With the majority of developed countries now moving out of recession, many people will think the worst is over. But for some countries and some people, there may be worse to come. The single currency in the eurozone was introduced in 1999 and in December 2009, the eurozone saw its highest level of unemployment at 10%. There are now 23 million people unemployed across the 16 countries that make up the eurozone and many of those people reside in Spain, where unemployment has reached a 12-year high of 18.8% and is even expected to reach 20%.
Interest rates in the eurozone and in the UK have been maintained at 1% and 0.5% respectively, and inflation has seen a rise in both places. Whilst in the eurozone inflation remains well below the inflation target, in the UK there has been a rapid rise to 2.9% to December 2009 (see Too much of a push from costs but no pull from demand)
While Spain is suffering from mass unemployment, Greece is struggling with the burden of a huge budget deficit. The former European Central Bank Chief Economist, Otmar Issing, has said that any bailout of Greece would severely damage the Monetary Union and “The Greek disease will spread”. With concern that Greece will not be able to service its debt, there is speculation that the country will be forced out of the currency bloc. However, the chair of the single currency area’s finance ministers said that Greece will not leave the eurozone and does not believe that a state of bankruptcy exists.
So, what’s behind rising unemployment, rising inflation and rising budget deficits and how are they likely to affect the eurozone’s recovery?
Eurozone inflation rises to 0.9% BBC News (15/1/10)
Unemployment sector remains beat in Eurozone pressuring price levels FX Street (29/1/10)
greek bailout would hurt Eurozone – Germany’s Issing Reuters (29/1/10)
Eurozone unemployment rate hits 10% BBC News (29/1/10)
Greece will not go bust or leave Eurozone Reuters, Michele Sinner (27/1/10)
Eurozone unemployment hits 10% AFP (29/1/10)
New rise in German job loss total BBC News (28/1/10)
Spain unemployment nears 12 year high Interactive Investor (29/1/10)
Questions
- How do we define unemployment? What type of unemployment is being experienced in the eurozone?
- Why do you think unemployment levels have risen in the eurozone and in Spain in particular? Illustrate this on a diagram.
- What are the costs of unemployment for (a) the individual (b) governments and (c) society?
- What explanation can be given for rising levels of both unemployment and inflation?
- Inflation in the eurozone increased to 0.9%. What are the factors behind this? Illustrate the effects on a diagram.
- Greece’s forecast budget deficit for 2009 is 12.7% of GDP, but Greece has said it will reduce it to 8.7% of GDP. How does the Greek government intend to do this and what are the likely problems it will face?
- Why could bailing out Greece hurt the eurozone?
Trade relations between the USA and China have deteriorated recently. There are two key issues: the exchange rate and trade protectionism.
The Chinese currency, the yuan or renmimbi, since 2005 has been officially pegged to a trade-weighted basket of other currencies. In recent months, however, as the dollar has fallen relative to other major currencies, so too has the yuan. It seems as if the peg is with the dollar, not with the basket. From March to December 2009, the exchange rate index of the dollar depreciated by 16 per cent. Yet the exchange rate between the yuan and the dollar hardly changed. In other words, the yuan depreciated along with the dollar against other world currencies, such as the euro, the pound and the yen. The trade advantage that this was giving to the USA with other countries did not apply to China.
Complaints continued that cheap Chinese goods were flooding into the USA, threatening US jobs and undermining US recovery. The Chinese currency was argued to be undervalued relative to its purchasing-power-parity rate. For example, the July 2009 Big Mac index showed the yuan undervalued by 49% against the dollar (see Economics 7e, Box 25.4 for a discussion of the Big Mac index).
The USA, and other countries too, have been putting diplomatic pressure on the Chinese to revalue the yuan and to remove subsidies on their exports. At the same time various protectionist moves have been taken. For example, on December 31 2009 the US International Trade Commission voted to impose tariffs on the $2.8 billion worth of steel-pipe imports from China. The tariffs would be between 10.4% and 15.8%.
The following articles look at these trade and exchange rate issues. Are we heading for a deepening trade war between the USA and China?
