Essay questions for Chapter 4 Due to global and financial integration, the US subprime mortgage crisis spread to Europe via contagion. Since the EMU was launched in 1999 as an incomplete structure, the EA countries could not successfully cope with the crisis. What are the major deficiencies of the EMU? Is it feasible for such deficiencies to be corrected? If yes, explain how?
The EU and the IMF attempted to restore economic and financial stability in the EMU through an internal devaluation of all bailout recipient countries. This entails privatization programs, deregulation, and liberalizing of governmentally protected professions. All such programs aim to reduce wages and prices and thus increase international competitiveness. In 2014 four bailout EA countries achieved a positive, although low, rate of growth. Taking this news into consideration and by examining the real effective exchange rates and the real per unit labor costs of the EA countries shown in Figure 4.1, do you think there exists a chance for a quick recovery of the financially distressed countries?
Chancellor Merkel has repeatedly expressed her views to the media that it will take years for EMU problems to be resolved. Possibly she had in her mind past revisions of treaties that proved to be cumbersome and time-consuming. Do you believe that such an important European leader ought to be more careful, as her pessimistic remarks could have played a role in forming negative expectations by investors and CRAs? Could such remarks have further detrimental effects on the already battered and financially distressed EA countries?
Since the financial crisis spread in Europe, the ECB launched several monetary programs to restore economic and financial stability in the EMU member countries. However, the ECB monetary policy is not as expansive as the US Fed’s monetary policy. Is it plausible that the ECB monetary policy could have been more expansive, especially during a period of low inflation that prevailed during the European sovereign debt crisis? Explain your position whether or not you support a more expansionary ECB policy.
In its effort to cope with the crisis, the ECB adopted a few programs to assist financially distressed countries. Two of these programs are the “Securities Markets” program and the “Outright Monetary Transactions” program; both had beneficiary effects on the financially distressed EMU member economies. The ECB, however, was heavily criticized by a few national officials because such programs violate the “no bailout” clause of EU/EMU treaties that prohibit the ECB from bailing out EMU member countries. Do you think ECB independence will enable the EMU to protect member countries from future financial crises?
The two rescue funds, the EFSF and the ESM, were created to bail out the financially distressed EMU member countries during the European crisis. Despite the massive amounts of the two rescue funds and the unprecedented amounts of the bailouts, the European crisis is not over yet. Criticism of the two rescue funds ranges between two extremes: one side argues the funds are too small to protect EA countries; the other side argues that they are too big and thus encourage moral hazard. Compare the two extreme criticisms and state whether the present amount of the rescue funds are sufficient to cope with the crisis.
Repatriation of authorities now vested with the EU in Brussels back to the member states. Recent surveys of EU citizens suggest this is a popular preference.
Analysts, world leaders, and officials of international organizations have repeatedly criticized the handing of the European sovereign debt crisis by the EA country leaders. As a matter of fact, they consider the EU leaders responsible for prolonging the recession because they are not doing enough to find a solution. EU country leaders, however, have followed their constituencies and have adopted policies that are perceived to better serve their voters and taxpayers, who generally are against bailouts. Students should debate whether each criticism against EU country leaders has any validity.
The US was able to pull out of the 2007–9 recession by applying expansionary fiscal and monetary policies. Students should debate whether the EMU member countries can exit the crisis without first forming a complete monetary and fiscal union. The alternative would be to create a full monetary, banking and fiscal union and follow the successful US approach.