What about monetary policy?! – Is it trendy enough for you?

Monetary policy is such a fancy word but what exactly does it mean…  Let’s first discuss the basic elements before you’ll make up your mind.

Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. The main objective of monetary policy is all about maintaining a price stability. The principal way to influence price stability is for the European Central Bank (ECB) to raise or lower interest rates. It is idealistic to keep inflation rates at levels below but close to 2 percent over the medium term. To control these interest rates, the ECB employs a two-pronged strategy; the money-supply growth and the economic indicators. Heavily rising prices (inflation) or falling prices (deflation) cause insecurity and harm the economy. So, price stability is a necessary precondition for a healthy economy. Monetary decisions are made by the ECB Governing Council, which consists of the central bank governors of the sixteen euro countries plus the ECB Executive Board. The Eurosystem uses three monetary policy instruments to influence the liquidity position of the banking sector. These instruments help maintain price stability by steering the short-term money market rate to the key policy rate determined by the ECB.

The three policy instruments are:                                               

• Minimum reserve requirements                                                                 
• Open market-operations
• Standing facilities

The Bank of England, the European Central Bank, and the Bank of Japan have all pursued similar policies. For example quantitative easing, a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.

This is all very interesting to know of course, but how exactly does it influence your own personal life? Everybody certainly can recall the euro crisis. Due to the 2008 financial crisis interest rates have been low and in many cases near zero. Do we as students or as European citizens contribute to this system of money control? We certainly felt the consequences, or at least I heard and still hear some people complain about the euro crisis and the suddenly increased prices. Although when I look around I constantly see people buying and spending money if it is no big of a deal.

Yesterday I attended a trade fair in Amsterdam. The annual household fair targets at especially housewives between the age of 30 to 45 years old. According to my own experience people tend to buy products with ease when they are in the sale. Their buying behaviour becomes more aggressively when there is a shortage, demand overrates supply. When analysing the spending behaviour of the ordinary European citizen it is recognizable to see that we tend to save money by spending less but on the other hand it is better to spend more because it will eventually stimulate the economy.

What about you!  Do you stop spending money on luxury products in a time of recession?

When clicking on this link you can watch a defined explanation of the ECB and Eurosystem which might be interesting for you! > https://www.youtube.com/watch?v=TAlcFwGIQBg

                                                                                                      Maxime Helgers

References

http://www.investopedia.com/terms/m/monetarypolicy.asp

http://www.investopedia.com/terms/q/quantitative-easing.asp

http://www.dnb.nl/en/interest-rates-and-inflation/monetary-policy/interest-rates/index.jsp

https://www.cer.org.uk/in-the-press/strategic-consequences-euro-crisis

http://www.economywatch.com/files/story/MonetaryPolicy.jpg

 

Banking Union in the EU

The economic crisis in 2008 and debt crisis among a part of countries within the eurozone in 2010 ~ 2011 has heavily damaged the EU. The EU needed to repair a defect of the EMU (Economic and Monetary Union), thus a banking union was seen as one of measures needed towards building a functional and stable EMU.

Under the purpose that the EU aims at integrating economy and currency by founding the EMU, the ECB (European Central Bank) was founded and the single currency “euro” was introduced.

However, after 2008, a debt crisis spread over European countries as EU fiscal rules had holes; as such it was not enough to deal with borderless economic activities. In response to this, leaders of the EU member states defined EMU by 4 bases: integration of financial, economic, economic policy frameworks, and strengthening democratic legitimacy and responsibility for explanation. The first of them, “integration of financial frameworks” would be the foundation of a banking union.

 

A banking union consists of 3 main components:

• SSM (Single Supervisory Mechanism)
• SRM (Single Resolution Mechanism)
• DGS (Deposit Guarantee Scheme)

Under this construction, it is defined that a banking union saves a bank by managing not public funds but charging by stockholders or creditors when it faces a crisis. This structure leads to a healthy use of taxes and stabilize activities of each bank, releasing people from a curtailed budget by improved markets. The 3 components mentioned above are as follows:

• SSM (Single Supervisory Mechanism)

SSM is the system where the ECB has the authority to supervise banks within the euro zone. ECB directly supervises banks which have more than 30 billion assets or which have at least 20% of assets in the ratio of its homeland. The ECB can intervene and demand a correction at an early stage to a bank which broke the equity capital requirements, causing danger.

• SRM (Single Resolution Mechanism)

SRM’s aim is to prevent the spread of a crisis to other countries within euro zone by conducting quick decision-making and treatment for the collapses. The unified process of decision-making leads to more effective treatment for each member state and can minimize a bad influence on the economy. This system is intended for the same banks as the objects of SSM.

• DGS (Deposit Guarantee Scheme)

Under definition of DGS, each country is under obligation to protect a depositor by subsidizing a depositor to a maximum of 100,000 euro, which they must pay within 7 days since the bankruptcy.

It could be said that the monetary system in the EU is under a very special situation because the EU itself is a motley union. If one member state’s economic condition gets worse, it would be able to lead a bad chain reaction.

In October 2015, “Trade for all” was declared as a new strategy for trade and investment. Borderless economic activities within the euro zone will accelerate by promoting this strategy. To activate this measure effectively, it is demanded that the EU integrates its member states economically, respecting opinions from each of them.

Anzu Imamura

 

<References>

・A new strategy of the EU. (2016, February 19). Retrieved February 28, 2016,from: http://eumag.jp/feature/b0216/

・Banking Union – leads the EU to a steady union. (2014, April 30). Retrieved February 28, 2016, from: http://eumag.jp/feature/b0414/

 

 

What exactly is Economic Policy?

An old man sits by the hearth on his rocking chair, with his two grandchildren…

“Grandpa! Grandpa! Could you explain us something?
-Sure, anything to satisfy your seemingly curious appetites.
–  We were watching KidsTV and Mr.Puffy was telling Ms.Tree about the social and economic dynamics within the sea that is the world market, but we don’t know what economic policy is. Is it like police?
-Holy smokes! At your age I was watching fictional animals beat each other for the glory of their masters. The world sure has changed…
-Could you please tell us?”

Economic policies are associated with what the government is doing to keep itself from running out of money.  In a nutshell, an economic policy would be a group of actions, directions (not directives) and set of rules based on economic philosophy, ethics and moral principles with the goal of maintaining economic growth and stability. Low employment rates are also a key point.

A government has many tools at its disposal, like taxes and incentives. But for the sake of keeping it simple let’s stick with one of the most hotly debated ones: Regulation. The reason this is the case is due to the seemingly forever-lasting clash between the theories of John Maynard Keynes and a man named Friedrich Hayek. Keynes would favour government intervention, also heavier use of regulations and spending to have quick results, especially during hard times whereas Friedrich Hayek would, in simple terms, steer the economic with a simple money supply button and watch the market work its magic; Little regulation, small government influence. These are some examples of tools Governments use to achieve their financial goals.

“So who won grandpa?
-Neither! And both at the same time. You see, there is no single, true answer to economic challenges. So countries try to figure them out as they go along… Like me and Grandma. The problem is that one country’s decisions affect others’, and we are all different in certain aspects and beliefs. If we were all the same, then things would be easy, but that wouldn’t make the world interesting, would it?”

Max Mücher

References:

http://economictimes.indiatimes.com/definition/macroeconomic-policy