of the Euro. A rising index indicates an appreciation of the Euro against the currencies in the currency basket, a falling index in contrast, a devaluation.
Euro Currency Index | Concept
As solution for this problem, which he considers as the fundamental cause of the euro crisis, he proposes coordination of wage policies in the European monetary union. In view of the facts that the option of revaluations and devaluations is not given anymore because of the abolition of national currencies, the only alternative was a real devaluation of states with high current account deficits such as Spain, Portugal, Greece and Italy, as well as a real revaluation of Germany — brought by steadily higher wage increases in Germany than in the other eurozone countries.
Heiner Flassbeck | European Monetary Union and crisis
As the reference values for HICP inflation and long-term interest rates change on a monthly basis, any member state with a euro derogation has the right to ask the ECB for an updated compliance check, whenever they believe they have met all both economic and legal convergence criteria. For example, Latvia asked for such an extraordinary compliance check in March 2013 (outside the regular 2-year interval for automatic assessments). In 2009, the authors of a confidential International Monetary Fund (IMF) report suggested that in light of the ongoing global financial crisis, the EU Council should consider granting new EU member states which are having difficulty complying with all five convergence criteria the option to "partially adopt" the euro, along the lines of the monetary agreements signed with the European microstates outside the EU.
Euro convergence criteria | Criteria
The rate of change of the real exchange rate over time for the euro versus the dollar equals the rate of appreciation of the euro (the positive or negative percentage rate of change of the dollars-per-euro exchange rate) plus the inflation rate of the euro minus the inflation rate of the dollar.
Exchange rate | Purchasing power of currency
This is a political decision that keeps these wages and benefits on the then-current level, in order to reduce the government's budget deficit. The Wilfried Martens government in the 1980s did three such "index jumps", and the Michel I Government did one as well in 2015.
Consumer price index (Belgium) | Compensation for inflation
On 7 May 2008, the European Commission approved the application and asked member states to endorse the bid during the EU finance ministers' meeting in July 2008. Slovakia fulfilled the euro convergence criteria. At 2.2%, Slovakia's twelve-month inflation was well below the 3.2% threshold. However, for March 2008 annual inflation was 3.6%. Fiscal deficit was 2.2% versus the reference value of 3.0%. Finally, the government debt ratio was 29.4% of GDP in 2007, well below the maximum ratio of 60.0%. Public opinion supported the switch, with 58% in favour and 35% opposed, but 65% worried about the inflationary impacts of the adoption.
History of the euro | Slovakia
In a dramatic change of policy, following the new Jackson Hole Consensus, on 22 January 2015 Mario Draghi, President of the European Central Bank, announced an "expanded asset purchase programme", where €60 billion per month of euro-area bonds from central governments, agencies and European institutions would be bought. Beginning in March 2015, the stimulus was planned to last until September 2016 at the earliest with a total QE of at least €1.1 trillion. Mario Draghi announced the programme would continue: "until we see a continued adjustment in the path of inflation", referring to the ECB's need to combat the growing threat of deflation across the eurozone in early 2015.
Quantitative easing | Eurozone and Switzerland
On 5 December 2011, S&P placed its long-term sovereign ratings on 15 members of the eurozone on "CreditWatch" with negative implications; S&P wrote this was due to "systemic stresses from five interrelated factors: 1) Tightening credit conditions across the eurozone; 2) Markedly higher risk premiums on a growing number of eurozone sovereigns including some that are currently rated 'AAA'; 3) Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members; 4) High levels of government and household indebtedness across a large area of the eurozone; and 5) The rising risk of economic recession in the eurozone as a whole in 2012.
Causes of the European debt crisis | Rating agency views
By adding dollar amounts that represent different amounts of purchasing power, the resulting sum is misleading, as one would be adding 10,000 dollars to 10,000 Euros to get a total of 20,000. Likewise subtracting dollar amounts that represent different amounts of purchasing power may result in an apparent capital gain which is actually a capital loss. If a building purchased in 1970 for $20,000 is sold in 2006 for $200,000 when its replacement cost is $300,000, the apparent gain of $180,000 is illusory.
Inflation accounting | Measuring unit principle
Quoting extracts from a book by French economist Alain Cotta, she claimed that devaluation of the franc would not bring about inflation.
