ECB’s monetary policy and current macroeconomic perspectives in Euro Area

1. Using data from Eurostat and/or the ECB, illustrate (with your own graphs from excel or other software) and explain your assessment of the current macroeconomic perspectives in the Euro Area. Why is the ECB not following a more restrictive monetary policy (increased interest rates, ending of unconventional policies)? What would be the potential effects of such policy on the Euro Area economy?

2. Focusing on the French economy and using all the economic information you need, present briefly and describe the results of one French economic sector listed below (industry codes are provided). During the period 2010 to 2017, what are the main drivers of thus companies’ benefits? What trend can we expect for this sector in 2018 and 2019? Detail and argue your answer using several scenarios with an upside and downside risk assessment.

European Union is the collection of some European countries, economies, and politics of which are related to one another for the overall betterment of the area. European Central Bank (ECB) looks after the monetary and fiscal policies of the economy of the area. ECB ensures to maintain and manage the price level of the economy, takes care of the liquidity requirement of the area and controls the interest rates and money supply in order to provide the necessary boost the economy of the area. The figure one clearly shows the sluggish increase in the GDP growth of the country which may be due to the fact that the ECB pursues a policy which is not restrictive.

The main reason for the unconventional monetary policies which are not restrictive is because of the basic philosophy of the ECB. They believe that the long run, income of the people of the economy and the employment is not determined or controlled by the money supply in the economy. Orphanides (2017) stated that ECB has an objective to control only the short-term economic problems. Therefore, ECB keeps on maintaining low-interest rates. Apart from that, there are few of the objectives of ECB which is unique than other central banks of the world. ECB also aims to maintain an effective level of money supply in the economy in order to maintain a healthy value of the Euro. Winkelmann, Bibinger & Linzert (2016) stated that this strategy of the ECB is effective not only in controlling the value of the currency but also effective in controlling the liquidity of the money throughout the area of the eurozone.

Reasons for ECB not following a more restrictive monetary policy

Furthermore, the central financial institutions of European Union are mainly the believer of monetary forms of economics. Hutchinson & Smets (2017) highlighted that anti-fiscal views are the result of previous failures that fiscal policies have brought the European Union. According to the advocates of the ECB, the monetary policies are more effective than the fiscal policies in the context of market stabilization of the macroeconomy. Furthermore, high amount of borrowing may harm the performance in the long term leading to devaluation of the currency. Eser & Schwaab (2016) highlighted that the aim of the ECB has always been to support and boost the supply side of the economy. According to Fratzscher, Duca & Straub (2016), a supply-side boost from the monetary policies can spread across all the sectors of the economy increasing the effectiveness of the strategy.

The inflation target of the ECB is also not clear and symmetrical. Bank of England has a symmetrical target for the inflation rate which balances between high prices of the market and the danger of the deflation. From the figure2, it can be seen that inflation of the region has increased over the years till 2012 and then decreased till the year 2015 depicting the absence of vision of ECB. In the case of ECB this is missing and inflation generally does not increase more than 2%. However, Serati & Venegoni (2017), criticised this policy saying that this can lead to low aggregate demand in this economic region. The ECB has less focus on boom side of the business cycle and hence monetary policies are more conventional and defensive in nature. Therefore, these collective believes the ECB regarding the operation of the economy as whole results in an unconventional monetary policy which is not restrictive.

Another reason for the lack of restriction is the high savings rate of the region during the year 2000. The high savings rate in the country allowed the region to invest in the home projects of the member countries. Therefore the ECB has no incentive to pursue a restrictive monetary policy that would have decreased the savings rate of the people of the country. However, in this context, Serati & Venegoni (2017) criticised even after that even after following the restrictive policies the saving rent went down during the global economic crisis. However, after the recovery of the region from the widespread global economic crisis in the year 2007, a huge inflow of investment occurred. The lack of restrictive policies of the ECB, in this case, made the justification regarding its existence crowding out any kinds of private foreign investments from aboard.

The potential effects of such defensive monetary policies which are not restrictive are immense, few of which can already be seen. For example, the interest rate of the economy is reducing at an alarming rate. The interest rate of this region was stable till the year 2009 and after that, the interest rates fell sharply to become negative in the year 2013. This resulted in deflationary conditions in most part of the eurozone. Shaw, Murphy & O’Brien (2016) highlighted that the performance of this economic region has been deteriorating before the global financial crisis. The falling interest rates affected the savings rate of the economic region significantly leading to low investment rates and hence low rate of growth. The global financial crisis added to the economic downfall of the eurozone leading to a more intense recessionary situation.

Potential effects of more restrictive monetary policy on Euro Area economy

The lack of stringent monetary policy of the ECB mainly affected the supply side of the European economy leading to slow economic growth and hence the corresponding low aggregate demand for the goods and the services of the economy. The supply side of the market failed to generate demand in the market that reflected on the demand for the labor as well. Figure 4 clearly shows the absence of the significant reduction in the unemployment of the area. The ECB has also admitted its inefficiency in maintaining the monetary policies of the region in line with the globalization. Fratzscher, Duca & Straub (2016) pointed out that, low rates of interest rates and inflation coupled up with the low level of aggregate demand reduced the likeliness of investment from other parts of the world and hence the member countries failed to grow economically with the rise in globalization. ECB was reluctant to change the interest rates of the economy in order to deal with the low economic growth due to the fact that it would put an inflationary expectation and pressure on the economy of the region. Galí (2015) pointed out that, the monetary policies of EU lacked the objective and purpose and became vulnerable to the global financial crisis. The crisis pressured the ECB to reduce the inflation rate to the level of 1.5%, a historically low level of inflation for this economic region.

