The Eurozone is an economic and monetary union, which consists of 19 countries within the European Union, which in itself is a confederation of 28 nations primarily from Europe, forming an economic union. The countries of the Euro zone (euro area) use a common currency called the Euro and share a common independent monetary policy which is presided over by the European Central Bank.

The Euro zone sovereign debt crisis reflects the still mounting and enormous debt of some of the individual governments of the Euro zone, and their inability to refinance these debts. The countries which could not put their public debt in order and received huge bailout packages from the Euro zone countries and the IMF include Greece ,Ireland and Portugal- in that chronology. The causes of the crisis range from –

• Interest rates, which had fallen to unprecedented lows in southern European countries when they joined the euro. And that encouraged a debt-fuelled boom, causing governments as well as the private sector (causing companies and mortgage borrowers) to borrow beyond their means, and the subsequent bail-out packages to the troubled banking industries and financial sector by the governments which raised their debt levels even more. Also reckless public sector spending especially by Greece on social security measures like increasing minimum wages drove up labour costs without raising productivity.
• Real estate bubble bursts followed by writing off of assets post the global meltdown.
• International trade imbalances of the debt ridden Euro zone nations.
• Downgrade of the nations’ debt by credit rating agencies leading to spiraling bond yields which further intensified the crisis.

In 2011, euro zone finance ministers set up a permanent bailout fund, called the European Stability Mechanism, worth about 500bn Euros to help the crisis countries.The Southern Euro zone nations of Greece, Portugal, Spain, etc were trade deficit nations due to their noncompetitive exports (high labour costs) and high imports (financed by the borrowing boom). They had their deficits with the northern European nations (especially Germany), raising their debt levels and fuelling the crisis

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Linear functions are the simplest way to define relationships between variables in economics. They are of the form:

y=a + bx

If you plot this equation on a graph, it will form a straight line. ‘a’ is the intercept on the Y-axis (that is the point on the Y-axis where the line meets the Y-axis) and ‘b’ is the slope. They are the parameters that describe the linear relationship between x and y.

Here y is the dependent variable and x is the independent variable. A linear relationship is where the change in y is always b times the change in x, irrespective of the level of x. Thus the marginal effect of x on x on y, the slope, is constant. That is why the graph is a straight line as it has a constant slope. The slope, as stated above, is the ratio of the change in y to the change in x. It thus gives us a measure of the change in y relative to the change in x. If the slope is positive, x and y have a positive relationship i.e. of x increases, y increases as well and vice versa. If the slope is negative, x and y are negatively related, i.e. they when x increases, y decreases and vice versa.

For example, let’s consider the relationship between expenditure on holidays and vacations in a linear form.

Expenditure on holidays and vacations=102 + 0.13 disposable income.

Thus when disposable income (after-tax income) increases by 1 rupee, expenditure on holidays and vacations increases by 0.13 rupees. The intercept in this equation denotes the expenditure when disposable income is zero. Here it is 102 rs. This is obviously incorrect, a family with no income will not spend on holidays. This is the drawback of a linear relationship, and hence we require non-linear equations/functions to model an economic relationship better at lower levels of income.

Here 0.13 is also the Marginal propensity to consume (spending on holidays and vacations) (MPC), that is the change in consumption caused by a change in income. As you can see, it remains constant irrespective of the level of income, which is also not true in real life. Different levels of income have different MPCs, as the share of spending on holidays and vacations in one’s change in income would be different for households with different level of income and hence the relative change in both quantities would be different as well.

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One of the most common birthdays cited in probability theory is the birthday problem where the probability that at least two people in a group of people would have their birthdays on the same day. This means that the month and day of birth is the same, but the year does not have to be the same. This probability increases as the number of people in a group increases, but to find the exact probability for a group comprising a particular number of people, we will have to make certain assumptions. We assume that whoever is born on the 29^th of Feb, will consider their birthdate as either March 1 or Feb 28. We also assume that there are no twins in the group as they will have the same birthday. These assumptions make sure that every day in a year is equally likely to be the birthdate of the people in the group.

