An excellent article from Staphanie Flanders.

http://www.bbc.co.uk/news/business-your-money-13391090

The euro has fallen by more than 1% against the dollar, following a report that Greece had raised the possibility of leaving the single currency.

German magazine Der Spiegel reported that a meeting was taking place on Friday evening about Greece readopting its own currency.

The claim was vigorously denied by Greece and Germany.

However it was later confirmed that ministers from five eurozone countries were meeting in Luxembourg.

The countries – Germany, France, Italy, Spain and Greece – were said to be discussing EU issues, including the financial situation of Portugal, Ireland and Greece.

Greece denounced the Spiegel report about the possible exit of Greece from the Eurozone as “not only completely untrue but also written with incomprehensible flippancy despite repeated denials by the Greek Government as well as other EU Member States”.

“Such articles are not only provocative but also highly irresponsible as they undermine Greece’s efforts and those of the Eurozone and serve only the interests of speculators.

Despite the denials, at 2230 GMT the euro was worth $1.44.

Denials

After the talks the Eurogroup Chairman Jean-Claude Juncker issued a categorical denial that Greece’s euro status was up for debate.

“We have not been discussing the exit of Greece from the euro area, this is a stupid idea, it is in no way… an avenue we would never take,” Reuters reported him as saying.

“We don’t want to have the euro area exploding without reason.

“We have ruled out any restructuring of Greek debt,” Juncker underlined, saying the talks were about “discussing European problems in relation to G20 and Eurogroup meetings over the coming weeks.”

Despite dismissals from officials, the story “does seem to be having a market effect,” said Ron Leven, a currency strategist at Morgan Stanley in New York.

But he played down the significance of the report. “For [Greece] to leave the euro is very complicated. It’s not like they can just wake up tomorrow and say we’re not in the euro anymore.”

Bailout

Greece became the 12th country to join the single currency when it ditched its own currency, the drachma, in 2002.

Over the past decade the Greek government borrowed heavily – public spending soared and money flowed out of the government’s coffers.

Protesters demonstrated in Athens in December 2010 against government austerity measures.

However, the revenues the government generated through tax were not enough to counterbalance this, mainly as a result of widespread income tax evasion.

The result was a bulging budget deficit, more than four times the limit under eurozone rules.

In the end Greece was forced to accept a multi-billion euro bailout, by the EU and the IMF, to finance its huge deficit.

The 110bn-euro ($136bn; £94bn) loan was designed to prevent Greece from defaulting on its massive debt.

But despite a programme of government spending cuts and other reforms, its economy has struggled to keep its head above water.

In recent weeks there has been increased speculation that Athens could default and will need to restructure its debts.

Yields on Greek government 10-year bonds have leapt to over 15%, a sign that investors are becoming increasingly sceptical that they will be repaid.

The UK economy grew by 0.5% in the first three months of the year, official figures have shown, reducing the risk of a double-dip recession.

The chancellor welcomed the return to growth, which followed a contraction of 0.5% at the end of 2010.

But Labour said the economy was flat and the recovery had been “choked off”.

The manufacturing and services sectors had performed well, the Office for National Statistics said, but construction output had fallen sharply.

Mixed response

Chancellor George Osborne said: “It is good news that the British economy is growing. It is particularly good news that manufacturing is growing so strongly, when we have had such an unbalanced economy in recent years, and manufacturing has not done so well.

“Jobs have been created since the New Year and government borrowing is down,” he added.

Ed Balls, Labour’s shadow chancellor, responded: “If George Osborne thinks zero growth over six months is good news and a sign that the recovery is on track then he is more out of touch and out of his depth than I feared. ”

‘Fragile recovery’

Economists gave a mixed response to the figures.

David Kern, the chief economist at the British Chambers of Commerce, said: “These figures were mixed and well below the Office for Budget Responsibility prediction that the economy would grow by 0.8% in the quarter.

“Given the fragility of the recovery, it is vital for the government to persevere with policies that support growth, and remove the obstacles that prevent businesses from creating jobs and exporting.”

Growth in manufacturing continued to be strong, at 1.1%, the same as the previous quarter.

The GDP also figures showed that the services sector had returned to growth, after contracting during the bad weather at the end of last year. This had particularly been the case with hotels and restaurants, the ONS said.

However, construction – one of the worst hit areas in the last quarter of 2010 – was down by 4.7% at the start of 2011.

Ross Walker, from RBS Financial Markets, said that as new data came in, the picture was likely to improve: “You do have what looks to me like a surprisingly large fall in construction output. Do we really believe that the level of construction output was lower in January than in December? We may well see some revisions here.”

