Answer to Question #82087 in Macroeconomics for Yemi

Question

The member countries in the European Union are quiet different in structure. What mechanism do they have to adjust to shocks that affect them differently?

Answer 1

The member states of the European Union are generally united in their monetary and credit and banking systems, but they differ in fiscal and socioeconomic systems, which in turn leads to different levels of economic development. Thus, the FRG is the undisputed leader, while the lowest figures are in Greece, Ireland and the states of the Iberian Peninsula. The main challenge for the EU is a high proportion of the sovereign debt of member states, a decline in labor productivity and an increase in payment and trade deficits in the context of individual participating states and the lack of effective and prompt measures to eliminate them. The sensational crisis in Greece is evidence of this. The policy of austerity, which is a condition for refinancing the debt of Greece has not justified itself. From the point of view of the Keynesian theory of reducing government spending, in the end, it will only lead to a loss of GDP. At the same time, in a number of other EU countries, such as Italy, Portugal and Spain, in the early 2000s, there was a discrepancy between the level of wages and labor productivity (observed a reduction in exports).

Thus, to reduce the possible negative impact of various economic factors, it is necessary:

I. Increase the competitiveness of products:

1. Reduce labor costs by opening borders for cheap and unproblematic cheap power from the countries of Central and Eastern Europe.

2. The introduction of new technologies in production.

II Revise fiscal and budgetary policies:

1. To reduce state expenditures in terms of social payments to persons who do not want to work and lead an antisocial lifestyle (criminals, dependents, and parasites).

2. To stop the policy of austerity and reduction of the apparatus of civil servants, as this reduces household spending and increases the propensity to accumulate.