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Comment on the problems of a lack of economic convergence (10)
Convergence is the process by which the economic conditions in different countries
become more similar In order to achieve the aims of price stability by the European
Monetary Union. Upon entering a single currency, the euro, countries must meet
certain convergence criteria. These include (on the monetary side):
· Inflation levels must not be more than 1.5% higher than the average in the three
member countries with the best price stability (lowest inflation)
· The national currency must have been stable relative to other EU currencies for
a good period two years prior to entry into the monetary union
· Gross government that must not exceed 60% of GDP and the annual
government's budget deficit must not be greater than 3% of GDP.
· Lastly, the interest rate must not be more than 2% higher than the three member
countries with the lowest inflation level.
Structural convergence analyses whether the supply-side structures of countries.
Structural convergence analyses whether the supply-side structures of the country
might be different from within the euro area if they are, the extent of which different
structures could make the country more vulnerable to economic supply side shocks
that affect the rest of the euro area.
A lack of economic convergence could occur when one country is in a boom phase of
the economic cycle and one is in a recession. In this situation, one country requires
interest rates rise and the other needs interest rates to fall. In this situation, the lack
of business cycle convergence means that one interest rate throughout the economic
area (Europe) does not "fit all", And monetary decisions made by the European
monetary policy may not be optimal for all countries. In this way, it is inflexible.
Moreover, different countries have varying levels of unemployment (Jaunary 2011:
Germany had 6.5% unemployment compared to Spain's 20.4%) which may further
inhibit convergence on a macro level.
Countries with different economic structures can also like economic convergence as
changes in interest rates can have different effects in different economies, depending
on the nature of their borrowing and interest elasticity of demand. In countries where
borrowing tends to rely on the variable rates of interest will respond very differently
from countries rely on fixed rate interest borrowing.
Different economic structures can also lead to economies experiencing different kinds
of external shocks, including supply-side shocks in relation to the price of oil,
especially if that particular country is a net importer of oil, such as Spain, which will
have a knock on effect on domestic production costs.
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A lack of of economic convergence may be is greater problem for smaller countries in
the European Union, such as Greece and Portugal compared to core countries such as
France, Germany and Italy as their labour markets are likely to be more flexible and
there could be greater levels of capital mobility. However may use fiscal policies to
make matters worse, eg increasing unemployment through reductions in government
expenditure, and increase economic divergence.…read more