In terms of the decisions coming from the Euro system's Governing Council, explain why, at times, relatively small countries may be at a distinct disadvantage in terms of monetary policy targets but perhaps have undue influence in terms of the actual policies.

Question

What will be an ideal response?

Answer 1

One example to show how the smaller countries can be at a disadvantage comes from the setting of targets. For example, the ECB sets a specific numerical target for inflation and the measure of inflation is the Harmonized Index of Consumer Prices (HICP), where the inflation of each country is weighted by the relative size of each country's GDP. So a small country that may be experiencing a high rate of inflation finds that their experience does not impact the overall system's rate very much and may not bring about any policy to address the problem their particular country is experiencing. On the other hand, one has to wonder if what a small country is experiencing will influence their representative to the Governing Council to push for measures that will have a positive impact on their country at the expense of the Euro system as a whole. Here a small country can have a lot of influence on the policies that impact the Euro system.