2. the IMF and the EMU Flashcards
what is monetary policy?
-determining the money supply in an economy.
-Usually managed by a central bank (e.g., the Federal Reserve, European Central Bank).
-Balances controlling inflation and promoting economic growth.
-Affects exchange rates, which influence international trade and investment.
-Central banks buy and sell currencies, impacting the foreign exchange market.
2 reason on why to cooperate on monetary policy
Stabilizing exchange rates → Reduces transaction costs for trade and investment.
Providing lending mechanisms (systems or structures through which financial institutions, such as central banks or international organizations, provide loans or financial assistance to countries facing economic difficulties) → Helps countries with balance of payments difficulties (especially when they lack foreign exchange reserves).
3 reasons why to cooperate through institutions in monetary policy?+ challenges every time
Weaker currency → Competitive Exports
A weaker currency (monaie) makes exports cheaper and more competitive in foreign markets.
But if countries devalue their currencies to compete, it leads to “beggar-thy-neighbor” policies (one country’s gain at the expense of others).
Crisis Lending & Moral Hazard: Institutions create lending mechanisms for countries in crisis.
However, this creates moral hazard:
If a country knows it will be bailed out, it might take riskier economic actions.
Example: A government might borrow excessively if it expects international financial support in a crisis.
How Institutions Help:
-Establish rules, monitoring, and enforcement mechanisms to ensure commitment.
-Promote long-term cooperation, predictability, and trust.
-Correct incentives to defect (e.g., currency manipulation, unsustainable borrowing) and ensure collective gain.
4 ways to cooperate on monetary affaires
- Minimal Approach: Coordination of Monetary Policy & Flexible Exchange Rates
-> to avoid excessive exchange rate fluctuations: exchange rates remain flexible but within some stability framework. - Fixed Exchange Rate System
Central bank guarantees a fixed exchange rate for its currency (May allow some adjustments) -> reduces transaction costs but limits a country’s monetary policy freedom (since interest rates must support the fixed rate). - Monetary Union (e.g., Eurozone)
Irrevocably fixed exchange rates, meaning no devaluation or revaluation possible.
-> Can lead to a single currency (e.g., the Euro).
Pros: Eliminates exchange rate uncertainty, encourages trade.
Cons: Loss of independent monetary policy (countries can’t adjust their currency to respond to economic shocks). - Crisis Support Mechanisms: Simple agreements for mutual assistance.
Institutions that act as “lenders of last resort” (e.g., IMF, European Stability Mechanism).
what are the 3 big steps of the origin of the IMF?
-Pre-WWI: Gold Standard
*countries followed the gold standard, meaning each currency had a fixed value in terms of gold.
*This system ensured stable exchange rates but limited governments’ ability to adjust monetary policies.
-1930s: Great Depression & Competitive Devaluations
*Many countries abandoned the gold standard and engaged in competitive devaluations.
*This led to currency instability and trade conflicts.
-1944: Bretton Woods Conference → Gold Exchange Standard
*To prevent future financial instability, world leaders created the Bretton Woods system
*Role of the IMF: Monitor and advise on exchange rate stability + Provide loans to countries facing balance of payments crises (functioning as a lender of last resort).
what is the gold exchange standard?
1944, Bretton Woods: To prevent future financial instability, world leaders created the Bretton Woods system:
..The US dollar was directly linked to gold ($35 per ounce).
..All other currencies were pegged to the US dollar (but could adjust within limits).
..Exchange rates were fixed at “par values,” but adjustable in exceptional cases.
=/ the gold standard, meaning each currency had a fixed value in terms of gold.
what is a lender of last resort
is a financial institution that provides emergency funding to banks or countries facing a liquidity crisis when no other lender is willing to do so. The goal is to prevent financial system collapse and restore market confidence.
ex: The IMF, Central Banks…
explain the 3 big steps of the Breakdown of Bretton Woods & the “Non-System”
- 1960s–1971: The Gold Exchange Standard under Strain (sous pression)
*system faced increasing pressure due to US trade deficits and inflation.
*Other countries accumulated large amounts of US dollars but began doubting whether the US had enough gold to back them. - 1971: Nixon Ends Dollar Convertibility into Gold
*suspension of the gold standard, meaning the dollar was no longer redeemable for gold.
*This ended fixed exchange rates, leading to a system of floating exchange rates. - 1976: Jamaica Agreement – “Non-System”
*Countries were no longer required to peg their currency to gold or the dollar -> free to choose their exchange rate regime (floating, fixed, or managed).
*The IMF’s new role:
..No longer enforcing fixed exchange rates.
..monitoring global macroeconomic policies (“surveillance”): monitor economic policies worldwide, analyzing risks like inflation, debt, and currency fluctuations..
..Providing technical assistance (“capacity development”) and loans:
-Training for central banks (on managing inflation).
-Advice on tax policies (to improve government revenue).
-Support for financial regulations (to prevent banking crises).
..Acting as a debt restructuring coordinator in the wake of 1980s debt crises: stepped in to negotiate debt relief between debtor countries and private lenders, coordinate debt restructuring to prevent defaults, ensuring countries will repay over time
what is the role of IMF during recurring crises (in the “Non-System” Era)
- intervention during recurring crises:
*Since the 1980s, the global economy has faced repeated debt and financial crises, such as:1980s Latin American debt crisis; 1990s Asian financial crisis;,2008 Global Financial Crisis
*IMF response:
..Increased loan volumes over time.
