Essay on european economies, English


After a brief period of disruption in 1946-1947, most of the high income countries experienced the faster economic growth after 1947. The post-war rates of growth enjoyed by many European economies, particularly Germany, were far greater than they have even been. Between 1950 and 1973, the average annual growth of GDP of Germany was 2.7% higher than it had been between 1890 and 1913 (Brenner 2006).The European economies enjoyed a relatively high economic growth rate and macroeconomic stability. Between 1950 and 1955, the unemployment rate in Germany fell from 10.4% to 5.2%, and by 1960 to 1% (Brenner 2006). The long boom was lasted for 25 year from 1950 to 1973 among the OECD countries.

However, the boom was nearly ended in 1973. The advanced capitalist world was suddenly projected from boom to crisis due to stagflation and oil crisis. Profitability for G7 economics, taken a long epoch of reduced rates of profit on capital stock. Meanwhile, investment growth fell sharply, leading to reduction in the growth of output and productivity, as well as sharply higher rates of unemployment and much more severe recessions. The growth in per capital GDP was dropped from 4.08% in 1950 to 1.78% in 1973 in Western Europe (Gibson, H D 1989). The OECD countries were less interest in growth theory and resulted in diminishing return in investment. At the time of the collapse of Bretten Wood in 1971, the US economy was very unstable because of the further weakening Dollar and the persistent current account deficit, as well as the inappropriate tight monetary policy. The US deficit reached $14.5 billion and 15.4 billion, respectively, in 1977 and 1978, about 0.7% of GDP. Between 1971 and 1973, the dollar had devalued twice time and the official gold price was increased from $35 to $38 per ounces. The European countries then leave the fixed ER system, not pegged with the dollar and float jointly against the dollar by imposing flexible exchange rate system in 1973.

After the collapse of Bretten Wood in 1971 and the world growth started slowing down in 1973, the European countries realised the importance of regional integration.  They did not trust the US dollar anymore and decided to join the flexible exchange rate. European countries started integrating together and develop their own currency unit for themselves. It became a determining factor of inter-European economic restricting. The renewal of the old continent was invigorated by the creation of a European Community, and then the formation of the European Union and finally developed their common currency, Euro. The process took 25 years from 1973 to 1998.

The common currency of Euro and European central Bank are the most important supranational institutions of the European Union so far. It successfully leaded to a deeper economic integration among European countries.  The Euro has become the second most important international currency after the US dollar. According to the IMF web site (2009), there are more than €790 billion of Euro in circulation in the world, make up of 28% of world GDP. The main objectives of this essay divided into two parts. The first part is to explore the development of Euro currency for the period of 1950-1998. The second part of the essay exanimate the  cause factors that drive the major European economies to use a common currency. After reading the essay, readers should understand that there is not only historical background, but also economic objectives that drive the European integration. A deeper regional integration for Europeans is the only way to lead them to a more stable economic environment. 

Restoration of current account convertibility:

At the beginning in the late 1950s, the US authorities had decided not to control the unregulated Eurodollar market. Through the Eurodollar market, which increased domestic capital controls, US banks were largely enable continue their foreign lending. Net outflow of US continuous to increase and balance payment keep staying negative. From 1957, as the trade balance began to decline while net overseas investment kept rising. At the same year, the sterling crisis started and the bank of England prohibited the sterling financing of non-UK trade. It aimed to provide customers with dollar deposits in The Bank of London and other European centres.  By the mid 1958, a European market in dollar deposits and loan had become established. Berend (2006) argued that the US deficit are major contributed by the growth of the Eurodollar market. 

With the restoration of current account convertibility in Europe at the end of 1958, with its associated relaxation of ER controls, gave further stimulus to the European market. It permitted an increase in the supply of dollar (by private owned) which could now swapped into Euro currency. Foreign exchange markets became more active, encouraging arbitrage between Eurocurrencies and national markets.   

Monetary Policy and Capital Control in US:

In order to moderate the US BP deficit, the US authorities introduced regulations to limit the placed on loans to foreigners and investment in other foreign assets. This leaded to a shift of operation to foreign branches of US firms and in particular to the Eurodollar market.

Under the regulations, credits to non-residents by US banks office were limited; It leaded overseas borrowers to turn to the Eurodollar market, which in turn helped to keep Eurodollar interest rate at a relatively high level (attract capital inflows to Europe); the number of US banks with branches overseas increase, as well as the assets of overseas branches increase. These regulations on capital flows were to shift of international banking away from national (US) banking system to the Euro banks.

During the period of 1966 to 1969, the US Federal Reserve rely on tight monetary policy by regulated the quantity of money. It prohibited the payment of interest on demand deposits, as well as encouraging the Federal Reserve to set a maximum interest rate on saving and term deposits in US banks. Hence, the level of interest rate in money market was increased through slowing down the growth of the Money supply. However, while money market interest rate rose, the interest rate payable on time deposits was held down. Therefore, investors shifted their time deposits from the banking system, causing the banks to experience a shortage of funds. The banks then looked to the Eurodollar market for funds and in 1966, when money was tight, borrowing from European branches of US banks rose by 205 billion (Christopher, J,1996). Moreover, US banks began to regard the market as a substitute source of dollars when the tight MP was not effective in 1967 and funds continuous to increase through this method and used it to lend to US customers.

McKenzie, G, Venables, A, Jacqemin, A (1991), believe the US tight monetary policy play an important role of stimulated the growth of the Eurodollar market by reinforced the market's ability to offer higher interest rate on deposits.

