Macroeconomics The European Union Macroeconomics Basics The European Union What is macroeconomics? First look at Output and its rate of growth Inflation rate Unemployment rate International trade The.
The European Union Macroeconomics Basics The European Union What is macroeconomics? • First look at: – Output and its rate of growth – Inflation rate – Unemployment rate – International trade The European Union Measuring Economic Growth • Gross Domestic Product (GDP) – Value of all final goods and services produced within a country in a given time period • Real GDP – The volume of goods and services produced within a country (i.e GDP adjusted for inflation, GDP in terms of goods) • Economic Growth: – Percentage rate of increase of real GDP The European Union Measuring Inflation • Percentage change in the price level – GDP deflator – Consumer Price Index (CPI) • In the Eurozone: Harmonized Index of Consumer Prices (HICP) The European Union Measuring Unemployment Labor force = employed + unemployed Unemployment rate=Unemployment/Labor Force Unemployed: does not have a job and has been looking for one in the past weeks The long term unemployment rate is the share of unemployed persons since 12 months or more in the total number of active persons in the labor market European Labor Force Survey (LFS) Discouraged workers Labor force participation varies across countries and time The European Union 1987 1997 2007 2015 Country projections for participation Germany Total 69.6 70.4 75.5 75.1 rates France Italy Spain Females 57.6 61.8 70 71.4 Males 81.8 78.8 81 78.7 Total 67.1 68 68.6 68.8 Females 57 61.1 64.1 66.4 Males 77.6 75.2 73.3 71.2 Total 59.7 58.7 62.7 66.3 Females 41.9 44 50.9 57.7 Males 78.3 73.6 74.5 74.8 Total 58.3 62.8 72.5 74.2 Females 36.9 47.7 61.9 66.3 Males 80.3 78 82.7 82 Total 63.9 71.4 78.2 79.6 Females 48.4 61.2 71.8 76.7 Males 79.1 81.4 84.4 82.4 The European Union Measuring trade with other countries The European Union Growth, Unemployment and Inflation in the Euro area and the US since 1970 19702006 19962006 2006 2007 2008 2009 forecast EU 2.3% 2.0% 2.7% 2.6% 0.7% -4.2% US 3.1% 3.4% 3.3% 2.1% 0.4% -2.7% Unemployment EU 7.4% rate 8.7% 7.6% 7.5% 7.6% 9.9% US 6.2% 5% 4.6% 4.6% 5.8% 9.3% EU 5.4% 1.8% 1.7% 2.1% 3.3% 0.3% US 4% 2% 2.9% 2.9% 3.8% -0.4% Output Growth rate Inflation rate The European Union Government Policies • Short-term/Medium term policies – Monetary and fiscal policies – Affects output, prices, interest rates employment • Long term policies – Affect productive capacity The European Union Monetary Policy • Independent Central Banks • Change in money supply affects interest rates and ultimately demand for goods and equilibrium output Eurosystem (ESCB) – European Central Bank – National Central Banks The European Union Tasks of the ECB • Sets interest rates • Manages foreign exchange operations • Holds and manages some official reserves of euro area countries • Promotes smooth operation of payment systems • NCBs – Lend to national financial institutions – Ensure settlement of cashless domestic and trans-border payments – Collect national statistics The European Union Eurosystem Strategy • Primary objective: price stability • Definition of price stability: “a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2%” The European Union Inflation and interest rates in the euro area The European Union Fiscal policies • Government spending and taxes • Affect economy’s output and price level The European Union How does fiscal and monetary policies work in the short term? • Equilibrium in the goods market: Y = C(Y-T) + I(i, Y) + G + NX (Y, E, Y*) • In the short term, priorities may reflect the business cycle or response to a natural disaster • in the longer term, the drivers can be development levels, demographics, or resource endowments The European Union Fiscal Policy • Stability and Growth Pact – National government – deficit no larger than 3% of GDP – debt-to-GDP ratio of 60% – Reduces inflationary pressures (and free-riding) – Main purpose of fiscal policy should be stabilization • But fiscal policy is main tool left to governments where monetary policy is constrained – Evidence that most fiscal policy is pro-cyclical – Automatic stabilizer The European Union Automatic stabilizers and fiscal stimulus • Stabilizers go into effect as tax revenues and expenditure levels change and not depend on specific actions but operate in relation to the business cycle • Taxes collected, unemployment benefits and other social spending • These cyclical changes make fiscal policy automatically expansionary during downturns and contractionary during upturns • Automatic stabilizers are linked to the size of the government The European Union External and Fiscal Balances, 2006–10 Current Account Euro area US Government Balance Euro area US Government Debt Government Expenditure 2006 2007 2008 2009 2010 0.8% 0.6% -0.1% -0.1% 0.3% -5.98% -0.9% -5.3% -0.4% -4.7% -1.8% -2.8% -6.6% -2.8% -7.2% -2.23% -2.9% -6.1% -13.6% -9.67% Euro area 68.3% 66% 69.3% 77.7% 83% US 42.5% 43.2% 49.9% 61.7% 70.4% NA 46.1% 46.6% 50.1% 51.1% 31.6% 31.% 33% NA NA Euro area US The European Union A European Economic Recovery Plan (December 2008) • The Commission is proposing that, as a matter of urgency, Member States and the EU agree to an immediate budgetary impulse amounting to € 200 billion (1.5% of GDP), to boost demand in full respect of the Stability and Growth Pact • The second pillar rests on the need to direct short-term action to reinforce Europe's competitiveness in the long term The Plan sets out a comprehensive program to direct action to "smart" investment The European Union Other Public Policies – Investing in productivity (technology policy) – Improving human capital (education) – Improving physical capital (infrastructure) – External relations (e.g war expenditures in Iraq) • In the EU, these public policies mostly not integrated ... Percentage rate of increase of real GDP The European Union Measuring Inflation • Percentage change in the price level – GDP deflator – Consumer Price Index (CPI) • In the Eurozone: Harmonized Index of... • Definition of price stability: “a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2%” The European Union Inflation and interest rates in the...The European Union What is macroeconomics? • First look at: – Output and its rate of growth – Inflation rate – Unemployment rate – International trade The European Union Measuring Economic