Political positions of Marine Le Pen | Euro and eurozone
The compliance check above was conducted in June 2014, with the HICP and interest rate reference values specifically applying for the last assessment month with available data (April 2014). As reference values for HICP and interest rates are subject for monthly changes, any EU member state with a euro derogation, has the right to ask for a renewed compliance check at any time during the year. For this potential extra assessment, the table below feature Eurostat's monthly recalculation of criteria values being used in the calculation process to determine the upper limit for HICP inflation and long-term interest rates, where a certain fixed buffer value is added to the moving yearly average for the three EU Member States with the lowest HICP figures (ignoring states classified as "outliers").
Euro convergence criteria | Reference values
The Euro Currency Index started on 4 January 1971 with 100 points. Before the introduction of the European single currency on 1 January 1999, an exchange rate of 1 Euro = 1.95583 Deutsche Mark was calculated. On April 19, 1971, the Euro Currency Index gained 99.67 points calculated with an all-time low. Until 3 December 1979, the index rose by 68.0 percent to 167.43 points. With the depreciation of the Deutsche Mark against the major currencies, the index fell to mid-1980s. On 3 May 1985, the Euro Currency Index was at level 122.26 points, up by 27.0 percent. The strength of the Deutsche Mark against almost all global currencies set the index in the following years to rise again.
Euro Currency Index | Historical overview
Membership in the Eurozone established a single monetary policy, preventing individual member states from acting independently. In particular they cannot create Euros in order to pay creditors and eliminate their risk of default. Since they share the same currency as their (eurozone) trading partners, they cannot devalue their currency to make their exports cheaper, which in principle would lead to an improved balance of trade, increased GDP and higher tax revenues in nominal terms. In the reverse direction moreover, assets held in a currency which has devalued suffer losses on the part of those holding them. For example, by the end of 2011, following a 25 % fall in the rate of exchange and 5 % rise in inflation, eurozone investors in Pound sterling, locked into euro exchange rates, had suffered an approximate 30 % cut in the repayment value of this debt.
Causes of the European debt crisis | Monetary policy inflexibility
The NHIF is estimated to have lost 479m shillings in the collapse of Euro Bank after the bank collapsed with deposits from state corporations.
National Hospital Insurance Fund | Euro Bank Scandal
The primary objective of the European Central Bank, set out in Article 127(1) of the Treaty on the Functioning of the European Union, is to maintain price stability within the Eurozone. The Governing Council in October 1998 defined price stability as inflation of under 2%, “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%” and added that price stability ”was to be maintained over the medium term”. (Harmonised Index of Consumer Prices) Unlike for example the United States Federal Reserve System, the ECB has only one primary objective—but this objective has never been defined in statutory law, and the HICP target can be termed "ad hoc".
European Central Bank | Mandate and inflation target
Any EU Member State may also ask the European Commission to conduct a compliance check, at any point of time during the remainder of the year, with HICP and interest rates always checked for the past 12 months – while debt and deficit compliance always will be checked for the 3-year period encompassing the last completed full calendar year and the two subsequent forecast years. As of 12 September 2014, all of the remaining euro derogation states without an opt-out, had not yet entered ERM-II, which mean its highly unlikely any of them will ask the European Commission to conduct an extraordinary compliance check ahead of the publication of the next regular convergence report (scheduled for release in May/June 2016).
Euro convergence criteria | Reference values
The collapse of the Bretton Woods system destabilised European markets and delayed the wish to have monetary integration in the member states of the European Economic Community. (Today EU). The Bretton Woods system was a system where exchange rates remained stable while having inflation under control. The dollar was pegged to the gold standard and the 14 European participating countries became convertible with the dollar. In the EU, further monetary cooperation and stable exchange rates were considered necessary to facilitate the creation of the internal market. The Werner Report was a draft proposal in the EU framework to have monetary cooperation to facilitate the internal market.
Denmark and the euro | European Monetary System and pre-euro monetary co-operation
In addition, 16 banks did not clear the hurdle rate of 8% in the baseline scenario after adjustments due to the AQR, with an aggregate shortfall of 9.4 billion EUR.
2014 European Union bank stress test | Results of the stress test
Presenting the idea of "stability bonds", Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy co-ordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public finances. Under the proposals, eurozone governments would have to submit their draft national budgets for the following year to the European Commission by 15 October. The commission would then be able to ask the government to revise the budget if it believed that it was not sound enough to meet its targets for debt and deficit levels as set out in the Euro convergence criteria.
