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It is beyond all doubts that economic events occur around us every day. First of all, people are residents of different countries where numerous economic events happen very often. For example, inflation rate constantly changes, the trade balance becomes different daily, the level of national gross product and labor activity continuously increases or decreases. At first sight, it seems that these economic changes have nothing to do with the everyday life of country citizens. On the contrary, it is extremely important to lay the stress on the fact that all economic events that take place in the country strongly influence its citizens. For example, the inflation rate affects the prices of commodities that people buy every day, and exchange rate defines how much money random people earn while exchanging currency. In addition, the labor market defines the opportunity of university graduate to obtain the desired position. Thus, all economic events that take place in the macroeconomic and microeconomic environment of the country have a considerable impact on all its residents.
On the other hand, people often neglect the importance of economic events that happen around them or they realize their meaning but prefer not to pay attention to them due to the impossibility to change or prevent these economic events. On the contrary, being aware of things happening and knowing their consequences may let people become flexible to the economic events: for instance, this knowledge may help make a good deal while selling the house or buying the car. In addition, the awareness of economic basis can help a person in everyday banking service usage such as leasing, lending or crediting.
Overall, the economic events frequently occur in people’s life. Importantly, these economic events cannot be neglected because the knowledge may help people get an advantage out of them. The object of the essay is the article analysis and comparison of the described elements with the theoretical models and basis.
The article of Maria Tadeo (2016), which was published on Bloomberg.com in February 2016, is called “Euro Area Maintains Momentum as Turmoil Threatens Outlook.” The article describes the economic events that occurred in the European Union at the end of previous 2015 year. In addition, the reasons and the consequences of economy maintaining momentum are described in the paper.
The different performance of the countries that are the EU members is shown in the article; for example, Germany shows positive results while Greece is leading European economy down. In addition, the overall world economy violation and oil prices decrease affected the EU economy considerably (Tadeo 2016). Furthermore, one of the core ideas that are highlighted in the article is the significant economic power of European Central Bank. The experts in the sphere stress the importance of special European Central Bank policies and instruments that are to influence the EU economic situation in order to make the countries’ economies grow and the inflation level decrease. In spite of the fact that the economy may go up, it is rather hard to slow down the inflation. As the experts consider – additional instruments should be used in this situation. For example, only concerted actions of numerous central banks from Japan to Sweden may influence the inflation (Tadeo 2016).
There are several options proposed by the author for European Central Bank in the article. The first one is rising a number of asset purchases each month that is currently 60 billion Euros as well as cutting the deposit rate right after it announces a new round of stimulus in December (Tadeo 2016). Another proposed measure deals with the overnight index average of the euro currency. It measures the cost of lending between the banks of the European Union and can be reviewed during one of the Central Bank meetings depending on the economic circumstances (Tadeo 2016).
One of the most important elements of forming monetary and financial policy is economic situation prediction. In this regard, European Central Bank has overviewed the prognoses for the next year. According to them, the inflation rate is set at the point of 0.5 percent while the growth rate is lowered from 1.8 percent to 1.7 percent in 2016 (Tadeo 2016).
Economic Background of the European Union
The European Union is an organization of 28 European countries that are joined for political and economic reasons (European Union). The members of the EU are operating as a single market thus creating a major world trading power. Moreover, the economies of the countries that are the members of the EU are running according to the common policy and strategy. Interestingly, the EU’s economy, which consists of goods and services that are produced in the EU’s countries (GDP), is now one of the largest in the world. For instance, the EU’s GDP in 2014 was €13,920,541 million (European Union).
The European Union is an important world economic player that influences world economy significantly. The European Union occupies about 7% of the world’s population (European Union). In addition, the trade amount of European Union is approximately 20% of the global exports and imports operations (European Union).
Another important element that influences the economic situation of the European Union is the budget system. One of its core principles is the Multiannual Financial Framework (MFF) that establishes the EU’s limits, expenditures, and spending (European Union). Furthermore, the Commission, the Council, and the Parliament are the institutional organizations that are engaged in forming financial and economic policies of the European Union (European Union). However, the EU countries and the Commission have about 80% of the budget sharing responsibility (European Union).
In addition, the overall economic performance of the European Union depends on the well-being of each separate member of the union. The EU countries organize common national policies so that they will have the possibility to act together in case of economic crisis. One of the tools that make the coordination easier is one currency that is used by 19 countries of the union (European Union).
Moreover, all EU member countries participate in the organization called Economic & Monetary Union (EMU) that is aimed at economic cooperation, labor force coordination, and sustainable economic growth. At the same time, EMU is engaged in solving financial and economic challenges that occur in the European Union rather often (European Union).
Finally, another tool of the EU economy that is aimed at controlling euro area’s financial stability and safety is the European Stability Mechanism (ESM) – one of the world’s largest financial institutions with the lending capacity of up to € 500 billion (European Union).
Current European Union Economic Situation Analysis
The article “Euro Area Maintains Momentum as Turmoil Threatens Outlook” (Tadeo 2016) describes the slowdown of the European economy at the end of 2015. However, the growth of the economy by 0.5 percent was seen in the first quarter of 2015 (Economist 2016). This comparison is made with the final quarter of 2014 (Economist 2016). By the spring, the growth pace lowered to 0.4 percent and the slowdown of the economy’s growth for 0.3 percent was observed in the second half of 2015 (Economist 2016).
Such economic situation in the European Union was formed by several economic events that took place and preceded economic growth in 2015. These economic events were highly beneficial for the European Union and consequently for its citizens. First of all, the fall of oil prices was beneficial for the customers and made the latter ones spend more, which is the main tool of the economy’s recovery. Another economic event that influenced the EU’s economic growth was the quantitative easing launched by the European Central Bank in March 2015. This economic tool created a possibility to buy financial assets. Finally, the negative interest rate in June 2014 made the national currency weaker comparing to other currencies. According to the economic laws, when the value of the national currency decreases and the value of the foreign currency increases, the export operations become extremely profitable. Consequently, export and national production are strongly stimulated. In the case of the EU, it contributed to a considerable current account surplus that was 3.7% of GDP in 2015 (Economist 2016).
