Impact Of The Eurozone

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BACKGROUND The Eurozone was established on 1st January, 1999. It is made up of 18 European countries who have adopted the Euro (€) as their currency. Before the Eurozone became operational on January, 1, 1999, the European Central Bank (ECB) had been established earlier (1 June 1998 when it replaced the European Monetary Institute). However, the ECB could not exercise its powers until the Euro became operational on 1st January, 1999. The ECB is responsible for monetary policy implementation in the Eurozone. The ECB has a primary mandate of ensuring price stability in the Eurozone. For instance, Inflation has a ceiling of 2%. The establishment of the ECB meant that all the member state of the European Monetary Union (EMU) have surrendered their powers over the monetary policy of their respective countries but control over fiscal policy was kept. Now, in order to ensure that monetary policy powers in the hands of the ECB and fiscal policy powers left in the hands of member states do not work in an opposite direction (The idea is that monetary and fiscal policy should complement each other), a set of rules were set. This is contained in the Stability and Growth Pact (SGP). The SGP for instance put a ceiling on budget deficit as a percentage of Gross Domestic Product (GDP) at 3%. Similarly, sovereign debts of member states should not exceed 60% of GDP. The aim was to ensure that the member state have fiscal discipline in the day to day running of their economies. It did not stop there. Member states were prohibited from bailing out other members who contravened these limits. Despite these limits which were set and which was mandatory for member states to comply with, the borrowings of member states have not been kept under control. Th... ... middle of paper ... ..., the bailout package would be paid back at 4.5% interest rate the aim of which was to bring Greece’s budget deficit as a percentage of GDP to 3%. The austerity measures include; increase in Value Added Tax (VAT) from 21% to 23%, a 10% increase in tax on tobacco and alcohol, 3 freez in salary increase of public sector workers, wage cuts and pension freez led to the riots that broke out in the whole of Greece. Similarly, Thomsen (2012) again reported that a €85 billion bailout approved for Ireland on 28th November, 2010 for 7.5 years at interest rate of 5.8%. €67.5 to be provided by the EU and the balance by the IMF. The austerity measures Ireland was demanded to implement include; reduction in the minimum wage, doubling of its budget cuts, increased in taxes e.t.c Ireland agreed to implement the austerity measures but did not agree to increase its corporate tax.

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