Eurobond (eurozone) | Tighter fiscal rules
Flassbeck cites that the monetary policy of the German Bundesbank and the European Central Bank (ECB) to control the money supply ever geared to the potential output of the past. If economic growth would exceed money supply respectively Gross National Product, the estimated potential output, the ECB would swivel in the Bundesbank already in advance to a restriction course without a noteworthy endangering of price stability by exceeding the target inflation rate. One could never set a potential output beforehand. Flassbeck also considers the target inflation rate of the ECB to be too low and refers to the height at other major central banks.
Heiner Flassbeck | Monetary, fiscal and wage policy
The European microstates of Andorra, Monaco, San Marino, and the Vatican City are not covered by convergence criteria, but by special monetary agreements that allow them to issue their own euro coins. However, they have no input into the economic affairs of the euro. In 2009 the authors of a confidential International Monetary Fund (IMF) report suggested that in light of the ongoing global financial crisis, the EU Council should consider granting EU member states which are having difficulty complying with all five convergence criteria the option to "partially adopt" the euro, along the lines of the monetary agreements signed with the microstates outside the EU.
Enlargement of the eurozone | Alternative proposals
One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates. It has been found that the introduction of the euro created "significant reductions in market risk exposures for nonfinancial firms both in and outside Europe". These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-euro firms with a high fraction of foreign sales or assets in Europe".
Euro | Exchange rate risk
The 3% rule was later incorporated into the Maastricht criteria, which establishes the requirements potential member states should meet to enter the third stage of the Eurozone and adopt the euro as their currency. The rule has been maintained through all subsequent treaties of the Monetary Union, including the Stability and Growth Pact and the European Fiscal Compact.
Guy Abeille | Career
The formula "R = N-I" approximates the correct answer as long as both the nominal interest rate and the inflation rate are small. The correct equation is "r = n/i" where "r", "n" and "i" are expressed as ratios (e.g. 1.2 for +20%, 0.8 for −20%). As an example, when the inflation rate is 3%, a loan with a nominal interest rate of 5% would have a real interest rate of approximately 2% (in fact, it's 1.94%). Any unexpected increase in the inflation rate would decrease the real interest rate. Banks and other lenders adjust for this inflation risk either by including an inflation risk premium to fixed interest rate loans, or lending at an adjustable rate.
Inflation | General
Inflation was higher in Ireland than elsewhere in the Eurozone.
Irish property bubble | Eurozone membership and ECB interest rate policy
These positions came as a response to those countries within the bloc that see a need for higher individual contributions to the EU's budget after Brexit. The group of Austria, Denmark, the Netherlands and Sweden also disagrees with the idea of Eurobonds, an hypothetical tool for joint bonds within the eurozone, as well as taking mutualised debts within the EU. As a consequence, the group stands opposed to the idea of the limited "corona bonds" as well.
Frugal Four | Position
The Maastricht Treaty, which Bulgaria acceded to by way of its EU accession treaty in 2007, requires that all members of the European Union join the euro once certain economic criteria are met. In November 2007 the Finance Minister Plamen Oresharski stated that his goal was to comply with all five convergence criteria by 2009 and adopt the euro in 2012. Besides not complying with the requirement to be an ERM-II member for two years, Bulgaria also did not satisfy the price stability criterion in 2008. Bulgaria's inflation in the 12 months from April 2007 to March 2008 reached 9.4%, well above the reference value limit at 3.2%.
Bulgaria and the euro | Convergence criteria
Noting that the bank already held over €1 trillion of bonds bought at artificially low or negative yields, so would face great losses when interest rates rise again, he warned. The reputational risk of such actions by a central bank would have been unthinkable in the past." His conclusion was that in its current form the euro project was unworkable and one day would collapse.
Otmar Issing | Positions
The Austrian School maintains that inflation is any increase of the money supply (i.e. units of currency or means of exchange) that is not matched by an increase in demand for money, or as Ludwig von Mises put it: In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.
Monetary inflation | Austrian view
The principal task of the ECB is to keep inflation under control. Though there is no common representation, governance or fiscal policy for the currency union, some co-operation does take place through the Eurogroup, which makes political decisions regarding the eurozone and the euro. The Eurogroup is composed of the finance ministers of eurozone states, but in emergencies, national leaders also form the Eurogroup.