..Applied greater conditionality (requiring economic reforms in exchange for financial aid).
..Promoted the Washington Consensus in the 1980s–90s, advocating for free markets, deregulation, and privatization.
what are nowadays the different IMF loans?
- Concessional loans for low-income countries (low-interest, long-term).
- Credit facilities for developed economies, often with fewer conditions.
- Expanded funding sources: IMF increased quotas and borrowed from member states to meet rising demand.
what are the recent challenges of the iMF
Rising Global Debt & IMF Lending Constraints:
1. High global debt levels (e.g., post-COVID economic strains).
2. IMF’s lending capacity is being tested as more countries seek financial support.
3. Debate on whether the IMF has enough funds to handle future crises
what is an Exchange Rate Regime?
the way a country manages its currency in relation to other currencies. There are three main types:
1.Floating Exchange Rate: Currency value is determined by supply and demand in foreign exchange markets (no government or central bank control).
Ex: US dollar, Euro
2.Fixed Exchange Rate (Pegged System): A currency is tied to another currency or a commodity (e.g., gold) at a set rate.
3. Managed Float: hybrid system where the currency is mostly floating, but central banks occasionally intervene to prevent extreme fluctuations.
what is the differences bwn Bretton Wood and Washington consensus ideologies?
Bretton Woods = fixed exchange rates, government-led economic policies.
Washington Consensus = free markets, privatization, deregulation.
what are the 2 main differences btwn IMF and WB?
IMF = short-term financial stability & crisis management.
World Bank = long-term development & poverty reduction.
how is the decision-Making in the IMF
- Similar to the World Bank, the IMF has:
*Managing Director (traditionally European).
*Board of Governors & Board of Directors (representing member governments). - Voting System: Weighted Votes
*Voting power depends on capital contributions (“quotas”).
*85% majority is required for major decisions (e.g., reforms, quota reviews).
..US has a de facto veto (16.51% of votes).
..EU countries collectively hold about 33% of votes.
what are the pb of the governance structure of the IMF?
Power Imbalance & Underrepresentation:
*Developing countries have less influence, despite their economic importance.
*Advanced economies, especially the US and EU, have outsized power in shaping IMF policies.
*IMF conditionality and policy prescriptions often reflect Western economic ideologies.
what is the response of the IMF to the critics of its governance structure?
2010 Reforms: Attempt to Address Inequality
*Total quotas were doubled, increasing the weight of developing and emerging economies.
*The US Congress only ratified the reforms in 2015, delaying their implementation.
what is the eu Economic and Monetary Union (EMU)
-the framework for economic and monetary integration among European Union (EU) member states
-It includes a single currency (the Euro)
-and a coordinated monetary policy led by the European Central Bank (ECB).
what is the first step towards monetary unification in Europe (early foundations of the EMU)
Treaty of Rome (1957)
*established the European Economic Community (EEC), laying the foundation for economic integration.
*Article 2 states that the goal was to create a common market and approximate economic policies to ensure:
..Balanced economic growth
..Stability
..Higher living standards
..Stronger cooperation between member states
what are the early plan for the EMU
The Werner Report (1970)
*Proposed by the 1969 Hague Summit
*report outlined a plan for full economic and monetary integration by 1980.
*Key features:
..Fixed and irrevocable exchange rates
..Full capital mobility: free movement of capital, across borders within the European Economic Community (EEC)
..Possible single currency
..A unified system for central banks
*proposed role of the Economic Union:
..Harmonization of economic policies
..Common economic policy decision-making center, accountable to the European Parliament (EP)
*Problem: The plan failed due to economic crises in the 1970s, including the collapse of the Bretton Woods system and oil shocks.
what is the EMS
In 1979, to address monetary instability, the EMS was introduced. It included:
*Exchange Rate Mechanism (ERM)
*Allowed fixed but adjustable exchange rates between European currencies to reduce volatility.
*Mutual Credit Facilities: provided financial assistance to defend exchange rate stability.
*European Currency Unit (ECU): A basket currency used for accounting, paving the way for the Euro.
-> Success: The EMS helped stabilize exchange rates and formed the basis for deeper monetary integration.
how/ when is born the EMU?
*The Treaty of Maastricht (92) formally established the Economic and Monetary Union (EMU).
*Key goals:
..Creation of a common market
..Economic and social progress
..A single currency (the Euro)
*The Maastricht Treaty also set convergence criteria (inflation, budget deficit, debt, interest rates) that countries had to meet before adopting the Euro.
what are the 3 theories explaining the EMU dvlpmt?
- Intergovernmentalist Perspective (State-Centric)
- Neo-Functionalist Perspective
- “Failing Forward” Theory (Jones, Kelemen, Meunier, 2016)
what is the Intergovernmentalist Perspective (State-Centric) as a theory explaining the EMU devlopment?
EMU was driven by state interests:
*Countries preferred fixed exchange rates for economic stability.
*But divisions over monetary policy caused delays—until economic convergence in the 1980s made the EMU more feasible.
