ECON220 University of Waterloo Eurozone Crises Article Discussion I have one question about an economic article by Martin Wolf
Financial Times: October 28, 2014
I will be uploading article and the question below Will the asset quality review and stress tests conducted by the European Central Bank and
the European Banking Authority mark a turning point in the eurozone’s crisis? Up to a point.
They are an improvement on what has gone before. But they are not a complete fix for the
banking sector, still less for the economy’s wider problems. …
Between the first quarter of 2008 and the second quarter of this year, eurozone nominal
demand rose by a mere 2.5 per cent. … Nominal gross domestic product grew by 5 per cent
over that period. Now assume trend real growth was a mere 1 per cent and inflation
2 per cent (in line with ECB targets). In that case, nominal GDP should have been growing at
3 per cent a year. By the second quarter of 2014, nominal GDP was 13 per cent below this
objective. Under Mr Issing, the ECB looked at monetary aggregates as well. In the six years
to September 30[,] 2014, broad money (M3) increased by 9.6 per cent, a compound annual
rate of 1.5 per cent. On both measures, the ECB has failed.
Mr. Wolf argues that while the European Central Bank is reviewing the quality of assets of the
banking system, it is not doing its job in reviving the EuroZone economy. He argues that from
2008 to 2014, the money supply, as measured by M3, increased at a compound annual rate of
1.5%. This he labels a failure. Why does he do so? What is the connection between the money
supply and nominal gross domestic product?
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