Let there be ‘n’ people in a group. So every person in the group can have any birthday out of the 365 days. That is there are 365 possibilities for every person. Therefore the total number of permutations (or the possibilities) is 365 multiplied by itself ‘n’ times, i.e 365ⁿ. Thus each one of the outcomes in the total permutations is equally probable. If n>365, a birthday is bound to get repeated. Hence n<=365. Arriving at the probability that at least two people will have the same birthday is tedious and hence we calculate the probability that all have different birthdays and subtract it from the total probability that is 1. (The range of probability is between 0 and 1). It can be calculated in the following way:

Let’s take any person from the group. That person can have his/her birthday out of any of the 365 days. Let’s take a second person from the group. This person will have a birthday on any day, except the day on which the first person has his/her birthday. Therefore there 364 possibilities for this person. In this way, the number of possibilities reduces by 1 for every new person till the all the ‘n’ people have been considered. Hence the total number of permutations=

365×(365-1)×(365-2)…..×(365-n).

To calculate the probability that no two people will have the same birthday, we divide the above figure by 365ⁿ and subtract the value now calculated from 1.

These are the probabilities that we get for different values of n:

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The Eurozone is an economic and monetary union, which consists of 19 countries within the European Union, which in itself is a confederation of 28 nations primarily from Europe, forming an economic union.  The countries of the Eurozone (euro area) use a common currency called the Euro and share a common independent monetary policy which is presided over by the European Central Bank. Below is an evaluation of Germany’s performance after the formation of the Eurozone.

From 2000 to 2008, Germany’s average annual GDP growth was 1.4%. From 1995 to 2008 GDP growth averaged 1.6% p.a. Although the per capita GDP has been growing steadily since 1991; it has almost been the same after Germany’s entry into the Euro zone. The GDP took a hit after the beginning of the debt crisis, even witnessing negative growth in 2009, but has bounced back promisingly. The German economy grew by 3% in 2011.Its real growth since 2007 has averaged 1.684% which is lower than only 4 Euro area countries: i.e. Poland, Sweden, Austria and Belgium, showing resilience to the crisis as compared to other euro area nations.

Exports and the Current Account:

German exports have undoubtedly benefited from the Euro as it is cheaper than what the Deutsche Mark would have been, as it represents the competitiveness of the entire Euro area. The European Commission estimated that the Euro was 10-12% undervalued for Germany in the 1^st quarter of 2009.It’s share in world exports increased in 2000-2009 ,considering that the share of other advanced countries reduced. In the same period, the share of exports to its GDP rose by 14%.

The German current account balance improved after the Euro’s adoption, after declining into negative territory after the German reunification. Germany’s bilateral trade surplus with the PIIGS countries (Greece, Ireland, Portugal, Spain and Italy-the countries affected by the crisis) also improved. For e.g. Greece’s trade deficit with Germany widened from -1.5% of Greece’s GDP in 199 to -2.5% in 2008.

Unemployment: (as % of total labour force)

Germany’s unemployment rose steadily since the Euro’s introduction, barring the reduction in 2000. But since the global meltdown, it has been declining, reaching 7.07% in 2010 and sliding further to 6.3%, 6.5%, 5.8% and 5.6% in the consecutive quarters of 2011 respectively. Its unemployment rate is the third lowest among all Euro zone nations, just above the rates in Austria and Netherlands (countries which have been relatively unaffected by the debt crisis).

Government debt:

After an initial fall after 1999, Germany’s debt has also been rising since 2002 which is in sync with the trend in other euro area nations. As of January 2012 Germany’s government debt equals 81.2% of GDP lower than 89.2% in France and 88.8% in the UK and all the crisis countries of PIGGS (excluding Spain)

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The Eurozone is an economic and monetary union, which consists of 19 countries within the European Union, which in itself is a confederation of 28 nations primarily from Europe, forming an economic union.  The countries of the Eurozone (euro area) use a common currency called the Euro and share a common independent monetary policy which is presided over by the European Central Bank.