Currency contortions The Economist (17/12/09)
Beijing dismisses currency pressure Financial Times, Geoff Dyer (28/12/09)
China aims for 10pc growth and won’t appreciate yuan The Australian (29/12/09)
Wen stands firm on yuan China Daily (28/12/09)
China’s premier says banks should curb lending BusinessWeek, Joe McDonald (27/12/09)
China insists will reform yuan at its own pace Forexyard, Aileen Wang and Simon Rabinovitch (31/12/09)
US slaps new duties on Chinese steel Financial Times, Alan Rappeport (30/12/09)
Chinese Steel Pipes Face Heavy U.S. Duties BusinessWeek, Daniel Whitten (31/12/09)
The US-China Trade War Is Here The Business Insider, Vincent Fernando (10/12/09)
Year dominated by weak dollar Financial Times, Anjli Raval (2/1/10)
Questions
- Explain what is meant by the ‘purchasing-power-parity (ppp) exchange rate’.
- Why is the yuan (or ‘renmimbi’) undervalued in ppp terms?
- What are the the implications of an undervalued currency for that country’s current and financial account of the balance of payments?
- What would be the implications of a revaluation of the yuan for (a) China and (b) China’s trading partners?
- Discuss Premier Wen Jiabao’s statement, “The basic stability of the renminbi is conducive to international society”.
- What forms of protectionism have been used by (a) China and (b) China’s trading partners? Who gains and who loses from such protectionism?
Back in 1993, the EU imposed tariffs on bananas imported from countries which were not former colonies of EU countries. These former colonies are in Africa, the Caribbean and the Pacific (the ACP countries). This meant that the main countries bearing the tariffs were banana producing countries in Central and South America.
“In 1996, Ecuador, Guatemala, Honduras and Mexico, together with the US, formally complained to the World Trade Organization (WTO) about the tariffs. Since then the WTO has repeatedly ruled that the EU tariffs are unfair, but little has changed thanks to continued discussions and arguments between the major players.”
Over the years the disputes between the EU and the APC countries on one side and the Latin American countries and the USA on the other have become known as the ‘banana wars’ (see Web cases 24.5 and 24.6 in Economics 7e MyEconLab). The WTO has ruled against the EU on several occasions, but to little effect as appeals have been lodged and talks have continued. At last, however, agreement has been reached – and without the WTO. This should see EU tariffs on Latin American bananas cut from 176 euros per tonne now to 114 euros per tonne over a seven-year period.
So are the banana wars over? Will EU consumers gain? And what will be the effect on Latin American and ACP banana producers? The following articles examine these questions.
Ending the longest trade dispute in history: EU initials deal on bananas with Latin American countries EU Press Release (15/12/09)
The EU-Latin America Bananas Agreement – Questions and Answers EU Press Release (15/12/09)
Lamy hails accord ending long running banana dispute WTO Press Release (15/12/09)
EU ends ‘banana wars’ with Latin America EU Observer (15/12/09)
Bananas dispute at the World Trade Organisation Reuters Factbox (15/12/09)
Banana prices to fall after longest trade dispute in EU history settled Telegraph (16/12/09)
End of banana wars brings hope for Doha Financial Times, Joshua Chaffin (16/12/09)
EU cuts import tariffs in a bid to end ‘banana wars’ (video) BBC News (16/12/09)
EU cuts import tariffs in a bid to end ‘banana wars’ BBC News (15/12/09)
Banana wars: the fruits of world trade BBC News, Nigel Cassidy (15/12/09)
EU, Latin America Proclaim End to “Banana War” Latin American Herald Tribune, Marta Hurtado (15/12/09)
Settlement should help Chiquita Business Courier of Cincinnati, Dan Monk (15/12/09)
Banana deal offers hope for global trade talks Sydney Morning Herald, Alexandra Troubnikoff (16/12/09)
Pact Ends Long Trade Fight Over Bananas New York Times, Stephen Castle (15/12/09)
Banana deal offers hope for global trade talks Sydney Morning Herald, Stephen Castle (15/12/09)
EU banana dispute ends in favor of Latin American exporters Deutsche Welle (15/12/09)
Questions
- Who has gained and who has lost from the tariffs imposed on non-ACP producers over the past 16 years?
- How might the agreement over bananas impact on the stalled Doha round talks?
- What is likely to happen to banana prices in the EU over the coming months? Use a diagram to illustrate your answer.
- Are the banana wars likely to be over now?
According to Sir Liam Donaldson, England’s Chief Medical Officer, swine flu is on its way back. However, vaccinations are now available to the most vulnerable people, including front-line medical staff, people with chronic health problems and pregnant women. But, what about every-day workers? Surely, these are people that need protecting too, as they are the ones who contribute to the economy. How do you prioritise?