These figures are an initial estimate and will be revised at least twice in the coming months as more information is gathered.

‘Uncertainty’

The low rate of growth could lessen the chance of an early interest rate rise by the Bank of England to combat inflation, which is currently running at 4%, analysts say.

“We are expecting the Bank of England to raise rates in August,” said Deutsche Bank economist George Buckley, “but it is far from certain whether they will do that”.

“We will have the second quarter GDP numbers by then, but the problem is they may have been negatively affected by the royal wedding and two back-to-back bank holiday weekends which will depress production.

“It is still very uncertain. All of these figures are being affected by a lot of volatility, by holidays, the weather, snow. It has all had a big impact on the numbers.

Lending lags

The Prime Minister, David Cameron, said the growth in manufacturing indicated that the economy was moving away from its reliance on the service sector.

But he added that bank lending was still a stumbling block: “On the banks, we have an agreement with them they must increase their lending to businesses, large and small, and that needs to happen.”

Separate figures released on Wednesday from the British Bankers’ Association (BBA) showed that total net lending to companies fell in March by £4.7bn compared with a year ago, a slightly bigger fall than in February.

The BBA said in a statement that weak trading activity meant businesses were less likely to borrow money for expansion, and most were trying to pay down debts.

The European Central Bank has become the first of the four major central banks to lift policy interest rates since the start of the global financial crisis. This decision came on the same day as Portugal applying for emergency support in a bail out that might be worth Euro 80 billion. David Blanchflower, a former member of the Monetary Policy Committee has called the move “a big mistake” hinting that Spain – where more than 80% of mortgages are on variable interest rates – is more vulnerably to financial distress than many are prepared to admit.

The ECB is starting to move their policy interest rates towards normal levels – but this tightening of monetary policy starts with the Euro Area suffering 10 per cent unemployment – it takes a hawkish central bank to start increasing the cost of borrowing money when one in ten people in the currency union is out of work and when the Euro has already been appreciating against the US dollar threatening the strength of an export-led recovery for the currency union. The ECB was forced to reverse a rate rise in the autumn of 2008 when the financial crisis took hold. Might they have to do the same sometime this summer?

It seems that the ECB has confirmed that the Euro Area will now experience a two-speed currency union for the next few years with Germany leading a group of fast-growing countries and the debt-ridden periphery (the PIIGS) condemned to grow more slowly and suffer the impact of a period of painful fiscal austerity.

Click Here for BBC Clip

A month away from the final deadline for submitting essays for the 2011 RES essay competition, I thought that I would remind students of the essay titles and some advice drawn from the comments of judges from the previous competitions.

The essay titles are as follows:

1/ Is the rise of China good for America and Europe?
2/ Has recent government policy towards banks reduced the chance of another big financial crisis – or increased it?
3/ Would a ‘fat tax’ be an effective policy to counter obesity?
4/ “An NHS free at point of access is unsustainable in the 21st century and an alternative funding model is needed.” Discuss
5/ Should governments go for growth or for happiness?

The judges have to read several hundred essays and the overall standard has risen year by year which makes the task even more difficult! Here is some advice on the essays that have stood out in the past
What makes an answer really stand out?

Most of all, the judges don’t want to see an exam type answer! The definition, content, analysis, evaluation approach is drilled into students during their AS and A2 course and pays dividends in an exam but rarely lifts an answer in the RES competition. Originality is the key

The best essays are innovative, creative and written confidently. They need to be fluent and readable.

Judges are looking to hear your voice in an answer, there are many entries and only unique perspectives will shine out

Evidence of wider reading is important and adds markedly to the interest of reading an answer during the judging process

We like an original approach, some humour, flowing and cohesive argument(s) and most of all something that answers the question

Diagrams are not essential – indeed we urge students to avoid an exam-based approach of too many analytical diagrams! Strong answers are not afraid to step outside the subject into history and politics to find themes that were then woven back into the economics as part of the reflection around the question.

It is really good to see evidence of a student who has undertaken wider reading and explored an economic theory not found in the standard AS/A2 texts. Likewise students shouldn’t simply rely on ‘populist’ economic texts i.e. Freakonomics.

References need to be wide – don’t rely on Wikipedia – a strong bibliography can make a difference. The essay needs to be presented in a professional manner. Lots of referencing, use of bibliography and where data charts or tables are included they must be referred to in the text not simply ‘dumped’ in to make it all look pretty!

Put simply – You are writing an essay for the Royal Economic Society competition; not an essay for a May or June exam! So break away from the shackles of a mark scheme. The fluency of writing is crucial and there should be absolutely no typos or grammatical errors.