[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] I [/yt_dropcap]f it were not for the euro, Germany’s trade balance would have caused a revaluation of the Mark, which would automatically have reduced the exchange rates of the other “European currencies”, thus favouring them on international markets. The single currency was not created to stimulate exports and improve productivity.
In fact, for the first time, the then President of the European Economic Community, Roy Jenkins, proposed a common currency which, however, was also based on a common budget, equal to 10% of the sum of all Member States’ GDPs.
Initially the Euro was based on the “optimum currency area” theory developed by the Canadian economist, Robert Mundell, in 1961. It also rested on the fact that an economy open to international trade always tends to a low exchange rate.
Furthermore, as assumed by Mundell’s group of economists, in a highly diversified national economy the exogenous shock is always very limited.
This would lead a country open to trade and with a diversified economy to accept, in principle, a currency common to other countries.
Provided, however, that there is flexibility on the capital and labour markets and that its economy is very diversified and open to international trade.
However, to what extent can an economy be “diversified”? Does excess of diversification not lead – as natural – to a different and sometimes negative gain margin between products?
In Mundell’s model, the national currencies were described by the economic theory as simple barriers to international trade, as well as limits to productivity and finally obstacles blocking commercial transactions.
At that time, Jacques Delors and Romano Prodi theorized that – rebus sic stantibus – with the mere introduction of the Euro, the European economy would grow 1-1.5% per year.
Later Perrson and Nitsch proved that the econometric model used for those predictions was wrong, while other academics and experts studied the influence of the European monetary union on international trade.
Once again the analyses carried out on macroeconomic data demonstrated that the assessment of the benefits resulting from the single currency had been greatly exaggerated.
Obviously, for political purposes, economics is not so much a “sad science”, but rather rhetoric used to convey political and social messages and choices.
According to these more realistic models, the monetary union was responsible only for a 4.7-6.3% increase in foreign trade, while the most pessimistic forecasts of the first analyses on the Euro-induced growth pointed to a 20% or even a 200-300% increase in international trade.
We have always known that economics is ideology in disguise.
In other words, the Euro does not change international trade transactions, but rather tends to change competitive pricing.
Furthermore, there is no factual evidence of a stable structural difference between foreign trade and exchange rate.
Moreover, according to the International Monetary Fund, a 10% decline of the exchange rate leads to a 1.5% average increase of GDP.
Yet another demonstration of how a healthy and sound devaluation is good for international trade.
The persistently “high” single currency has also hampered recovery in the Eurozone countries, while other European countries, such as Sweden, could quickly rebuild their economy.
This implies that the Euro could do nothing to avoid the crisis, except in Germany, where the per capita GDP has been growing incessantly since 1999.
As to investment in fixed assets, only France, Belgium and Finland have been successful.
Portugal and Greece have fallen to the levels of fixed capital investment of the 1980s, while per capita fixed capital investment (housing, infrastructure, roads, railways, airports, machinery, etc.) has levelled off since 1999.
With the Euro introduction, investment in infrastructure was put to an end.
Furthermore, as repeatedly noted, the crisis of the single currency and of the Eurozone began with Greece’s tragic situation.
Greece is worth almost 3% of the Eurozone GDP and the banking crisis following tension in Greece, at first, and later in Spain, Germany and Italy, cannot be solved with the EU banking union, but only with the action of individual governments.
The signal to international markets is clear: if the Euro is hit with a speculative action, the Eurozone individual countries shall try to solve it, with their limited resources.
With its crisis Greece has later demonstrated that monetary and credit tensions in each country of the single monetary area are never supported by the rest of the Eurozone – as would happen in any real monetary union – but the country in trouble is blamed for being “spendthrift”. The result is that the other Eurozone countries buy the assets of the nation in crisis below cost.
In fact, the single currency works only in really federal States, such as India or the United States, where the internal market and financial networks are wide and can manage the income gap between the various regions of the country.
If we were to support the economies of Italy, Greece, Spain and Portugal, the cost of recovery for these four countries would be 260 billion euro per year for ten years.
Hence the issue does not lie in Germany being wicked, but in the fact that the Euro has been conceived and designed badly and leads to crisis the countries which do not adjust their domestic economy to a structurally and unreasonably overvalued currency.
And in these cases, monetary expansion combined with economic “austerity” does not solve the problems.
