European Economic and Monetary Union (EMU)-Italy - Term Paper Example

? First M. Section No. Italy European Economic and Monetary Union (EMU) European Economic and Monetary Union (EMU)--Italy 0 Introduction The European Union has become one of the successful treaties to overcome economic imbalance in the world. However, the Economic and Monetary Union of these European nations have created the recent economic crisis, which commenced in 2008. Italy, as one of its Member States, has been facing a serious economic downturn, and it is projected to last until the next two consecutive years. The German dominance in the European Union may have caused a lot of trouble in the policy implementation for economic terms. More than this, the recent recession is believed to have an impact on the economies of the world. This paper wishes to depict the mission and structure of the Economic and Monetary Union (EMU) in creating a direct connection towards the detrimental effects the cluster has made to Italy. Moreover, the economic state of Italy will then be described based on the output of fiscal and monetary policies of the country and aligned with the trade and foreign investment scheme. The European Sovereign Debt Crisis will then be discussed focusing on Italy’s experience during the crisis, and the causes of the crisis will also be explicated. Finally, a conclusive remark, which states the general perspective of the researcher, will be sighted in the conclusion. 2.0 Mission and Structure of the Economic and Monetary Union (EMU) The greatest problem that was faced by the European nations centered on how to build a sole market for capital, goods, and services and entities amid Member States that have interrelated economies, aligned with manifold currencies, and inconstant, weak forex rates. The construction of the EMU was an optimum alternative in curing such detrimental European problem (Liebscher). The errands of the EMU are in delved into three significant activities: (1) to implement an efficient monetary policy aligned with price stability; (2) to harmonize the economic policies in the Member States and; (3) to ensure the fluent operation of the sole market (“How Economics and Monetary Union Works”). The monetary policy’s focal objective is price stability. If a nation wants to achieve a free-market economy, price stability should be its priority. The Eurosystem’s prior goal is to sustain price stability because the latter reflects a pre-state of a maintainable economic progress and proliferating employment rate (Liebscher 378). The EMU would assist its Member States about public finances, which are aligned with the meeting of fiscal debt and deficit requirement (379). Lastly, institutional stability is also the target of the EMU wherein Member States are required to undergo institutional reforms (382). 3.0 Economic State of Italy 3.1 Fiscal and Monetary Policies Fiscal policy is the alterations in federal taxes and government expenditure in order to attain macroeconomic goals. Monetary policy, on the other hand, is the action executed by the European Central Bank and the national bank to manage the accessibility of cash and interest rates in achieving goals. Fiscal policy is essential to restrain the prejudice done by the state in terms of deficiency. This policy serves as a barrier for the government overspending, deficiency issues, and restrictions in implementing discretionary rules. When intense pressure attacks the economy, wherein monetary policy’s efficiency dissolves, fiscal policy can be a remedy to resolve the pecuniary issues (Liebscher 379). In terms of fiscal policies, there has to be 0.5 percent of yearly development of the gross domestic product of the country as stipulated by the reformed Pact (Marino, Momigliano, and Rizza 445). In 1997, Italy had accumulated a 1.4 percent of GDP, which was the end of the consolidation proceedings of the 1990s. When Italy was reformed, especially on the accounts of stability and economic growth, the grounds for the formulation of the policies were stipulated from the event. In fact, the Bank of Italy has the procedures as parallel to that of the European Commission (Marino, Momigliano, and Rizza 453-454). As the result, Italy’s public finances have become detrimental in 1998-2003 because of a proliferating tax and capital expenditure (455). In terms of monetary policies, Italy’s money supply has subsided, but relatively increasing, and the policy interest rate falls from 3.5% in 2011 to 0.5% in 2012. As projected, Italy will maintain 0.5 interest rate at the end of 2013 (“Economics Policy: Monetary Policy” 17). 3.2Trade and Foreign Investments Italy has opened its door to foreign investors, but political interventions became a frontier. In fact, a hundred percent of accessibility for foreign investors to own an Italian firm is granted onto them. However, the issue of merging organizations is a crucial question because Italian government would devour time to investigate such merger. If the Italian government finds out that there is a differential measure in the transaction, the merging plan will not be executed. This is embodied by the Italian anti-trust law, which gives the government the power to revoke or disapprove any merger plans in the business industry of Italy. Moreover, Italy issues additional capital requisites for non-Member State banks and supplemental constraints for non-European Airline companies. The trade and investments schemes are bureaucratic (“Italy: Country Conditions: Investment Climate” 1). However, Italy has implemented free trade, especially in the areas of Trieste and Venice. Taxes and duties do not exist in these areas as long the products being imported are for production purposes (“Italy: Country Conditions: Investment Climate” 3). Italy also has strict governance in the shipping industry. In terms of overseas workers, the Italian government only recruits foreigners for a specific job when it is proven that no Italian citizen is qualified for the job. Furthermore, foreign investment in Italy is low. The total foreign investment of Italy last 2003 was US$15 billion having a rate of 1.1 for its Gross Domestic Product (“Italy: Country Conditions: Investment Climate” 1). 