Question

1. Why have the fortunes of Germany and Italy diverged since the introduction of the euro?
2. What factors besides the euro play a role in Italy's low level of economic growth?
3. What do nations gain and what do they give up when they become members of the euro zone?
4. What challenges does the ECB face when setting monetary policy for the euro zone?

Answer 1

Factors responsible for Italy's low level of economic growth:-

- High government borrowings

- Low Foreign direct investments

- Low job creation

Nations on becoming members of Euro zone have the right of free trade within Euro zone. The residents of the Euro zone members also have the freedom of movement within the Euro zone. Smaller countries have the advantage of being backed by giant European countries like Germany. However, the nations lose their ability to print currency notes. They also have limits to tweak the monetary policies which has to be done in consent with the other member nations.

Challenges faced by ECB when setting monetary policy for Euro zone:-

- Correctly forecasting inflationary scenarios in the Euro zone countries

- Keeping track of the economic conditions of every members and taking the best decisions which would be best for all