Public spending and discretionary spending, as well as wages and salaries and, in some respects, even profits are now regulated by the Solidarity Pacts of 2011, in addition to the Treaty on Stability, Coordination and Governance signed in 2012.
They are inter-European agreements prohibiting the redistribution of funds within the EU. They were signed upon German pressure and it is worth recalling that Germany cannot objectively take upon itself the cost for restructuring Southern countries’ debt.
Indeed, we could devalue the Euro.
Nevertheless the relations between the Eurozone members would not change and Germany would gain even more from a devalued Euro.
Therefore the only way then to change the exchange rate between the various countries of the single currency is not to devalue the Euro, which is based on fixed exchange rates established ne varietur in 1999, but just leave the Euro area.
Furthermore, considering the differences of economic integration in the Eurozone, if the single currency were devalued, the least integrated country, namely France, would gain much more than the others.
It is worth making clear that it would be a gain at the expense of the Euro Mediterranean countries.
It would be tantamount to go back with the Euro to the old gold standard of the 1930s, with the Euro: either it is fully dissolved or you decide to leave.
In this sense, the single currency is a severe loss of economic flexibility in the relationship between inflation, productivity and public debt.
Relations between macroeconomic values which can be manipulated for the better only in a national context, given that the EU still records very significant micro and macroeconomic differences.
It should be noted that the impasse resulting from the gold standard led to the Great Depression after the 1929 crisis.
At the beginning of the Great Depression, Germany and Great Britain tried an internal devaluation, but in these cases, if there is a fixed monetary standard, devaluation only means domestic deflation.
Considering price rigidity, unchanged financial costs and the money supply restriction, any policy of this kind finally makes both politics and society unmanageable.
What about leaving the single currency?
Meanwhile, it is worth recalling that, in international financial law, what matters is not the lender’s nationality, but rather the law applicable to the contract.
If, for example, the debt were regulated by French law, regardless of the parties’ nationality, the payment should be made in the French national currency.
Moreover, statistics throughout the single currency EU tells us that the private debt would not be affected by the transition to the new Franc, Lira, Peseta, etc.
According to the studies of the Bank for International Settlements, which has already analysed these issues, the cost to be borne by EU countries for leaving the single currency would be approximately 5 billion euros – a figure that can be easily managed by everybody.
Hence, after the end of the Euro, the EU countries could appreciate or devalue their currencies, by offering competitive prices and thus recreating precisely those competitive advantages which had been basically removed by the single currency.
In this way the German Mark would surely appreciate as against the Lira and the Peseta, thus favouring the Southern countries’ currencies and making the huge German trade surplus disappear, as if by magic.
Probably this is the best prospect and the best way forward.
Decoding European Union’s Economy
European Union (EU) is a political and economic union which consists of 27 member countries. It acts as one economic unit in the world economy and is considered a major world trading power. They are subject to obligation and privileges of the membership. It focuses on comprehensive growth of all countries.
The EU was formed to end the centuries of warfare that culminated during World War II. The union was founded in 1992 with the Maastricht treaty but was given its reformed structure and powers in 2007 with the Lisbon treaty. Under these treaties, the 27 members agree to come together with their sovereignty and delegate many decision-making powers to the unified body. Currently, there are seven official EU institutions which are made for the executive, judicial and financial functions. The primary aim of this treaty was to boost economic social and political integration amongst the nation.
The European Central Bank is the EU’s central bank . It regulates monetary policy and manages bank lending rates and foreign exchange reserves . The institution over the
years has expanded and strengthened its own authority. It has proved to be a competent institution and is serving its purpose.
However, It has also faced a series of unforeseen circumstances including the 2008
economic crisis, an influx of migrants from the Middle East and Africa and Brexit Negotiations. In June 2016 the United Kingdom decided to leave the European Unionand officially from 31 January 2020, the United Kingdom is no longer part of the EU.
Breakdown Of The Economy
Most countries that are a part of the European Union and use the same currency Euro. A group of nineteen of the twenty-seven EU members use the Euro currency. Therefore the trade process is simplified and the rest of the EU is also legally required to join the eurozone at some point. In terms of the total value of all the goods and services, it is considered bigger than the US economy. The 19 EU member states that comprise the euro area accounted for 85.5% of the EU’s GDP in 2019. However, due to the unforeseen circumstances implemented across the world in 2020 GDP is down by 3.8% in the euro area and 3.5% in the EU.