As Europe’s strongest economy, Germany has borne the brunt of the cost of recent rescue deals. It foots more than a quarter of the rescue bill which consists of contributions made by Euro zone members. Of the 780 billion Euros in the European Financial Stability Facility, Germany vouches for 211 billion and many Germans worry there could be more demands to come. After the Standard and Poor’s , the credit rating agency, cut the ratings of nine Euro zone nations including France and Austria, while Germany retained its top AAA rating, the burden of financing the Euro zone debt rests predominantly on Germany’s shoulders. German bonds, which have been considered safest in the Euro zone, have yields averaging 3.5% over the past ten years making it easier for Germany to refinance itself. Germany is keen to save the Euro but it is now wary of pouring water into a leaking bucket. Recent polls have revealed Germans in favour of bringing back the Deutsche Mark and stopping the bailout packages.

If that were to happen, it would withdraw all its funds from the European Financial Stability facility and would have a much stronger currency than the Euro owing to its current account surplus. It has been argued that a revaluation could be desirable for Germany, as it does not make much sense to operate permanent current account surpluses. Exports have been the major driver of its growth, whereas domestic growth has lagged behind. A real revaluation would help in shifting savings from investment abroad to domestic investment, which clearly would benefit Germany. Also it would be favoured to other Eurozone nations as an investment destination, owing to the uncertainty in the Euro zone and low wages in Germany. It may have to forego a part of its current account surplus but history has shown that Germany was a huge surplus nation before the reunification when it had the Deutsche Mark.

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The Eurozone is an economic and monetary union, which consists of 19 countries within the European Union, which in itself is a confederation of 28 nations primarily from Europe, forming an economic union.

The countries of the Eurozone (euro area) use a common currency called the Euro and share a common independent monetary policy which is presided over by the European Central Bank.

Germany which had been suffering from the after-effects of the reunification which included huge public deficits owing to an expansionary fiscal policy and rapid increases in wage levels leading to loss of competitiveness in the export market, current account deficits and high unemployment, has bounced back, -partly because of its membership with the Eurozone- as country resilient to the current crisis.

• Europe’s largest economy is the biggest winner from the Euro, giving it an incentive to be a part of the bailout packages given to. As an exporting nation, Germany has particularly benefited from the euro. A trade surplus drove almost 60 percent of GDP growth from 2000 to 2009 according to a Mckinsy report. Back in 2010 the growth mix was still about 30% to 70%, with the domestic side contributing 70%.

*Contribution of net exports to change in GDP (%)

• About 40 percent of its exports are destined for the Eurozone and 20 percent for the rest of the European Union.
• Nearly three million jobs in Germany depend on exports to the Euro zone while 4.4 million depend on exports to the EU as a whole, according to a study by the Prognos research institute.
• Southern Euro zone countries(France, Italy, Spain, Greece and Portugal), traditionally more prone to inflation, have enjoyed better credit conditions due to a single interest rate fixed by the European Central Bank, encouraging them to buy German goods. Here’s an example of Greece (worst affected country in the debt crisis) enjoying lower interest rates from the euro.

*Real interest rate in Greece.

• If it had its own currency, Germany’s economy would probably also be struggling with an exchange rate far higher than the euro’s now, which would have made its exports costlier.

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The Euro zone is an economic and monetary union, which consists of 19 countries within the European Union, which in itself is a confederation of 28 nations primarily from Europe, forming an economic union.

