• ECB
• See EUROPEAN CENTRAL BANK.
• ECONOMETRICS
• Mathematics and sophisticated computing applied to ECONOMICS. Econometricians crunch data in search of economic relationships that have STATISTICAL SIGNIFICANCE. Sometimes this is done to test a theory; at other times the computers churn the numbers until they come up with an interesting result. Some economists are fierce critics of theory-free econometrics.
• ECONOMIC AND MONETARY UNION
• In January 1999, 11 of the 15 countries in the EUROPEAN UNION merged their national currencies into a single European currency, the EURO. This decision was motivated partly by politics and partly by hoped-for economic benefits from the creation of a single, integrated European economy. These benefits included currency stability and low INFLATION, underwritten by an independent EUROPEAN CENTRAL BANK (a particular boon for countries with poor inflation records, such as Italy and Spain, but less so for traditionally low-inflation Germany). Furthermore, European businesses and individuals stood to save from handling one currency rather than many. Comparing PRICES and WAGES across the EURO ZONE became easier, increasing COMPETITION by making it easier for companies to sell throughout the euro-zone and for consumers to shop around.
• Forming the single currency also involved big risks, however. Euro members gave up both the right to set their own INTEREST rates and the option of moving exchange rates against each other. They also agreed to limit their BUDGET deficits under a STABILITY AND GROWTH PACT. Some economists argued that this loss of flexibility could prove costly if their economies did not behave as one and could not easily adjust in other ways. How well the euro-zone functions will depend on how closely it resembles what economists call an OPTIMAL CURRENCY AREA. When the euro economies are not growing in unison, a common MONETARY POLICY risks being too loose for some and too tight for others. If so, there may need to be large TRANSFERS of funds from regions doing well to those doing badly. But if the effects of shocks persist, fiscal transfers would merely delay the day of reckoning; ultimately, WAGES or people (or both) would have to shift.
• In its first few years,the euro fell sharply against the dollar, though it recovered during late 2002. Sluggish growth in some European economies led to intense pressure for interest rate cuts, and to the stability and growth pact being breached, though not scrapped. Even so, by 2003 12 countires had adopted the euro, with the expectation of more to follow after the enlargement of the EU to 25 members in 2004.
• ECONOMIC INDICATOR
• A statistic used for judging the health of an economy, such as GDP per head, the rate of UNEMPLOYMENT or the rate of INFLATION. Such statistics are often subject to huge revisions in the months and years after they are first published, thus causing difficulties and embarrassment for the economic policymakers who rely on them.
• ECONOMIC MAN
• At the heart of economic theory is homo economicus, the economist’s model of human behaviour. In traditional CLASSICAL ECONOMICS and in NEO-CLASSICAL ECONOMICS it was assumed that people acted in their own self-interest. Adam SMITH argued that society was made better off by everybody pursuing their selfish interests through the workings of the INVISIBLE HAND. However, in recent years, mainstream economists have tried to include a broader range of human motivations in their models. There have been attempts to model ALTRUISM and CHARITY. BEHAVIOURAL ECONOMICS has drawn on psychological insights into human behaviour to explain economic phenomena.
• ECONOMIC RENT
• See RENT.
• ECONOMIC SANCTIONS
• A way of punishing errant countries, which is currently more acceptable than bombing or invading them. One or more restrictions are imposed on international trade with the targeted country in order to persuade the target’s GOVERNMENT to change a policy. Possible sanctions include limiting export or import trade with the target; constraining INVESTMENT in the target; and preventing TRANSFERS of MONEY involving citizens or the government of the target. Sanctions can be multi¬lateral, with many countries acting together, perhaps under the auspices of the United Nations, or unilateral, when one country takes action on its own.
• How effective sanctions are is debatable. According to one study, between 1914 and 1990 there were 116 occasions on which various countries imposed economic sanctions. Two-thirds of these failed to achieve their stated goals. The cost to the country imposing sanctions can be large, particularly when it is acting unilaterally. It is estimated that in 1995 imposing sanctions on other countries cost the American economy over $15 billion in lost exports and 200,000 in lost jobs in export industries.
• Widely considered a notable success was the use of economic sanctions against the apartheid regime in South Africa, although some economists question how big a part the sanctions actually played. Clearly important was the fact that the sanctions were imposed multilaterally by the international community, so there were comparatively few breaches of the restrictions. But, arguably, the most crucial factor in persuading the government in Pretoria to cave in was that foreign companies fearing that their SHARE price would fall because their investments in South Africa would attract bad publicity voluntarily chose for commercial reasons to disinvest.