The EU’s trade structure has helped it to become one of the world’s largest economies after China. In 2018 it surpassed China’s GDP with a difference of $3.3 trillion. These measurements use purchasing power parity to the account of discrepancy between each country’s standard of living. Some experts argue that the EU produces more but the US still a larger economy, whereas the US is a country and the EU is a trading area which compiles the 27 countries. Despite the eurozone debt crisis, the EU is staggering towards a bigger fiscal integration. The EU’s currency, the euro has successfully competed with the global currency dollar. The EU’s exports in 2019 were for products petroleum, automobiles and medication while its top imports are petroleum, communications equipment, and natural gas.
Classification Of Eu Budget
The biggest chunk of the percent spent on the agricultural sector. Which includes the direct payment to farmers development of fisheries, forest and rural areas. The second chunk goes into economic, social and territorial cohesion, which is meant to help the EU’s less developed countries. It includes infrastructure, job development, technical assistance for
Small business. The rest is spent on research and development and building the EU’s foreign policy which is under Global Europe. The EU budget must balance as it has no authority to spend more than it takes in.
The 64% trade is undertaken within the EU states. The trade with the rest of the world accounts for some 15.6% of global imports and exports. The EU countries had the second-largest share of global imports and exports of goods in 2016.
After the global economic crisis and eurozone turbulence in 2008, the employability saw a rise in future.
The Economy Post Covid-19
The world economy has witnessed a plethora of ups and downs in this pandemic. European Union leaders sealed a 750 million – euro ($857billion) deal for their coronavirus blighted economies after a marathon talk. The EU was slow to coordinate initially with the pandemic and already weakened by Brexit, It was important for an upfront on economic aid which would demonstrate its come back. Earlier it has been observed bitter rows over how the grants would be managed. Council President Michel said securing a deal as “not only about money, it’s about people, about the European future, about our unity.”
Chancellor of Germany Angela Merkel said on Monday that EU leaders had come up with a “framework” for a possible agreement. Whereas Michel told, “This agreement sends a concrete signal that Europe is a force for action”. French President Emmanuel Macron, who spearheaded the deal with German Chancellor Angela Merkel, hailed it as “truly historic”.
But Currently, Countries like France, Spain and smaller nations in the EU have been adversely affected, It is believed that the economies of France and Spain will shrink by over 10%. The Country’s GDP is not expected to return to last year’s level before 2022. Earlier this month that it expects the EU economy to shrink 8.3% in 2020, The European Commission said considerably worse than the 7.4% slump predicted two months ago.
Comparisons With India
The deficiency in India’s COVID relief package is inadequate fiscal spending ( just 1% of GDP). For spending more the government will have to borrow more. However, without spending, the economy will likely struggle a little longer. Whereas in the EU package Euro 390 billion of grants. Cheap loans and credit guarantees are important but for a declining economy, stress should be given more to wage subsidies and emphasis on the MSME sector.
The meeting of the EU is the first major in-person gathering of world leaders since the COVID-19. The ideal emphasis which every leader is saying is the concept of ‘fundamental of the internal market should begin again with all necessary precautions and not just countries most affected by the crisis but also for those which benefit the most from the internal.
Covid-19: Implications on Kerala’s Consumption Expenditure Pattern
According to Keynes, “The consumption of a person or a society depends on his current level of income that is absolute income called absolute income hypothesis.”The Covid -19 pandemic has given a new pathway to the Kerala’s consumption model. There is a change in the consumption pattern, from non-food items to food items.
Also, there has been is a shift in consumption pattern within food items due to different factors. Why is there a change in the overall consumption pattern during the pandemic? Why there is a change in the consumption pattern within food category? In this article I would like to explore and analyse the immediate implications of COVID-19 on Kerala’s consumption expenditure pattern.
Non-food consumption expenditure
The present crisis due to the pandemic was unexpected. The Global lockdown is a newand different experience, surprising many. However, the consumers are not convinced that the lockdown would be the only way to save lives. At the same time, the strategy of lockdown is to contain the spread of the virus, established various implications to the consumer consumption pattern put the economy unpredictable. Consumption will determine the demand and supply of the economy. Without demand there will be neither production nor growth. Moreover, the continuous lockdown affects the movement of goods and consumption.
