Overview, Knowing the Euro, Factors affecting the EU economy and the Euro

Factors affecting the EU economy and the Euro

The M3 as a measure of Inflation: The extent of net money supply in the EU economy is gauged through M3. The ECB controls inflation through M3. To achieve an inflation below 2%, the ECB set a value of 4.5% growth of M3 in 1998.

The HICP: The Harmonized index of Consumer Prices (HICP) is looked upon by the ECB as the index of Inflation. The HICP reflects the state of inflation by taking into account country specific indices & factors from the national statistical agencies of member countries. The ECB calculates HICP as the weighted average of the Indices.

Unemployment Rate in Germany: Germany, France and Italy are the largest member countries, and contribute significantly to the EU economy. Being the largest economy in the EU, the German unemployment is seen as an indicator of EU's Economic health.

The European GDP: Calculating the overall GDP of the EU is more complex because some member countries like Portugal, Greece, Luxembourg & Ireland do not yet collect the required data at the required frequency (quarterly etc). The Preliminary estimate of GDP (inclusive of Germany, Holland & France) reflects data from 95% of member countries and indicates the Overall Output & Rate of Growth of the EU's economy.

Budget Deficits of Member countries: Deficit is the difference between the net Income & Expenditure of a country. Countries with a large Budget Deficit are considered poor in fiscal discipline lacking proper control over Income & Expenditure. Such poor performers can affect the Economic Growth & Stability of EU as a whole. Hence, maintaining the deficit below 3% is one of the directives of EU to its member states.

Economic Development in Germany: Germany contributes about 30% to the EU's GDP. Hence, any change in the German economic conditions is bound to affect the EU in a significant manner. The 'IFO Business Climate Survey' collects the opinion of the German industry with regard to their Current Business conditions & Future Business confidence. Comparing the results of this survey with the previous year's results is helpful in understanding the state of the economy. Any growth in the German economy will send the Euro skyrocketing in the absence of any other negative factors.

Political Instability: Political instability in any of the member countries, particularly Germany, France or Italy (largest members) has a negative impact on the Euro. It is interesting to note here that Russia's political instability also has a negative influence on the Euro due to the presence of large German investments in Russia.

EU's Trade Balance: A growth in exports and fall in imports will boost the Euro since the Foreign countries have to pay for the goods/services through Euros, thereby increasing its demand. A reverse phenomenon would depreciate the Euro.

The Consumer Price Index (CPI): The CPI is also a measure of inflation like the HICP. An increasing CPI indicates inflationary tendency, which may be countered by high interest rates by the ECB. This change in the rate of returns also affects the Euro.

Use of Euro as a Reserve currency: With more number of countries adopting the Euro as their Reserve currency, the Euro has been appreciating considerably against the US Dollar. Any reversal of this trend can have an adverse impact on the Euro.

Overview, Knowing the Euro, Factors affecting the EU economy and the Euro