Eurozone | Introduction
The EU treaties contain so called convergence criteria, specified in the protocols of the Treaties of the European Union. Concerning government finance the states have agreed that the annual government budget deficit should not exceed 3% of the gross domestic product (GDP) and that the gross government debt to GDP should not exceed 60% of the GDP (see ). For eurozone members there is the Stability and Growth Pact which contains the same requirements for budget deficit and debt limitation but with a much stricter regime. In the past, many European countries including Greece and Italy have substantially exceeded these criteria over a long period of time.
Controversies surrounding the Eurozone crisis | Convergence criteria
The euro is the second-most widely held reserve currency after the U.S. dollar. After its introduction on 4 January 1999 its exchange rate against the other major currencies fell reaching its lowest exchange rates in 2000 (3 May vs Pound sterling, 25 October vs the U.S. dollar, 26 October vs Japanese yen). Afterwards it regained and its exchange rate reached its historical highest point in 2008 (15 July vs U.S. dollar, 23 July vs Japanese yen, 29 December vs Pound sterling). With the advent of the global financial crisis the euro initially fell, to regain later. Despite pressure due to the European sovereign-debt crisis the euro remained stable.
Euro | Against other major currencies
There is no pressure on Romania to adhere to ERM in a certain year, followed by the adoption of the euro two years later. The EU Member States can bring into play the derogation clause from entering into ERM and hold on to their monetary policies as a buffer against external shocks. The EU Commission neither the European Council have ever urged Romania - a euro candidate country - to join the Eurozone, and it is not very probable that this will happen in the future – not least due to rising doubts in Brussels and the capitals of some current Eurozone members regarding the wisdom of further Eurozone enlargement.
Romania and the euro | Current perspectives
Nobel prize-winning economist James Tobin thought that the euro project would not succeed without making drastic changes to European institutions, pointing out the difference between the US and the eurozone. Concerning monetary policies, the US central bank FRB aims at both growth and reducing unemployment, while the ECB tends to give its first priority to price stability under Bundesbank's supervision. As the price level of the currency bloc is kept low, the unemployment level of the region has become higher than that of US since 1982. When it comes to fiscal policies, 12 percent of the US federal budget is used for transfers to states and local governments.
Eurozone | Criticism
There have been debates as to whether the Eurozone countries constitute an optimum currency area. There has also been a lot of doubt if all eurozone states really fulfilled a "high degree of sustainable convergence" as demanded by the Maastricht treaty as condition to join the Euro without getting into financial trouble later on.
Economic and Monetary Union of the European Union | Criticism
The euro convergence criteria (also known as the Maastricht criteria) are the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their currency. The four main criteria, which actually comprise five criteria as the "fiscal criterion" consists of both a "debt criterion" and a "deficit criterion", are based on (ex article 121.1) of the Treaty on the Functioning of the European Union. Full EMU membership is only open to EU member states. However, the European microstates of Andorra, Monaco, San Marino and the Vatican City, which are not members of the EU, have signed monetary agreements with EU which allow them officially to adopt the euro and issue their own variant of euro coins.
Euro convergence criteria | Introduction
When decimal currency and the euro were in turn introduced, many people in Ireland believed that prices had been improperly raised by traders taking advantage of the confusion, exchange rates notwithstanding. In the case of the euro, the Irish government took special measures to try to prevent any unnecessary price changes, which ultimately proved to be ineffective. The changeover coincided with an economic boom in the country, and inflation was moderately high. People were eager to blame price rises on merchants taking advantage of changeover confusion. Most retailers, especially the larger chains, continued to show prices in Irish pounds beneath the price in Euro for up to five years after the changeover, enabling people to see the price in old currency and check whether prices had been improperly inflated.
Irish pound | Hidden inflation
On 5 July 2012, Policy Exchange announced that the winning entry was submitted by the team led by Roger Bootle from Macroeconomics research consultancy firm Capital Economics, titled "Leaving the Euro: A Practical Guide". The proposal recommended that member-states who want to exit should introduce a new currency and default on a large part of their debts. The net effect, the proposal claimed, would be "positive for growth and prosperity". It called for keeping the euro for small transactions and for a short period of time after the exit from the Eurozone, along with a strict regime of inflation-targeting and tough fiscal rules monitored by "independent experts".