Due to the lockdown, only essential goods were available in the market like groceries, medicines, milk, vegetables, etc. So the total non-food consumption expenditures were minimal. However, the consumption percentage of essential medical products have been increased during the lockdown.
Shops were closed during the strict period of lockdown. This unusual situation pushed the consumers not consume the durables goods. For example clothes, footwear were not consumed. As the transportation was completely stalled due to the lockdown people’s movements were completely restricted.
Likewise, the educational department was complete in chaos. The education department is linked with transportation, health, food, stationery and many more. When the transportation department was at a standstill, the consumption pattern had serious short term impacts and will have further impacts in the long run also. The reason is when the consumers fail to turn toward these sectors will have no demand for related products. Hence, there was no production. It is better to remember here about the words of Adam Smith, “Consumption is the sole end and purpose of all production.”
Several reports indicate that during the first month of lockdown the total non-food consumption expenditure was decreased. But there was a significant increase in the consumption of medicines of the total households, in anticipation of shortage of medicines. There was a significant decrease in the total conveyance expenditure also. But there was a significant increase in monthly conveyance expenditure of households for the people working in the banking sector and the health sector, due to the lack of public transportation and they needed to use their own vehicles and taxis.
Food consumption expenditure
The lockdown scenario indicates the decrease in income for the consumers unprecedentedly affected the market. The consumers have a reservation to go out freely to purchase their usual essential requirements during the lockdown. For example fish is not available – because there was a ban on fishing to combat the spreading of the virus. Some of them were utilizing their home grown vegetables.
However, there were no changes in the consumption of milk related products. Packaged food items consumption slightly declined due to the stalled transportation. In addition to this the price of essential commodities also increased due to no substitutes. Moreover, a strictly managed supply chain, shortage of laborers to lift stocks from the wholesale markets for essential goods and the minimal supply are the reason for increase in price of essential commodities. A close look of the Kerala society indicates the increasing in price of the essential food products due to purely a supply side matter but also an increase in demand for essential food items also the causes for increase in food prices.
In common the increase of essential food related products are in a huge demands during this lockdown is not surprising. When it comes to food consumption expenditure, the consumption of pulses has increased, even though total food expenditure has declined. Pulses were kept in stock in the fear of running out. More than 50% of households have spent very low on consumption of food due to the decreased income, they depend on ration shops for rice, wheat and other essential commodities.
The consumption of cereals slightly declined during the pandemic when compared with before the lockdown. The consumption of pulses, milk & milk products, salt & sugar are slightly increasing during this time. However, the consumption of products like pan, tobacco intoxicants and beverages are went up to nil during the lockdown because of its non-availability.
Moreover, egg, fish & meat were largely less consumed. Furthermore, vegetables and fruits were also less consumed. The market report about Kerala’s consumption shows that a reservation of people spend less for food items make us to draw a line that they are moderately affected because of the lockdown. It means their consumption pattern was altered due to their decline in income but fails to necessarily impact in the consumption of large quantity of essential food items could not be a surprise. This mainly because in particular places the consumers might have had the uninterrupted supply of essential items, well managed by the local administration gives confidence to the people makes them reserved for consuming more food items though they are essential for them for the next day use. However, the pattern of consumption obviously will not reflect the mood of entire Kerala would be a surprise for us. One thing is very clear that the consumption pattern curve drastically shifted from consumers friendly to the mood of accepting what is available in the market. Product substitutes are completely missing and consumers have not had many choices.
The decline in income completely decreased the purchasing power of the consumers prior to the Covid-19 indicating about the lavish spending culture of the Kerala consumers. However, the immediate short term impact of the covid-19 on Kerala’s consumption expenditure has changed from luxury to essential. We can say that the shift in consumption pattern of Kerala consumers tells us that human nature will change their attitude with in a moment when the nature changes against them for balancing. Here, the decision in change in consumption pattern is absolutely based on their survival.
Many express their fear would be well perceived that the consumption pattern of spending model will be around the food and necessity items than the luxury products will stay for a long term till the pandemic should be contained with the vaccine. The main reason for this is the lack of purchasing power. When the liquidity flow become normal then the consumption pattern also will be come to a normal stage. It means that when the difficult times disappear, the consumption pattern will also change.