4.0 European Sovereign Debt Crisis 4.1 Italy’s Experience During the Crisis Italy is recently encountering a high debt degree without projection of recovery in a short time. The threat can be tangible through the stability of Euro because once the investors would perceive the collapse of the currency, they would certainly be gradual on their operations in Italy. The high rate offerings of Italy were a manifestation of a weakening economy (“Europe’s Debt Crisis”). Italy has been affected by the European Sovereign Debt Crisis in the fall of 2011. Italy sustains its economic instability today (2012) before it can recover next year (2013). In terms of unemployment, Italy has recorded close to 10% this year (“Country Intelligence: Report: Italy” 3). Italy’s inflation rate declined at 3%, which is aligned with wage inflation rate that would stay low in the next years because of unstable work-market state. However, inflation rate was trapped at 2.6% to 2.7% in the first quarter of 2012. This year, prices fell six times, since the fall of the first quarter, according to the Italian services, purchasing management sector survey (“Country Intelligence: Report: Italy” 15). Italy had a weak public finance system, so the government stipulated a reform to sustain its fiscal policies (3). As a result, government spending declined at 1.4% in contrast to that of 2010 and 0.9% of 2011 (6). Generally, public finances developed, but consistently gloomy in 2010 (19); this is Italy’s biggest threat to recover from the recession (23). The services output of Italian industry has been downgraded as it shifted to lower than normal (9). This is because Italian manufacturers were under the shadow of foreign investors in the machinery and ores manufacturing industry (25). There has also been an issue of social instability because Italian workers, preferably those that are self-employed were not required to remunerate security shares (23). Moreover, the inequality of pensions was also detrimental because of high political spending of pension, which rose at 15%. The political pressure has been constantly deemed to the growing interest rate, thus, making the state unstable (24). 4.2 Timeline of Major Events 4.3 Causes (Internal and External) and Consequences of the Crisis To set it straight, there had been two principal issues to depict the cause of sovereign debt crisis: (1) the inequalities in the European Monetary Union and; (2) the inequalities in the international state economy (Detlef). The dominance of Germans in exportation schemes had built austere imbalances in the European Union. One of the main issues sets migration for employment because surplus and deficit countries had a hard accounting on the scheme. The fiscal transfers had also caused the countries to adopt such scheme that had led the central state to remunerate 40% from its GDP. EMU provisions for Germany had served the inequalities as German workers were prioritized in terms of workforce demand and proliferating wage prices. Furthermore, the inflation rates were almost parallel to that of German Central Bank, but some one of the member states could not adopt the scheme, such as Greece. Generally, there was never an issue of work mobility in the European Union. Pecuniary transfers were not even held from surplus to deficit nations, and federal taxation framework was neither existed nor effective. The Germans dominated the labor market, and inflation rules have been influenced by the firmest Member States (Detlef). 5.0 Conclusion Countries, which are under a treaty signed in the hope of economic growth, should deliver transparency and equality. The dominance of one Member State will not make the compact successful as what is happening recently to the Economic and European Union. Italy, as a Member State, should invoke their rights in the formulation of the policies because at the very beginning, the implementation of these policies will directly affect the status quo of the state. Italy’s present state will be heavily affected if none of these policies will support the structural disposition of the country. Since the adverse effects have already trapped Italy into the recent economic downturn, this would implicate a sole political decision that would serve EMU apart from it, such as political amendments. Works Cited “Credit Rating Agencies.” The New York Times. The New York Times Company, 5 Aug. 2012. Web. 5 Dec. 2012. . “Country Intelligence: Report: Italy.” Italy Country Monitor (2012): 1-31. Print. Detlef, Annemarie. “Causes of the Sovereign Debt Crisis.” E-International Relations. n.p., 16 April 2012. Web. 5 Dec. 2012. . “Economics Policy: Monetary Policy.” Italy Country Monitor (2012): 17-19. Print. “Europe’s Debt Crisis.” News Basics. News-Basics, 23 May 2012. Web. 5 Dec. 2012. . “How Economics and Monetary Union Works.” European Commission. n.p., n.d. Web. 5 Dec. 2012. . “Italy: Country Conditions: Investment Climate.” Political Risk Yearbook (2006): 35-12. Print. Liebscher, Klaus. “The Stability Architecture of EMU.” Progress in Development Studies 9.4 (2009): 377-283. Print. Marino, Maria Rosaria, Sandro Momigliano, and Pietro Rizza. “A Structural Analysis of Italy’s Fiscal Policies After Joining the European Monetary Union: Are We Learning From Our Past?” Public Finance and Management 8.3 (2008): 451-501. Print. Castle, Stephen. “Italy Borrows at lower Rate Despite Downgrade.” The New York Times. The New York Times Company, 13 Jul. 2012. Web. 5 Dec. 2012. . Waterfield, Bruno.”Debt Crisis: Angela Merkel Dismisses Spain and Italy’s Pleas for Aid.” The Telegraph. Telegraph Media Group Limited, 27 Jun. 2012. Web. 5 Dec.2012. . Wearden, Graeme and Nick Fletcher. “Eurozone Crisis Live: Italian Government Blasts Moody’s Over Downgrade.” The Guardian. Guardian News and Media Limited, 13 Jul. 2012. Web. 5 Dec. 2012.http://www.guardian.co.uk/business/2012/jul/13/eurozone-crisis-italydowngradd-moodys>. Read More