Wolfson Economics Prize | Winning Entry
Articles 119 to 144 concern economic and monetary policy, including articles on the euro. "Chapter 1: Economic policy – Article 126" deals with how excessive member state debt is handled. "Chapter 2: Monetary policy – Article 127" outlines that the European System of Central Banks should maintain price stability and work with the principles of an open markets and free competition. The "Article 140" describes the criteria for inclusion in monetary union (the euro) or having exception from it, and also says that it is a majority of the council, not the state alone, which decides upon usage of euro or national currency.
Treaty on the Functioning of the European Union | Title VIII: Economic and monetary policy
However, although transaction costs were reduced, some studies have shown that risk aversion has increased during the last 40 years in the Eurozone.
Euro | Transaction costs and risks
The euro (symbol: €; code: EUR) is the official currency of 19 of the member states of the European Union. This group of states is known as the eurozone or euro area and includes about 343 million citizens . The euro, which is divided into 100 cents, is the second-largest and second-most traded currency in the foreign exchange market after the United States dollar. The currency is also used officially by the institutions of the European Union, by four European microstates that are not EU members, the British Overseas Territory of Akrotiri and Dhekelia, as well as unilaterally by Montenegro and Kosovo.
Euro | Introduction
Real GDP growth across the full period of the Celtic Tiger represented by far the highest average of any western European country. Inflation was increased from 1.5% in 1997, to 5.5% in 2000, before falling steadily to just over 2% in 2004.
Charlie McCreevy | Minister for Finance
Helsingin Sanomat estimated that in an adverse situation this liability could reach €28.7 billion, adding interest rate of 3.5% for 30-year loans to capital guarantee. For this reason the parliamentary approval process on 28 September 2011 was misleading, and may require a new Government proposal.
European Financial Stability Facility | Controversies
The results are more diverse for the pre-crisis sample (1994–2007). The Consensus forecast for euro-area producer price inflation significantly outperforms the naïve forecast in the short-term. Finally, the Consensus forecast for the USD/EUR exchange rate during the period from 2002 to 2009 is more precise than the naïve forecast and the forecast implied by the forward rate."
Consensus Economics | Academic research
For example, increases in payments to workers and pensioners often lag behind inflation, and for some people income is fixed. Also, individuals or institutions with cash assets will experience a decline in the purchasing power of the cash. Increases in the price level (inflation) erode the real value of money (the functional currency) and other items with an underlying monetary nature. Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. The real interest on a loan is the nominal rate minus the inflation rate.
Inflation | General
One author described the "Breakfast Roll Men"—named after the popular convenience food construction workers often ate—as "the pumping heart of the economy". Interest rates set by the European Central Bank (ECB) are only guided by low inflation targets in the Eurozone. Some felt this was, and is, too narrow an objective, leading to decisions on interest rates that are inappropriate, e.g. for states with record levels of employment, rising house prices, and consumer spending.
Irish property bubble | Background
In economics, an optimum currency area, or region (OCA or OCR), is a geographical region in which it would maximise economic efficiency to have the entire region share a single currency. There are two models, both proposed by Robert Mundell: the stationary expectations model and the international risk sharing model. Mundell himself advocates the international risk sharing model and thus concludes in favour of the euro. However, even before the creation of the single currency, there were concerns over diverging economies. Before the late-2000s recession it was considered unlikely that a state would leave the euro or the whole zone would collapse.
Euro | Optimal currency area
However, inflation remains low because of either a pegged exchange rate or a supply shock, and thus the central bank does not tighten credit and money. Increasingly speculative loans are made as diminishing returns lead to reduced yields. Eventually inflation begins or the economy slows, and when asset prices decline, a bubble is pricked which encourages a macroeconomic bust.
Austrian business cycle theory | Similar theories
16% in 1992. Such rate of foreign investment was about 5% above the EU average.
IBEX 35 | Weighting
In other words, a situation has arisen in which "too much money goes for too much quantity of goods." Modern understandings point to the fact that inflation also occurs when this does not manifest itself in a general increase in prices. This is best seen in the former socialist countries in which there was a strong state price control. The prices remained stable but the shortcomings of certain commodities appeared on the market. However, any increase in monetary circulation and in free-market market economies does not automatically have to lead to a general increase in prices. This is inevitable only in a situation where we have a lot of capacity utilization and full employment of the labor force.
Hyperinflation in Yugoslavia | The concept of inflation