The Euro zone has succeeded in maintaining a low and stable inflation rate, which has been its primary goal since the Euro’s introduction. The creation of the monetary union and the successful monetary policy of the ECB have also permitted a decade of low and stable interest rates and achieved a good degree of convergence in the Euro zone economies. The other successes of the zone in the past decade can be attributed to the relatively favourable conditions in the world economy before the international financial crisis and the euro zone debt crisis. Both the crises have affected the major economic indicators negatively and have exposed the internal imbalances of the Euro zone, the debt crisis posing the most serious challenge to the future of the Eurozone. However the very format of the Euro zone as an EMU prevents it from practicing a possible solution to the debt crisis. Every euro member nation has lost independent control over its monetary policy thus barring its central bank from buying their debt and printing money.

However the German success story cannot be attributed to the Euro alone. Germany’s wage growth has remained moderate, keeping unit labor costs highly competitive relative to the rest of Europe. From 2000 to 2009, unit labor costs rose 7 percent in Germany, compared to an average increase of 31 percent in the GIIPS over the same period. This rise in unit labour costs is the lowest in the Euro zone, thanks to the extension of short-time work schemes, companies’ good financial situation, the flexible working hours negotiated in collective wage agreements and the assent of the German trade unions to keep wages low. Thus unemployment has been decreasing. This demonstrates how targeted reforms have boosted the flexibility of the German labour market. All of this has collectively contributed to keep German exports competitive compared to other Euro zone nations.

On the other hand the Southern Euro zone nations of Greece, Portugal, Spain, etc were trade deficit nations due to their noncompetitive exports (high labour costs) and high imports (financed by the borrowing boom). They had their deficits with the northern European nations (especially Germany), raising their debt levels and fueling the crisis.

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The Eurozone is an economic and monetary union, which consists of 19 countries within the European Union, which in itself is a confederation of 28 nations primarily from Europe, forming an economic union. To know more about an economic and monetary union, go here : http://vskills.in/certification/blog/the-eurozone-as-an-economic-and-monetary-union/. The countries of the Eurozone (euro area) use a common currency called the Euro and share a common independent monetary policy which is presided over by the European Central Bank. Here are a few economic indicators of how the Eurozone has performed till 2010.

Unemployment level:

The average unemployment rate has fallen from 9.3 to 8.3 recorded in the time frame of 1998-99 and 1999-2008 respectively. Roughly 16 million jobs have been created in the last decade, being testimony to the surge in job growth. But the unemployment rate has risen sharply since the debt crisis. It was 10% in July 2010 and was last reported at 10.4% in December of 2011. From 1995 until 2010 the rate averaged 9.06 % in light of the global financial crisis and continues to scale new heights after the introduction of the euro due to the ongoing sovereign debt crisis.

Employment(y-o-y changes in %, period average)

The Euro area has outpaced job growth in mature economies like the US and Japan.

Source: World Bank

Government Debt:

The debt of the governments in the Euro area had been hovering around the same level of around 69% of their GDP before 2009, after which the debt to GDP ratio has shot up drastically. From 1999 until 2010, the Euro Area’s average government debt to GDP was 71.18 %.

Euro’s share in the world’s foreign exchange reserves:

The Euro has emerged as a major international currency. The share of the euro in global foreign exchange reserves has been rising since 1999 and stands at more than a quarter of all reserves today, making it the second most important currency behind the US dollar.

Interest Rates:

From 1998 until 2010 the Euro Area’s average interest rate was 2.89 %.  Nominal long term interest rate (in %, period averages.) Thus reduction in interest rates can be seen in the euro area.

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The Eurozone is an economic and monetary union which consists of 19 countries within the European Union, which in itself is a confederation of 28 nations primarily from Europe, forming an economic union. The countries of the Eurozone use a common currency called the Euro and share a common independent monetary policy which is presided over by the European Central Bank.

The customs union is the foundation of the Eurozone, and is an essential element of the functioning of the single market. Common rules related to customs have been imposed at the borders of all the Eurozone countries, thus 19 Customs Administrations act as though they were one. These common rules go beyond the Customs Union as such – with its common tariff – and include all aspects of trade policy, such as preferential trade, health and environmental controls, the common agricultural and fisheries policies, non- tariff measures, etc.

