Economics for global business

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Introduction

In EMU, the monetary policy is usually assigned to the ECB while the fiscal policy is the remit of each EU member State as an individual. The aim of the treaty on the functioning of the European Union and the provisions on fiscal and monetary funds is to protect the value of the single currency as well as laying down the requirements from national fiscal policies. At times threats on and the financial stability has tremendous influence on both monetary and fiscal policy (Riley, 2012). During the crisis, some of the weaknesses in the national fiscal policies and EMU methods of governance have come to light. For starters it was evident that financial stability, incentive and rules for sound fiscal as well as the macroeconomic policies seemed to be insufficient. The EMU framework lacks a framework for the prevention and identification and correction of macroeconomic imbalances. A stable monetary policy, sound fiscal and financial stability policies are an essential foundation for sustainable growth and employment opportunities in the euros area. This calls for an improved policy framework which will address the identified weaknesses.

The framework must have features that maintain a price stability- oriented monetary policy, incorporate provisions that ensure financial stability and crisis management. The framework should also safeguard sustainable public finances and economic policies.

During the past few years, the combination of sustained fiscal imbalances and a financial crisis has seen a substantial breakdown in the institutional framework and the allowed barriers between the two policies. Unfortunately the pressure comes from both sides. For instance the governments have been pushing central banks to cross their monetary boundaries thus stepping into areas that are not acceptable for an independent central bank (Riley, 2012). There has been a lot of pressure directed to the central bank some have led the banks to engage in fiscal actions.

From the look of things, in the past two years Greece has been in the verge of economic crisis. This issue has invoked the idea of Greece quitting the European Union. The euro crisis can be solved but the problem is it will take long to do so. The EU member states have it wrong since they think the solution to the Euro crisis is a deeper economic and political union which has a single fiscal policy (Riley, 2012). Transfers should be from North to south and also increase the mobility of labor and capital. As a matter of fact, the solution lies within the fiscal and monetary policy. There have been conflicting ideas between Germany and France on the meaning of fiscal union. Unfortunately, the row between the two countries does not seem to have a near end.

Greece is unlikely to meet the requirements or rather the expectations that were imposed by leaders. The main challenge that Greece face is that the imposed plan is unpopular as well as the country being rocked by several rounds of large protests. Governments have fiscal policy and monetary policy as the only available tools. The fiscal policy focuses on the use of government expenditures and revenue to influence economic activities in the country. On the other hand monetary policy concentrates on manipulation of the money supply this is done through interest rates so as to promote economic growth. The monetary policy suggests that the government should keep interests rates lower in order to promote a steady economic growth. All these policies can help improve on the labor productivity and reduce costs hence leading to an increase in export demand as well as domestic

Governments use both the fiscal and monetary policy to manage economic growth and stability. However, it is different with the Eurozone since it encompasses a range of countries that have different economies. Some countries have a larger economy while others have smaller economies thus it is clear that the policies do not work out the same (WordPress, 2011). The crisis-ridden economies of Greece cannot be coordinated the same way as it would be for Germany. The European central bank faces a challenge of finding the perfect line to walk between the two countries. Greece being a member of the Eurozone therefore the European central bank has cut off one of the two policies that would be used to generate a solution to the economic crisis. Although the Greek government has been using the fiscal policy, it becomes hard to use the monetary policy as it is limited. This limitation is serious since the Greek government no longer has the control of their currency.

Leaving the Eurozone will not right the wrongs in fact, it looks Eurozone like Greece will continue to remain at the bottom of the Eurozone countries while Germany will continue being on the lead. The only options left are reaching an agreement with the troika or quitting the Eurozone

The primary objective of Greece’s monetary policy is to make sure that it achieves primary stability. After the evaluation of this objective, it seems that Greece will be achieving an inflation rate below 2% on the medium term (WordPress, 2011). On the other hand the fiscal policy objective has been decreasing the federal budget deficit so as to pay the huge government debt. In order to achieve the budget deficit to 2.6 %of the Gross Domestic product, the government functions are being streamlined so as to quicken the privatization of government property. Their tax systems have to be modernized to reduce the rate of tax evasion. The deficit can also be addressed through the induction of faster economic growth rates.

Supply side policies will help Greece economy in recovering since they help in restoring competition. The supply side policies that will work for Greece are reducing the power of trade unions, lowering the tax rates on labor and reducing labor market regulation demand (Pettinger, 2011). If an economy is in a liquidity trap, supply side policies can be effective in improving long-term expectations. If Greece is able to realize effective supply side improvements, it will be easy to gain confidence in having a stable and effective economy.

Conclusion

In summation, Supply side policies should be combined with other economic tools for better results otherwise it will be useless for Greece to rely on the supply side policies alone. It will be possible for Greece to get through the economic crisis if it sticks on the right policies. Fiscal policies and stability-oriented monetary policies will mutually reinforce a sustainable economic growth.

References

Pettinger T. (2011) The Role Of Supply Side Policies In A Recession. Retrieved from http://www.economicshelp.org/blog/4401/economics/the-role-of-supply-side-policies-in-a-recession/ On 27th March 2014

WordPress (2012) The Greek Option: Monetary and fiscal. Retrieved from http://worldpoliticsblog.wordpress.com/2012/10/07/the-greek-option-monetary-and-fiscal-policy/ On 27th March 2014

Riley G, (2012) Managing the economy- Government Fiscal Policy. Retrieved from http://www.tutor2u.net/economics/revision-notes/as-macro-fiscal-policy.html on 27th March, 2014