european economic and monetary union
TRANSCRIPT
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EUROPEANECONOMIC & MONETARY UNION
Abdul Basit Adeel
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Contenets
• Introduction
• What is Economic and Monetary Union?
• Stages of Economic Integration
• Historical development (1969-1991) + (1991-2015)
• Economic & Political perspectives about EMU
• Criticism of Economic and Monetary Union
• Conclusion
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Introduction
• EMU has been an integral part of European integration since 1970s
• Euro introduced on 1 January 2002
• Accepted by all member states
• Expect: Denmark, Sweden, UK
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Economic Unions Before EU
• Roman Empire
• Latin Monetary Union (1865 – 1927)
• Scandinavian Krona Union (1872
• EMU is different because these earlier unions only harmonized coinage and did
not introduce a single monetary policy or a central bank.
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Economic & Monetary Union
• EMU refers to the union of participating countries, which have agreed to:
• a single monetary policy which influences money supply and credit conditions
• a single monetary authority – European Central Bank which sets interest rates
• a single currency - Euro
• coordinated macroeconomic policies
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Economic & Monetary Union
• EMU could have been introduced without having a single currency
• Two alternatives
• By keeping national currencies and fixing exchange rates
• By introducing a common currency in parallel to the existing national currencies
• Single currency reduces costs and shows full commitment to EMU
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Coordination of Economic Policies
• Specific rules on public debts and budgetary deficits:
• Budget deficits must not exceed a reference value – 3% of GDP
• Government debts must not exceed a reference value – 60% of GDP
• Countries are not allowed to print money to finance their debts and deficits
• ‘No bail out’ clause put to reduce likelihood of ECB for bailing out a country
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Debate between Monetarists and Economists
• In 1960s-70s, policy makers were not sure about how to create the EMU
• Monetarists – Belgium, Luxembourg, and France:
• Fixing the exchange rate will start necessary cooperation in the economic policies
• Economists – West Germany and the Netherlands:
• Economic policies needed to be coordinated before fixing exchange rates or
introducing a single currency.
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Stages of Economic Integration
• Though to be consecutive/following each other but not anymore
• Free Trade Area (FTA) in which participating members remove barriers to trade amongst
themselves, but maintain the right to levy tariffs on third countries
• Customs Union in which a common external tariff s on goods and services from third countries,
in addition to the free trade among members
• A common market — 1985 =single market — in which free movement of goods, services,
labor, and capital among the participating states, and common rules, tariffs, and so on with
third countries.
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Stages of Economic Integration
• Economic union has a common/single market with high degree of coordination in the
economic policy and market regulation, as well as monetary policies and income
redistribution policies.
• Monetary union contains a common/single market, but also further integration in the
area of currency cooperation. It also requires integration of budgetary and monetary
policies.
• An economic and monetary union (EMU) combines the features of the economic
union and the monetary union. This combination is what European leaders had in mind.
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Further Stages of Economic Integration
• A full economic union (FEU) implies the complete unification of the economies of
the participating member states and common policies for most economic matters.
• A full political union (FPU) is the term used when, in addition to the FEU, political
governance and policy-making have moved to the supranational level.
• Positive integration refers to rules, norms, and policies. Negative integration is
taking away obstacles, and eliminating rules and procedures that are an obstruction
to integration
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Review
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Historical Development (1961-1991) – Initialization
• Process started in 1969 at Hague Summit
• Group of experts headed by Pierre Werner proposed 1970s Werner Plan
• 3 stages to reach EMU by 1980
• Recommended setting up 2 supranational bodies:
o Community System for the Central Banks to pursue monetary policies
o Centre of Decision for Economic Policy to coordinate macroeconomic policies (including some
tax policies)
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Historical Development (1961-1991) – Halt
• The process slowed down in 1970s due to:
• Differences among states about how to reach EMU
• Changes in global economic and monetary system namely fall of Bretton Woods
System
• European states set up exchange rate mechanism (ERM), the so-called ‘snake’
• Not all members participated + included some non-EEC members
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Historical Development (1961-1991) – Relaunch
• In 1979, the European Monetary System (EMS) was set up, in which all
European Community (EC) member states were to participate.
• Not all were immediately part of its most important feature, the ERM—a system
of fixed, but adjustable, exchange rates.
• UK currency was part of the European currency unit (ecu)
• Italy participated in the ERM from the outset, but was initially given more leeway
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Historical Development (1961-1991) – Relaunch
• Rule: most currencies could not fluctuate more than ± 2.25 % from an agreed parity
• Those who needed more leeway (for example, Italy) was set at ± 6 % from the parity
• If a currency threatened to move outside the agreed band, central banks would intervene by
buying or selling currencies in order to keep the currency from leaving the band
• If an imbalance were persistent, EC Monetary Committee (MC) – renamed in 1999 as
Economic and Financial Committee, an informal advisory body created by the Treaty of
Rome to discuss monetary policy and exchange rate matters, would decide the adjustments
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Historical Development (1961-1991) – Development
• Until 1992, became symbol of success in European Integration
• Deutschmark became anchor currency and other states started following policies of Deutsche Bank
• The 1986 Single European Act (SEA) facilitated the completion of the single market and EMU
• Delors Report (April 1989) proposed a road to EMU in three stages. It contained:
• Creation of a European System of Central Banks (ESCB)
• Same objectives of Werner’s Plan but idea of supranational economic institutions were sidelined
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Historical Development (1961-1991) – Development
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Historical Development (1961-1991) – Development
• 1st stage of EMU (the liberalization of capital markets ) started on 1 July 1990
• Intergovernmental conference (IGC) held negotiations on the point that countries
would have to meet certain criteria, dubbed ‘ convergence criteria ’, in order to be
allowed to join EMU.