However, at the end of the year, the economy of the EU stopped growing and remained at the same point. There are different reasons for that. The first one that is outlined by the scientists is the terrorist attack in Paris in November 2015. In addition, the overall economic global situation has become more challenging at this period and the EU economy as any other economy was rather sensitive to world economic changes. Another event that took place in the European economy at the end of 2015 and affected its performance was the decrease of national production. According to the European Union’s statistics, the level of national production decreased per 1 percent in December 2015, which reached the lowest point since August 2014 (Tadeo 2016). The last but not the least was the rise of the inflation rate that had negative consequences for the economy and the European Union residents.
European Central Bank Role in Monetary Health of the EU
European Central Bank is playing a critical role in the economic stability of the European countries through monetary policy. Essentially, ECB is mainly engaged in the EU monetary policy development. The main objective of monetary policy is maintaining price stability and defined inflation rate.
It is important to stress the fact that the ECB has developed a profound and unique strategy for the monetary and economic stability of the European Union. The mentioned strategy ensures the successful development and implementation of monetary policy. Importantly, the strategy is basing on a wide range of general principles that lead the whole policy to success. The first principle deals with the quantitative definition of price stability while the second one deals with the so-called “two-pillar” approach to the analysis of the potential and the price stability issues.
The ECB has settled price stability with the every-year increase in the Harmonised Index of Consumer Prices, which is applied to the euro area and is supposed to be below 2 percent (European Central Bank). At the same time, two-pillar approach refers to monetary policy and strategy development and implementation on the basis of both economic and monetary analysis. This approach gives the possibility to see the whole picture of the economic, financial and monetary situation in the European Union.
As for the price stability and inflation, the strategy of the ECB is aiming at supporting the inflation rate at a point close to 2 percent (European Central Bank). As for the real performance of the European Union the inflation rate is close to the target point and the EU is trying to control this situation with the certain macroeconomic tools.
Inflation Regulation Instrument
The term “inflation” is commonly used to identify a rise of the general level of prices comparing to the units of money. In other words, the inflation is a progressing fall of the monetary units’ purchasing power (White). Considering the fact that the inflation rise is a negative economic event for any country, the European Union having such situation uses different methods and tools to slow down the inflation rate increase.
European Central Bank is one of the most powerful institutions that can actually influence the inflation. The ECB uses different instruments and tools to regulate the inflation rate and other economic indicators: open market operations, standing facilities, and minimum reserve requirements for credit institutions (European Central Bank). Importantly, the first element of the process of inflation regulation is the participation of a wide range of counterparties. Only institutions representatives may have access to open market operations based on standard tenders. On the contrary, there are no restrictions on the variety of parties used for another instrument – the outright transactions. They can be used depending on the circumstances (European Central Bank).
Besides, open market operations are also extremely important in economic events regulations. There are five different types of financial instruments that can be used for the Euro system open market operations. Depending on the situation and conditions, reverse transaction, outright transactions, issuance of debt certificates, foreign exchange swaps or collection of fixed-term deposits can be used and applied (European Central Bank).
Another tool that ECB widely uses while regulating the inflation rate is standing facilities that are aimed at providing and absorbing overnight liquidity and bounding overnight market interest rates. One more integral part of the EU economy regulation tools is minimum reserve system. The main goal of minimum reserve system is to provide stabilization of interest rates and create a considerable liquidity shortage (European Central Bank). Interestingly, this tool is mainly used by the European Central Bank to deal and regulate the euro overnight index average. It is regulated in terms of the considerable cut of points in the ECB deposit rate. Thus, the tool suits the situation and can be used effectively.
One of the most effective ways to regulate the inflation rate is purchasing program. Exactly this type of tool was used by the European Union at the end of 2015 in order to make corrections to the inflation rate. According to the European Central Bank, “the expanded asset purchase program adds the asset purchase program for public sector securities to the existing private sector asset purchase programs in order to address the risks of a too-prolonged period of low inflation” (European Central Bank).
In summary, the fact that economic events occur every day is proved on the example of the economic situation that took place in the European Union in 2015. The analysis is conducted on the basis of the article “Euro Area Maintains Momentum as Turmoil Threatens Outlook” by Maria Tadeo. The mentioned article describes the changes that happened in the economic life of the European Union through the year of 2015. Specifically, there was a slight growth of the economy in the first three quarters of the previous year and the last quarter showed just the maintenance of the pace.
There are different reasons for such situation. In particular, the growth of the economy in the beginning of the year was caused by the oil prices fall and the export value growth. The later stagnation, in turn, was caused by different world trends, terrorism, and production volume fall. Nevertheless, the European Union is responsible for its economic situation and therefore it should influence it with a help of different institutions.
The European Central Bank is one of the most powerful organizations that influence the EU economy. Exactly European Central Bank is responsible for the financial, economic and monetary well-being of the European Union. Moreover, it has developed a monetary policy and numerous principles and instruments that help to maintain prosperous economy situation. According to these principles, the level of inflation should be always kept at 2 percent level.
As the situation of the last year economic instability shows, the EU and its Central Bank need to make interventions in order to regulate the economy successfully. That is why the ECB uses different tools to influence the countries’ monetary situation, namely participation, open market operations, standing facilities, minimum reserves, and asset purchase program. The usage of these tools helps to regulate economic, financial and monetary spheres of the European Union and provide prosperous well-being of the union and its citizens.