Now the Indian government and the WHO also started saying that until the vaccine reach citizens the best way to handle the pandemic would be to live with the virus. At the same time how the government will be going to resume the economic activity will decide our income in the coming days. Accordingly the pendulum of the consumption pattern will also swing. This is a serious debate whether the instability will resume to normal in the short-run. However, once the government relaxes the lockdown though the government order 144 still prevails, it is visible outside that people are moving out with special masks and other standard precautionary measures. Thus the economy activity will be resumed along with the warning of the virus spread.
Just before ending the arguments the pandemic teaches us lot of lessons. For the rich the pandemic would not be a big challenge. For the poor it will be a disaster. For the middle class if they have enough savings their consumption pattern will not alter extremely but they always will be very cautious.
Egypt’s Socioeconomic Status Hinders its Modernization
Trust reflects positively on nations’ rapid economic growth argues renowned political scientist Francis Fukuyama. To further illustrate his point, Fukuyama claims in his book, Trust: The Social Virtues and the Creation of Prosperity, that the high level of mutual trust and other shared positive cultural traits, such as hard work, have empowered Germany and Japan to become advanced nations. In the Egyptian business community, there is a noticeable shortage of trust that often leads to considerable business deceleration.
Nevertheless, the absence of trust in a given society could be compensated to some degree by the proper application of rule of law, which is also lacking in Egypt, either due to the ambiguity of our laws or to the extensively lengthy and bureaucratic proceedings of our courts. Egypt is known for its formidable government bureaucracy that can be circumvented by bribes whose sizes vary depending on the value of the transaction and the length of the bureaucratic procedure.
Some argue, correctly, that bureaucracy and corruption have been rampant and thriving in Egypt for decades. In the past, however, the Egyptian economy was mainly driven by cronies who were adept at overcoming both challenges smoothly and elegantly. Nowadays, Egyptian State entities are taking over projects from the famous Egyptian business cronies; while the timeframes of the projects they implement are admirable, these State entities certainly lack the entrepreneurship and the innovation that the private sector has the potential to offer.
Egyptians are generally individually driven creatures; rather than doing the right thing, they prefer to satisfy their personal egos by delusionally believing that they are always right! This behavior is plainly noticeable in most Egyptian family businesses wherein siblings immediately split inherited businesses to enable each family member to do whatever satisfies their personal egoism. Some families even tend to divide the business during the lifespan of the father to avoid any conflict in the event of his demise!
Furthermore, Egyptian society is formed of people with limited ambitions who don’t have any desire to expand their businesses internationally, or even regionally. I can’t think of a single Egyptian business enterprise that has a regional presence. By contrast, many Arab companies and banks are successfully expanding in the region, including in Egypt. Even products produced exclusively by Egyptians, such as our movies, are broadcast regionally, and successfully, by non-Egyptian media channels.
We are a society that easily settles for compromises. However, we are also an over-demanding society; werequire new employees to fulfill high-quality criteria that many of their present directors often cannot meet. Furthermore, the vast majority of Egyptian employees doesn’t work to advance their organizations’ productivity, which may directly affect their conditions of employment. Instead, they are constantly searching for new jobs, convinced that the professionalism that is lacking in their present workplace can be found in a new enterprise.
Moreover, paying millions of dollars to international TV channels to promote Egypt as an attractive investment or tourism destination will certainly interest the world in learning more about our investment opportunities, rules and business environment – which should have prompted us to work on addressing our business structure deficiencies prior to publicizing ourselves globally.
Egypt presently lacks the principal pillars for founding a sound economic platform that are needed to develop a truly modernized nation. Egyptian private enterprises will not be stimulated to modernize their entities on their own; our society is a naturally “static” society, wherein citizens prefer to prolong their respective enterprises’ status rather than risk changes that they can’t apply! This attitude is shared even by various Egyptian chambers of commerce and industry, who work to serve their members’ business aspirations.
The Egyptian government needs to expand its leadership role to fix our socioeconomic flaws, carefully addressing the private sector’s challenges by offering a bundle of scientific solutions. The government must immediately work on advancing rule of law, meritocracy and sound economic policy; these practicalities will help Egyptians to restore better socioeconomic norms. The sooner we tackle these issues, the better the results will be.
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