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Historical Development (1961-1991) – Criteria
• Participating countries should not have excessive budgetary deficits or public debts
• The national central bank needed to be made politically independent
• Authorities must not print money to reduce public debts and budgetary deficits
• There were ‘escape clauses’ built into the wording of the Maastricht Treaty
• Debt criteria could be soften for some countries, such as Belgium and Italy, not able to
meet the reference value in less than a decade. However, Budgetary criteria had to be
met
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Review: Historical Development (1961-1991)
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From Treaty to Reality (1992-2002) – Challenges
• Referendums: success in France but failure in Denmark
• ERM II was set up to replace ERM. It maintained the ± 15 per cent bands
• The accession treaty allowed new members to join EMU but:
• They had to wait at least two years and fulfill the convergence criteria
• Some concessions were provided
• Total members of Eurozone are 19
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From Treaty to Reality (1992-2002) – SGP
• Stability and Growth Pact (SGP) is a deterrent and a set of rules designed to
ensure that countries in the EU pursue sound public finances and coordinate their
fiscal policies.
• Member states that violate the rules to keep their public debt and budgetary deficit low
can be penalized, and may have to pay a fine
• SGP involves:
• A preventive arm multilateral budgetary surveillance
• A corrective arm or a deficit limit, the excessive deficit procedure (EDP)
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Historical Development (1961-1991) – Crisis
• In 2002, France, Germany, and Portugal were given an ‘early warning’ that they
were in breach of the SGP.
• Portugal made the necessary corrections but France and Germany failed to do so.
• Both were closer to the financial sanctions set out in the SGP but such proposal was defeated.
• SGP was interrupted for the cases of France and Germany.
• Other member states, notably Austria, Finland, the Netherlands, and Spain, were outraged at the situation.
• France and Germany had been exempted from the process because they were large.
• ECJ declared this move to be illegal.
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Historical Development (1961-1991) – Aftermath
• In 2005, the SGP was revised so as to include more flexibility over the circumstances
• States may temporarily run deficits in excess of the 3 % reference value
• The preventive arm of the SGP was strengthened:
• By giving attention to the fiscal sustainability when setting budgetary objectives
• By basing the medium-term budgetary objective on its debt ratio and potential growth
• The Commission is to give them ‘policy advice’ if this consolidation of states’ public finances when in favorable economic conditions, fails
• The SGP’s corrective arm was also adjusted:
• allowing more room for economic judgements and leaving open the possibility that the one-year deadline for the correction of an excessive deficit could be increased to two years.
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Explaining EMU – Economic Perspective
• Two different schools
1. State should create EMU only if they constitute a so-called ‘optimum currency area’ (OCA)
• When are sufficiently integrated economically and have mechanisms in place to overcome an economic downturn to maximize economic efficiency of the region
• Central bank credibility becomes important. Central banks can be effective only if financial markets have confidence in their policies.
• Maastricht regime ensured full central bank independence and gave the ECB a clear single mandate to maintain price stability.
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Explaining EMU – Political Perspective
• Two schools considered for the sake of simplicity
1.Neo-functionalists: EMU as the result of spillover and incremental policy-making.
• The success of the exchange rate mechanism (ERM) and the completion of the single market necessitated further collaboration in the area of monetary integration.
• Supranational actors were instrumental in creating EMU/
• Commission President, various EC committees, such as the Monetary Committee significant
2.Intergovernmentalists: EMU can be understood by examining the interests and bargaining behavior of the largest member states.
• By examining the interests of the largest member states, one is able to see why EMU happened.
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Explaining EMU – Criticism by states outside Eurozone
• People unconvinced of the need of creating a single currency
• Economic and Social prosperity of Sweden and Denmark
• Skepticism of UK
• Change in perception after 2008 financial crisis
• Euro remained rather stable compared to non-Euro countries
• Denmark now more interested in joining Euro
• Political pressure against joining Euro in Poland, Czech Republic
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Explaining EMU – Criticism of Institutional Design
• EMU has poor institutional design
• Problem of legitimacy and accountability due to extreme independence of ECB
• No one can instruct ECB as it is independent as a result of related treaty
• To change its mandate a new treaty is needed which is a difficult task
• There are few checks and balances on the ECB’s policies
• There is no equivalent supranational policies, heteronomy of ECB
o French proposal of gouvernement économique
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Explaining EMU – Financial and Sovereign Debt crisis
• Sovereign Debt: inability of a country to pay its public debt, usually due to critical high debt levels and suffers from (perceived) low economic growth
• Member state spent more than they taxed, leaving them with high deficits and public debt
• Creation of new institutions like European Financial Stability Facility (EFSF)
• Changes to rules of the Stability and Growth Pact
• The so-called ‘six pack’ (five regulations and one directive )
• The role of the debt is now taken to be as important as the deficit.
• A qualified majority vote (QMV) to stop the sanctions (before used to impose sanctions).
• European Commission has a supervisory role in guiding member states through the fiscal year and ensuring sound policies
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CONCLUSION
EMU is a lengthy and gradual development. It is
not only about economic and monetary system but
also has a political dimension.
Q: What will be the future?