The Euro zone Customs Union means:

• No customs duties at internal borders between the Eurozone Member States;
• Common customs duties on imports from outside the Eurozone;
• Common rules of origin for products from outside the Eurozone;
• A common definition of customs value

Here are a few facts on the European Union’s custom Union, of which the Eurozone is a part:

1. The EU is the largest trading space in the world – population of nearly 500 million

2.183 million Customs declarations completed in 2007 – 5.5 every seconds.

3. 1,545 million tonnes of sea cargo and 11.7 million tonnes of air cargo checked each year

With the elimination of exchange rate related risks and disappearance of the associated costs, trade flows have increased within the Euro zone and also with countries outside it. From 1999 until 2010, the Euro Area’s average current account as percent of GDP was -0.23 %

The exports of the Euro area have increased steadily after the introduction of the euro. The level of openness (export as a % of GDP in current prices) of the most important countries of the Euro zone at the moment of joining the monetary union in comparison to the year 2007.

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    I.            WPI: 

The WPI is considered as one of the  main inflation measures in India, because of its availability at high frequency, national coverage and disaggregated data which facilitate a better analysis of inflation. On 14 September 2010, a new WPI series was released with base 2004-05. A representative commodity basket comprising 676 items was selected and weighting diagram was also changed to reflect the change in share of different items in the total production as well as introduction of new ones. 176 items were dropped/ revised. The broad categories items in the WPI and their subcategories are as below:

1. Primary Articles:

• Food Articles
• Non food and minerals

2. Fuel and Power

3. Manufactures Products:

• Food Products
• Non-food Products

The share of primary articles has gown down and that of manufactured and fuel products has gone up, indicating the industrialization of the economy. Also since the share of manufactured products is higher, change in their items will affect the index more than the others.Before Oct 2009 the WPI was released on a weekly basis, with the lag of two weeks, now the weekly release covers only the ‘Primary’ and ‘Fuel & Power’ groups. The WPI for ‘All Commodities’ and ‘Manufactured Products’ is released on a monthly basis with the same time lag.The WPI is released by the Office of the Economic Advisor, Ministry of Commerce and Industry, Govt. of India. 

      II.            CPI: 

At the national level, there were four Consumer Price Index (CPI) numbers until recently. They were:

A) CPI for Industrial Workers (IW),

B) CPI for Agricultural Labourers (AL),

C) CPI for Rural Labourers (RL) and

D) CPI for Urban Non-Manual Employees (UNME)

 All these indices have different base years and cater to specific segments of the  population, and thus can be considered as partial indices. They are not oriented to reflect a true picture of the price behaviour and effect of price fluctuations of various goods and services consumed by the population in the country. Hence form January 2011 onwards the Central Statistical Organisation (CSO) of the Ministry of Statistics and Programme Implementation (MOSPI) has taken upon itself to compile a new series of CPI for the urban and rural populations separately and both combined. The indices will be released for all states and UTs and on an all-India level.

The National Sample Survey Organisation collects data for urban centres whereas MOSPI has roped in the postal department to collect price data from villages. Price data from 1,181 villages and 310 towns is collected.  Weighting diagrams (consumption patterns) of al the 3 indices have been derived from the results of the National Sample Survey’s (NSS) 61st round of Consumer Expenditure Survey (2004-05).

Source:RBI Annual Report 2010-11

As can be seen from above, food has the highest share in the household expenditure (49.71%), thus making CPI inflation sensitive to food prices. In April 2014, the Reserve Bank of India adopted the combined-CPI as the main policy measure for inflation. Before April 2014, the WPI with new base was used as they key inflation measure in deciding monetary policy. 

III. GDP Deflator: 

• The GDP deflator is released by the Central Statistical Organisation in the National Accounts Statistics. Although it includes the entire spectrum of economic activities, it is available on a quarterly basis with a time lag of two months since 1996.
• Hence GDP Deflator cannot be used as the main measure of inflation in India in spite of its apparent advantages over other indices.

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