The Bretton wood of fixed exchange rate system broke down in 1971 and leaded to a further development of Eurodollar market. After the twice time of devaluation of US dollar, there was a demand to borrow dollars to buys stronger European currencies. After the UK decision to float, Germany and Switzerland imposed capital controls and more tight monetary policy to control inflation. An massive outflow of dollar resulted and the dollar was devalued a second time in 1973!In the following month, continuous flight from the dollar to Europe and EU countries decided to move to flexible exchange rate system. In 1979, European Monetary System (EMS) established which based on the goal of stabilizing exchange rate. It used exchange rate mechanism founded on a European Currency Unit (ECU). In 1992, creation of European Union which takes a further step in the process of European integration and the major European economies committed to setting up Euro as a single currency in 1998.

Before I stated the second part of the essay,  I would like to summarise that the historical background mention above such as the end of long boom, instability economy in US, return to convertibility, collapse of Bretton wood system are the pull factors that drive European integration. In fact, there are a lot of push factors that drive the European countries to join the single currency system in order to lead European economies to a more stable economic environment.  

The Economic growth rate objective:

Most of the European believes regional integration can reach a faster economic growth. It opens the way to higher living standards and better public services. In fact, a single currency system would also keep the rate of price inflation down, another main objective of government policy. Lower inflation is one of the means to higher economic growth. A more sensible aim would be increase living standard or GDP per head among European countries. Countries with lower incomes per head have a chance to be more competitive in terms of unit labour costs, and thus to raise living standard by exporting more to their single-market partners. Moreover, single currency system makes balance of payments deficits become easier to finance, the additional economic objective of Government policy. It ultimately become as easy to finance as balance of payments deficits between regions of one country

Transactions cost saving:

When single currency system adopted in the European countries, there will no longer be any exchange rate conversions when money moves across national boundaries and therefore save time and as well as expenses. A single currency system could minimise the cost different between bank's buying and selling rates for foreign currency, which can reduce the bid-ask spreads. Also, the cost of commission in foreign exchange dealing and the extra cost charges on banknotes, traveller cheques could minimise. For the company prospective, single currency could reduce the internal cost for managing foreign exchange risks. Before the period of single currency, the costs of cross-border payments were costly and took long time. The EU commission found in 1993 that the average cost of a cross-border was 25.4 Eurodollar per transaction and often took more than 6 working days.  The reduction cost was estimated by the web site of European Union (2009) at around 33% of GDP which equal to 2.5 billion (pounds) and for the whole EU as a whole 25 billion.

One market with a single currency:

The single currency system will improve one essential feature of the single market by stepping up competition by means of pricing in a single currency. Reduce "menu price" from business. Since business will set different set of price for each market, a common currency market will be a better unit of account to make direct price comparison of similar products among European countries. Therefore, competition in one currency across borders would bring down the average price of products, and consumer would get real increase in the value of the interest rate pay packets. The single currency is essential to the narrowing of differential.

Lower interest rates:

The single currency can be expected to lower interest rates through-out its area and do not required Exchange rate risk premium against the other countries. The real long-term interest rates averaged 4.5 % in six major countries in 1980-1994, compared with 2.9% in 1960 and 0.8% in 1970 (Neal, 2007). According to classical economic theory, a shortage of supply of savings relative to investment demand pushes interest rate up and reduces investment.

Investment and Growth:

The other main effect of a cut in interest rate and share yields will be stimulate on business investment on capital expenditure. Investment projects will become economic which were not so when they had to earn higher returns to repay expensive borrowed money, compensate for Exchange rate uncertainty. The rate of interests also the discount rate used to measure the present value of future earnings. The fall in the inflation that may be expected over and above the cut in real interest rate will also make investment more attractive by reducing the financing burden. Although the UK had an investment boom in the late 1980s, it could not be sustained because of inflation, the balance payment deficit, and then the interest rate rose. Hence, the single currency should lower the interest rate, and stimulates investment with corresponding benefits to economic growth and living standards.


In fact, the Euro currency is running so far so good. The Euro market is now the second largest reserves currency in the world after the US dollar. The International Monetary (2009) shows that there is more than 790 billion of Euro in circulation in the world, make up of 28% of GDP in 2008. The major belief of deeper integration among Euro Zone could definitely lead to a more stable European economic environment. Hence, it generates another boom after 1990. However, this boom seems to be not sustainable which reflects on the news today about Greek and Argentina. It implies that there are hidden economic problem within the Euro Zone. It also indicates that there are a serious economic imbalance between Western and Southern Europe. Netherland and Germany have spent too little and their economies mostly driven by export. Meanwhile, Greece has spend too much and amassed debts as a result. It is time for us to re-think about the single currency system and evaluate the balance between cost and benefit of using a common currency within a particular area.

Posted Date: 2/22/2013 2:44:07 AM | Location : United States

Related Discussions:- Essay on european economies, Assignment Help, Ask Question on Essay on european economies, Get Answer, Expert's Help, Essay on european economies Discussions

Write discussion on Essay on european economies
Your posts are moderated
Related Questions
write a lettre of motivation to change school

What is a paper's audience? The audience is the person or people who will be reading your work. If you're writing a feature article for a magazine, for instance, your audience

my dreams and fair

please help me with writing skills

if you could speak to bierce, how would you describe your reaction to the ending of his story

In a 3-firm oligopoly, market demand is given by Q=100-P. Every firm's constant marginal cost is 40 and the firms compete with quantities. Suppose that two of the firms merge. a

#quWhich of the lettered sentences below contains an unnecessary shift in verb tense? (A) Jack White, a popular musician, grew up in Detroit, Michigan, and he was one of ten childr

how to prepare note making

i need help for my technical writing, research paper