The inactive fiscal policies of the ECB also led the region to the economic downfall following the global financial crisis. The borrowing process rather than the high rate of interest in the market would have allowed the ECB to control the balance of payment thereby crowding out the private sector of the economy (Serati & Venegoni, 2017). Thus, the lack of vision in terms of the monetary policies of ECB coupled up with the lack of restrictive behaviour made the economy vulnerable to changes in the external environment. Therefore, neither the region could deal with the globalisation nor it could shave from the ill effects of the global financial crisis leading to an overall economic downfall of the region.

The air transport industry of France has a number of benefits which contributes to the economic growth of the country. Not only is its contribution to the GDP, the employment opportunity it creates and the tax revenue it generates for the government also worth a mention. De Neufville (2016) highlighted that this industry is customer oriented and hence produces most values for the passengers of the industry.

Overview of French air transport industry

The operation of the French air transport industry has expanded since the year 2010. According to Cattaneo et al. (2016), in the year 2010, there were around 338 flights and routes to the urban areas of around the world. These routes and the huge number of flights connected areas with 10 million inhabitants. There were around 4 outbound flights from the major airports of the country per day in order to meet not only the domestic demand but the overall global demand as a whole.

Given that, FDI inflow is one of the important modern economic indicators, the figure 6 shows that there is a direct relationship between the operation of the air transport industry and the FDI inflow. This is due to the fact that, connectivity between the cities of France has allowed the domestic and international organisation operating in France to reduce their transportation cost. The subsequent increase in the marginal income thus attracts the foreign investors.

Figure 7 shows the relative size of the air transport industry of France, which is still small compared to other similar countries such as Netherlands or Germany. Cattaneo et al. (2016) stated that the contribution of the air transport industry increases with the operation of the industry. Currently, a 10% increase in the size of the air transport industry of France increases the GDP by 0.07%.

The impact operation of the air transport industry of France has created job opportunity in four channels of the economy. These involve the direct, indirect, induced and the catalytic channels of the economy. The direct channels are the recruitment in the operation of the organisations operating in the industry. The indirect channels are the related business whose operation is related to the business of the companies operating in the French market. The indirect recruitment opportunity can be labour demands in courier companies that used the services of the air transport. In addition to that, the labour requirement is also impacted by the induced business such as the online air transport booking companies. Mills (2017) noted that the performance of the overall industry in France has its impacts on all the four of the channels.

While the above discussion focuses on the overall potential of the sector to create job opportunity, this figure shows the overall changes in the job opportunity in the air transportation sector over the years. Since the year 2010 till the year 2013, the industry has experienced a reduction in the job growth. Mayo, Nohria & Rennella (2016) commented that the global financial crisis reduced the viable number of future projects of all the companies of the market that directly reflected on the requirement of workers in the industry. After the year 2013, the investors began to take interest in the airline industry of France. In this context, Carnein et al. (2017) highlighted that the increase in the tax rate has been favourable for most of the industries of the country including the air transport industry. The increase in the number of future projects has also increased the job opportunity in the air transport industry. For example, Air Corsica undertook a decision to increase their fleet by around 34% and a number of the root by 40% in a move to expand the business of the company.

Contribution of air transport industry to French economy

The air transport industry of France also has been doing good business for them as well. Despite the reduction in the aggregate demand following the great financial crisis, the air transport industry of the country has maintained a high and steady turnover rate. Steven, Yazdi & Dresner (2016) mentioned that this is due to the accurate collective decision making of the industry as a whole. The competitive pricing for the services during the crisis year allowed the companies operating in the market to hold a sizable part of the loyal customers of the market. However, Burghouwt (2016) pointed out that the growth in the turnover has not grown significantly even after the crisis period of the economy was over. According to the data, there is only 14% increase in the turnover of the industry from the year 2010 to the year 2017.

One of the main drivers for the steady and healthy turnovers of the industry is the flexibility and the control of the governing bodies over the different market players. This has allowed them to respond to the decreased aggregate demand and turn it into a profit making machine for the companies of the industry.

The above figure talks about the provincial air fright received through the channels of air transport. Lange et al. (2015) pointed out that the increase in the volume is not significant for many of the reasons. First major reason for the steady and constant level of air freight volume of the industry is the emergence of advanced transportation services through road channels. These services are less costly compared to the air transportation and meet the needs of most of the customers of the market. Apart from that, (De Palma, Criado & Randrianarisoa, 2017) noted that, on an average, the industry has reduced investment on this section by around 37%. However, the growth in the population and business in different provinces of the country has driven the slight increase in the volume that can be clearly seen from the figure 10. The downside risk in this subsection of the industry made it unlikely for the companies to attract new investment.

The future of the French airline industry is very promising due to the upcoming projects. Santana,Valle & Galan (2018) pointed out that, the players are working on projects to improve the fuselage of aircraft. That will not only bring down the operating cost of the companies, it will also work towards the sustenance of the environment as well. Apart from that, it is also estimated that the companies will use a more sophisticated method for the routing in the year 2018 and 2019. The population of the country and the number of tourist visiting the country is both going to increase in the couple of years direct effects of which can be seen on the demand for the services. This will also allow the companies to make use of the economies of scale in order to bring down the operational cost of the companies. Thus, in the couple of years the cost of using the service may reduce along with a better service delivery to the passengers of the market.

Main drivers of benefits in French air transport industry

Reference

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