A key question is how much swine flu has actually cost the UK economy. Here, we’re not just concerned with the cost of the vaccines, but also the opportunity cost of that money, the lost output from illness, the human suffering – both of the victims and of their relatives and friends – and, of course, the impact on business and the economy. Some of the countries worst hit by the outbreak of swine flu have faced particular problems, such as protectionist trade policies and a significant fall in business through tourism.
So, will the vaccine prove cost effective for the government, or is it more about the moral obligation to provide it? These articles look at some of the recent developments in the worst pandemic in years.
Mexico economy squeezed by swine flu BBC News (30/4/09)
Swine flu vaccine on its way to GPs Grimsby Telegraph (21/10/09)
Exclusive – WTO protectionism report to feature swine flu bans Reuters (12/6/09)
Flu bill ‘may hit fire plans’ Teletext (27/10/09)
Swine flu vaccination under way BBC News (21/10/09)
Swine flu costs have put dent in profits, Amerigroup says Pilot Online, Tom Shean (27/10/09)
Swine flu gives Pharmaceutical Companies a New Edge Top News, Tangaroa Snell (26/10/09)
Economic cost of swine flu could be around $3 trillion to $4.4 trillion Today’s Zaman (Turkey) (2/11/09)
Swine flu mass vaccination programme launched Guardian (21/10/09)
Full list of swine flu cases, country by country Guardian (updated daily)
Doctors plan mass swine flu jabs for under-18s Times Online (1/11/09)
Questions
- What is the opportunity cost of swine flu? How could you illustrate this on a diagram?
- Vaccines are going to those at risk first. Why is this particularly relevant in terms of the economic problem?
- What is protectionism and what are the main forms? Discuss the advantages and disadvantages of protectionist policies in the context of swine flu.
- If the government had to decide whether or not a swine flu vaccine was worth producing, how could they have done this? Outline the process by which costs and benefits can be weighed up. Are there any drawbacks to this method?
- How have businesses been affected by swine flu? Think about those who have benefited as well as those that have lost.
The International Monetary Fund is made up of 186 countries, which together strive for global monetary co-operation, financial stability, the facilitation of international trade, as well as promoting high employment and sustainable economic growth. At the same time, the IMF and the World Bank also aim to reduce poverty around the world. Some task! – especially with the current financial crisis putting strains on even the richest of countries. In its annual meeting on the 2nd October 2009, the ‘rescue’ of more than 12 governments has already been organised by the IMF.
But it is not just countries who are suffering. The World Bank has said that it could run out of money within the next year and the IMF’s Managing Director has also suggested that it will run out of money for its low-income-country loan facility, which loans money to low-income countries at zero interest rates. However, France and Britain have stepped up with a $4 billion allocation to the IMF to help poorer countries, which may lead to other countries doing the same.
Meanwhile, Alistair Darling continues to fight to keep Britain’s seat at the IMF, as some suggest that Europe has too many seats and should give them up to make room for growing economies. This comes at a time when Britain is also facing the prospect of being side-lined from a new group of economic superpowers that would include the US, Japan, China and the Eurozone countries. The following articles consider the role of the IMF and the WB, as the global economy continues to face financial turmoil.
Doubts remain over global power of IMF Financial Times, Alan Beattie (3/10/09)
Pledge for more IMF help for poor BBC News (4/10/09)
World Bank could run out of money ‘within 12 months’ Telegraph, Edmund Conway (2/10/09)
Will tough new G20 measures work? BBC News (26/9/09)
France, UK to loan IMF$4 billion for poor nations Bloomberg, Sandrine Rastello (3/10/09)
Darling rejects call for UK to lose permanent seat on IMF Guardian, Larry Elliot (4/10/09)
Alistair Darling battles to keep UK on the world’s economic top table Telegraph, Edmund Conway(3/10/09)
See also:
IMF Homepage
World Bank Homepage
Questions
- How do the roles of the IMF, the World Bank, the G7 and the G20 differ and overlap? Do we need all of them?
- What are the arguments for less European representation at the IMF? How may this affect decision-making?
- If the G4 does go ahead, with the Eurozone as one of its members, why will the UK be sidelined?
- It is often mentioned that all countries are interdependent, but what do we mean by international policy harmonisation and why is it desirable?
- The BBC News article and the Telegraph article talk about money shortages at the IMF and the WB. What does this mean for the poorer countries and also for the UK and France which have allocated $4 billion to the IMF?