Achieve Economic Growth of The Euro Zone - Article Example

Achieve Economic Growth of The Euro Zone The euro zone is facing a great crisis that involves ways on how they will achieve economic growth. The fiscal policy applications will achieve little if the economic growth is not generated. The over restriction of the fiscal policy has been seen as one of the reasons for failure to the decisions that have been propagated, but the obsession that has been with the European Central Bank on the issue of controlling inflation is another [Felton, A. and Carmen M, R. 2008]. It is agreeable and of the essence to note that; an inflation control is good and it is the role of the central bank to oversee this. However, it is also important not to generalize solutions and to be flexible enough to face the real big problem at hand, which is a serious threat the Euro zone current economy. This is since reversing its role to allow high inflation will help solve the current crisis. It has been noted that if the policies that dictate maintenance of an inflation rate of 2% or below do not change to raise that rate, then some countries like Italy and Spain will remain incompetent in the Euro zone and will end up with unsustainable debts. The official strategy of ECB has included the Bundes bank’s legacy and has clearly used it. The interpretation the central bank has, regarding the price stability, has revealed it to be the one with the most restrictive policy on price stabilization of all the major central banks. This is because it has had the experience (through the observation of the reaction of the other central banks policies in regard to the central banks in the euro zone countries), which have had high inflation previously. It has, therefore, had its full commitment to seeing to it that high inflation does not occur. However, it is of great importance that as the ECB crashes the thought of high inflation, (which they focus on as a way of ensuring that there is an economic growth elsewhere and the rate of reference being as low as 2%) is very low and may be damaging in circumstances like that the euro zone is in. This situation has been seen as one of those times that policies need to be redressed and made more specific to face the situation. The effect of having the interest rate lower as the policy dictates is that there will be very little room for an adjustment in the currency union as the countries like Italy and Spain will have to cut their costs relative to that of Germany, as the only way of improving their competitiveness since they cannot devalue. In this case, therefore, the countries will be at the mercies of Germany’s performance on having their interest rates rise by a higher rate than the current 1.5 per cent. If this does not happen, then these countries will be trapped in debts and will lead to a deflation. Therefore, it would be better to have a higher rate of around 3% that will allow symmetry in an inflation target. The ECB is, therefore, required to pump more money to the euro zone to help solve this crisis; if it has to take serious actions to fight the crisis in the euro zone through economic development. It needs to buy the government debts and some other assets that are unsterilized to be able to deal with the situation as it has been with the other banks like with the Bank of Japan, the US Fed and the Bank of England, which were in such states previously (where even the aggregate demand had fallen). This is what is referred as to the quantitative easing {QE} and as a result, the private and public borrowing costs will reduce. The volume of credit will eventually increase. In addition to this, the economic activity will strengthen, and the QE will guard against the deflation risk. It is important for ECB to know that this policy is not meant to remove the problem that there is completely, but it is the only available option to fight a bigger problem than the one it will cause. The dual target of inflation as well as employment by the Fed has led it to its pumping up of more bubble. It has been forced to sacrifice sound money principle on a platform of pump priming in the short term. This resulted to an unbalanced US economy, a world full of dollars and excessive debt that also put a downward pressure on the currency of the US. This threatened the monetary stability internationally. which is a self driven analysis. [Eichengreen, B. 2002] This had resulted from the fed having the interest rates very low and increased the supply of money into the economy and had this not been done, then worse things would have happened like slumping of the US economy and swinging of the trade balance into a surplus. The reason why high inflation will be important is because euro zone is trying to ensure monetary stability in its region at the cost of higher debt in other regions. The current crisis strategy is for the increase in the savings by the people while spending less so as to live within their means. This will involve huge trade surpluses by the euro zone with the rest of the world. The economy of the US is, however, too indebted as small to act as a consumer of last resort for eastern Asia and Europe, as well. With the fiscal policy being highly contractionary and the monetary policy being very restrictive, it is most likely that the bloc will remain in a slump and the crisis will persist. It so happens that; even though the policies may need to be changed, the ECB will first need to have its responsibility transferred to the euro group, where the decisions by the majority are to be followed as currently, it sets its own mandate. The reforms cannot include those of the ECB, even when made by euro zone, since some of the governments like that of Germany are constantly opposing such a move. Therefore, there is no way out for the currency union. There needs to be structural reforms, which will boost the long term growth and which will need the company of a steady investment strategy for the demand is still very weak. There needs to be adjustments in the price and labor costs in the participating economies. [Colin, 2008] If the ECB, therefore, would agree to release more money or even print out more, the bonds of the euro zone countries could be supported as this would end the euro crisis. This will result to a high inflation, but the best part is that all the debt will have been repaid in full. The ECB is in a better position than the fed as it has just the mandate of stabilizing the prices. This will nurse countries like Greece, which has a large debt crisis, and will from then be able to trade freely as well as focus on development. References: Colin. (2008). Global Financial Meltdown: How Can We Avoid the Next Economic Crisis. New York: Palgrave Macmillan. Eichengreen, B. (2002). Global Financial Crisis Resolution: Issues and Options. Helsingfors: Swedish School of Economics and Business Administration. Felton, A. and Carmen M, R. (2008). First Global Financial Crisis of the 21stCentury: A Voxeu.Org Publication. London, UK: Centre for Economic Policy. Read More