• EURO ZONE
• The economy comprising all the countries that have adopted the EURO. There is much debate among economists about whether the euro zone is in fact an OPTIMAL CURRENCY AREA.
• EURODOLLAR
• A deposit in dollars held in a BANK outside the United States. Such deposits are often set up to avoid taxes and currency exchange costs. They are frequently lent out and have become an important method of CREDIT CREATION.
• EUROPEAN CENTRAL BANK
• The CENTRAL BANK of the EUROPEAN UNION, responsible since January 1999 for setting the official short-term INTEREST RATE in countries using the EURO as their domestic currency. In this role, the European Central Bank (ECB) replaced national central banks such as Germany’s Bundesbank, which became local branches of the ECB.
• EUROPEAN UNION
• A club of European countries. Initially a six-country TRADE AREA established by the 1957 Treaty of Rome and known as the European Economic Community, it has become an increasingly political union. In 1999 a single currency, the EURO, was launched in 11 of the then 15 member countries. Viewed as a single entity, the EU has a bigger economy than the United States. In 2002, a further 10 countries were invited to join the EU in 2004, increasing its membership to 25 countries, with more countries likely to follow later.
• EVOLUTIONARY ECONOMICS
• A Darwinian approach to ECONOMICS, sometimes called institutional economics. Following the tradition of SCHUMPETER, it views the economy as an evolving system and places a strong emphasis on dynamics, changing structures (including technologies, institutions, beliefs and behaviour) and DISEQUILIBRIUM processes (such as INNOVATION, selection and imitation).
• EXCESS RETURNS
• Getting more money from an economic INVESTMENT than you needed to justify investing. In PERFECT COMPETITION, the FACTORS OF PRODUCTION earn only normal RETURNS, that is, the minimum amount of WAGES, PROFIT, INTEREST or RENT needed to secure their use in the economic activity in question, rather than in an alternative. Excess returns can only be earned for more than a short period when there is MARKET FAILURE, especially MONOPOLY, because otherwise the existence of excess returns would quickly attract COMPETITION, which would drive down returns until they were normal.
• EXCHANGE CONTROLS
• Limits on the amount of foreign currency that can be taken into a country, or of domestic currency that can be taken abroad.
• EXCHANGE RATE
• The PRICE at which one currency can be converted into another. Over the years, economists and politicians have often changed their minds about whether it is a good idea to try to hold a country’s exchange rate steady, rather than let it be decided by MARKET FORCES. For two decades after the second world war, many of the major currencies were fixed under the BRETTON WOODS agreement. During the following two decades, the number of currencies allowed to float increased, although in the late 1990s a number of European currencies were permanently fixed under ECONOMIC AND MONETARY UNION and some other countries established a CURRENCY BOARD.
• When CAPITAL can flow easily around the world, countries cannot fix their exchange rate and at the same time maintain an independent MONETARY POLICY. They must choose between the confidence and stability provided by a fixed exchange rate and the control over INTEREST RATE policy offered by a floating exchange rate. On the face of it, in a world of capital MOBILITY a more flexible exchange rate seems the best bet. A floating currency will force FIRMS and investors to HEDGE against fluctuations, not lull them into a false sense of stability. It should make foreign BANKS more circumspect about lending. At the same time it gives policymakers the option of devising their own monetary policy. But floating exchange rates have a big drawback: when moving from one EQUILIBRIUM to another, currencies can overshoot and become highly unstable, especially if large amounts of capital flow in or out of a country. This instability has real economic costs.
• To get the best of both worlds, many emerging economies have tried a hybrid approach, loosely tying their exchange rate either to a single foreign currency, such as the dollar, or to a basket of currencies. But the currency crises of the late 1990s, and the failure of Argentina's currency board, led many economists to conclude that, if not a currency union such as the EURO, the best policy may be to have a freely floating exchange rate.
• EXOGENOUS
• Outside the model. For instance, in traditional NEO-CLASSICAL ECONOMICS, models of GROWTH rely on an exogenous factor. To keep growing, an eco¬nomy needs continual infusions of technological progress. Yet this is a force that the neo-classical model makes no attempt to explain. The rate of technological progress comes from outside the model; it is simply assumed by the economic modellers. In other words, it is exogenous. New growth theory tries to calculate the rate of technological progress inside the economic model by mapping its relationship to factors such as HUMAN CAPITAL, free markets, COMPETITION and GOVERNMENT expenditure. Thus, in these models, growth is ¬ENDOGENOUS.
• EXPECTATIONS
• What people assume about the future, especially when they make decisions. Economists debate whether poeple have irrational or RATIONAL EXPECTATIONS, or ADAPTIVE EXPECTATIONS that change to reflect learning from past mistakes.
• EXPECTED RETURNS
• The CAPITAL GAIN plus INCOME that investors think they will earn by making an INVESTMENT, at the time they invest.
• EXPENDITURE TAX
• A tax on what people spend, rather than what they earn or their wealth. Economists often regard it as more efficient than other taxes because it may discourage productive economic activity less; it is not the creating of INCOME and wealth that is taxed, but the spending of it. It can be a form of INDIRECT TAXATION, added to the PRICE of a good or service when it is sold, or DIRECT TAXATION, levied on people’s income minus their SAVINGS over a year.
• EXPORT CREDIT
• Loans to boost EXPORTS. In many countries these are subsidised by a GOVERNMENT keen to encourage exports. Typically, the CREDIT comes in two forms: loans to foreign buyers of domestic produce; and guarantees on loans made by BANKS to domestic companies so they can produce the exports that should pay off the loan. This effectively insures producers against non-payment. When governments compete aggressively with export credits to win business for domestic FIRMS the sums involved can become large. The economic benefit of export credits is unclear at the best of times. This may be because they are largely motivated by political goals.
• EXPORTS
• Sales abroad. Exports grew steadily as a share of world OUTPUT during the second half of the 20th century. Yet by some measures this share was no higher than at the end of the 19th century, before FREE TRADE fell victim to a political backlash.
• EXTERNALITY
• An economic side-effect. Externalities are costs or benefits arising from an economic activity that affect somebody other than the people engaged in the economic activity and are not reflected fully in PRICES. For instance, smoke pumped out by a factory may impose clean-up costs on nearby residents; bees kept to produce honey may pollinate plants belonging to a nearby farmer, thus boosting his crop. Because these costs and benefits do not form part of the calculations of the people deciding whether to go ahead with the economic activity they are a form of MARKET FAILURE, since the amount of the activity carried out if left to the free market will be an inefficient use of resources. If the externality is beneficial, the market will provide too little; if it is a cost, the market will supply too much.
• One potential solution is REGULATION: a ban, say. Another, when the externality is negative, is a tax on the activity or, if the externality is positive, a SUBSIDY. But the most efficient solution to externalities is to require them to be included in the costings of those engaged in the economic activity, so there is self-regulation. For instance, the externality of pollution can be solved by creating PROPERTY RIGHTS over clean air, entitling their owner to a fee if they are infringed by a factory pumping out smoke. According to the Coase theorem (named after a Nobel prize-winning economist, Ronald Coase), it does not matter who has ownership, so long as property rights are fully allocated and completely free trade of all property rights is possible.