ANOMALIES ON THE MARKET OF THE EURO AREA

Authors

  • Vladimir M. Ristanović Висока школа за пословну економију и предузетништво Београд

Keywords:

Output Gap, Euro Area markets, Optimal Currency Area

Abstract

This paper analyzes the problems in the Eurozone market. The aim is to recognize where they're hiding and what are the causes of permanent problem in the goods market, financial market and the labor market. Fundamental problems related to regional integration as the Eurozone is, will be highlighted. The theoretical concept of optimum currency areas indicates that regional and economic integration is an important element in the progress of the economy, if certain criteria are met - the mobility of the workforce, the degree of openness of the economy, the level of diversification of production and the degree of financial integration. In contrast to the theoretical concept, the Eurozone is based on the convergence criteria - price stability, public finance conditions, participation in the exchange mechanism and compliance of long-term interest rates, which are the result of the agreement of the Member States. Problems of functioning of the European economy grow into chronic problems that most developed economies struggle to find appropriate solutions, which are hidden manifested before the financial crisis. Eurozone countries were observed in the period from 2000 to 2016, and an output gap was analyzed as an indicator of the lack of full utilization of the capacity of the countries of the Eurozone, as a result of long-term deviations of actual output from potential output. Many developed economies are faced with the problem of declining potential output even before the global crisis, which negatively affected the growth unemployment. In the pre-crisis period, low targeted inflation has had the effect on almost equaling the current and expected inflation, which undermined financial flows and caused asymmetric shocks in the financial markets. Relations between key macroeconomic variables in unstable conditions were assessed by regression analysis and confirmed previous research. It was confirmed that any further reduction of output current (below potential) by 1 percentage point increases the rate of unemployment for the large 1.5 percentage points. Negative conditions in the markets of the Eurozone - low economic growth, high unemployment and low inflation, will continue in the same trend and in the coming years/decades (until 2050) according to forecasts by international institutions. The solution is to be sought through the income adjustment mechanism, which means that both economy with a surplus in trade (such as Germany, Finland) have to implement inflationary adjustment measures and economy with a deficit in trade (peripheral economies such as Greece, Portugal) have to implement deflationary adjustment measures. For now, only economies with high deficit and debt are adjusted, while the capital stays in the surplus economies lacking investment and economic growth. The monetary policy has not been able to solve the accumulated problems, so it lead economies in the trap of liquidity (interest rates are still at a low level). It is necessary to use expansionary fiscal policy that would encourage investment and aggregate demand, and thus free Eurozone economy secular stagnation.

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References

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Published

2017-12-30

How to Cite

M. Ristanović, V. . (2017). ANOMALIES ON THE MARKET OF THE EURO AREA. KULTURA POLISA, 14(3), 57–69. Retrieved from https://kpolisa.com/index.php/kp/article/view/819

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