there are both winners and losers in the receiving country. Second, we can determine the net
effect on the receiving country. As we often conclude when we examine freer international
exchange, the net national effect of immigration is positive according to the basic economic
model, in this case even if we ignore the gains to the immigrants themselves.
The third controversy is the exchange rate value of the Chinese yuan. From the mid-1990s to
2005, the Chinese government maintained a fixed exchange rate of the yuan to the U.S. dollar.
As China’s trade surplus increased and the Chinese government continually had to enter the
foreign exchange market to buy dollars and sell yuan to keep the exchange rate steady, the
United States and the European Union increasingly complained about the fixed rate. In 2005 the
Chinese government began to allow gradualincreases in the exchange-rate value of the yuan. In
mid-2008, in response to the worsening global crisis, the Chinese government reverted to a fixed
exchange rate. Then, as the Chinese economy resumed its rapid growth and China’s government
continued to amass international reserves through its intervention to defend the fixed exchange
rate, foreign pressures reemerged. In mid-2010 China’s government again began to allow gradual
appreciation of the yuan.
In the controversy over China’s exchange rate policy, we can see many of the issues that we will
examine in Chapters 16-25 of the book, including the measurement and meaning of a country’s
balance of payments (including its trade balance), government policies toward the foreign
exchange market and how a government defends a fixed exchange rate against market pressure
for the exchange rate value to change, foreign financial investments and the role of currency
speculators, political pressures that can place limits on how long a country with a fixed exchange
rate and a trade surplus can maintain the fixed rate value, and how exchange rates affect not only
a country’s trade balance, but also its national macroeconomic performance (including
production, employment, and inflation).
The fourth controversial development is the euro crisis. The euro was born in 1999, with the
European Central Bank (ECB) overseeing the euro and conducting monetary policy for the euro
area. The number of European Union countries using the euro went from 11 in 1999 to 16 in
2009. Generally, in its first decade the euro looked successful. The global financial and economic
crisis that began in 2007 and intensified in 2008 caused a deep recession in the euro area
countries, but recovery began in mid-2009.
Crises then hit a series of euro area countries, Greece in 2010 (beginning as a fiscal and
sovereign debt crisis), Ireland later in 2010 (beginning as a banking crisis following a burst
housing price bubble), and Portugal in 2011 (a credit boom and bust). Contagion spread these
crises to adversely affect Spain and Italy in 2011 and 2012. As the euro crisis intensified, it
threatened the continued existence of the euro itself. Because both the causes of the crisis and the
possible solutions were and are controversial, the ECB reacted slowly, first with a mildform of
quantitative easing through loans to banks in late 2011 and early 2012. The ECB moved more
decisively with a commitment to “do whatever it takes” in July 2012, with the commitment
formalized as the Outright MonetaryTransactions program in September. The crisis subsided,
though, as of late 2014, macroeconomic weakness lingers (and Greece is in depression).
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