Common markets and monetary unions

Question 1

Monetary Unions definition

Answer 1

• Occurs when at least two countries share the same currency
  -the most important monetary union today is trhe EMU of the European Union.
  -on january 1st 2002, the euro replaced national currencies in 13 different countries

Question 2

The European Central Bank

Answer 2

• Members of the EMU have given control of monetary and exchange rate policy to the European Central Bank which was set up in 1988.
  -its functions include:

-distrubution of notes and coins,
-intrest rate setting,
-for maintaining a stable financial system,
-manages foreign currency reserves of the Economic Monetary Union

Question 3

Fiscal policy rules of the EU

Answer 3

• Not exceed a fiscal defecit of more that 3 percent of GDP
• Have a National Debt of no more than 60 per cent pf GDP

-these rules were pushed to their limit in the 2008 financial crisis as countries like Spain,Greece and Portugal found themselfs in a fiscal deficit of over 10%

Question 4

Advantages of monetary unions for member states in EU

Answer 4

• Fixed prices-eliminates risks that would have arisen from exchange rate fluctuations between member countries
• More trade and economies of scale-reduced exchange rate costs and greater price transparency has led to more trade between member countries
  -e.g there has been more cross-border mergers to create larger firms across eurozone rather than just a single nation economy
• Greater price transparency as many different currnecies can cause imperfect information as a single currency makes it easier for consumers to compare prices.
  -resulted in lower costs across the eurozone for consumers

Question 5

Disadvantages of monetary unions for member states in the EU

Answer 5

• Transistion costs-changing allm of the notes and coins in a country cost a lot of money
• Loss of policy independance as member states of a currency union may not be able to change their individual monetary policies or exchange rate policies
  -e.g Wales and Northern Island dont have control over South London
• Inability to change the value of a currency as sometimes the best option for a country is to try and depreciate the value of their currency and in a monetary union a country cannot do this
  -e.g Greece couldve dealt with their financial crisis in 2008 by going into fiscal austerity but it could not. Therefore they had to take more extreme austerity measures>huge fall in GDP

Question 6

Conditions required for the success of the Euro

Answer 6

• Should be free movement of labour as there are many more barriers in the EU than the US for example the language barrier
• Should be capital mobility associated with wage and price flexibility so financial capital should flow freely between member countries
• Should be automatic fiscal transfers when individual countries are performing poorly
  -the refusal by rich countries like Germany to help Greece during the financial crisis shows there is a lack of political will to deepen fiscal transfers in the EU

Question 7

What are the convergence requirements for a country if they are wanting to enter the EU?

Answer 7

1)Price Stability: The country’s inflation rate should not exceed 1.5 percentage points above the rate of the three best-performing EU member states in terms of price stability
2) Sound and Sustainable Public Finances: The country must not be under the excessive deficit procedure, meaning its government deficit should not exceed 3% of GDP, and its government debt should not exceed 60% of GDP
3) Exchange Rate Stability: The country must participate in the Exchange Rate Mechanism (ERM II) for at least two years without severe tensions or devaluing its currency against the euro
4) Long-term Interest Rates: The long-term interest rate should not be more than 2 percentage points above the rate of the three best-performing EU member states in terms of price stability

Question 8

Advantages for the UK of being in the EU

Answer 8

• Being a member of the EU means that UK firms have access to a common market of over 300 million people.Economies of scale in production means that the UK firms can enjoy lower costs whilst UK consumers can buy at lower prices
• Inward investment-Flows of FDI to the EU disproportionally benefit the UK as firms outside th EU like the US prefer to establish themselfs in the UK due to the lack of a language barrier
  -also, FDI from firms in trhe rest of the EU has been greater than FDI by UK firms into Europe. This has helped UK privatye sector investment

Question 9

Disadvantages for the UK of being in the EU

Answer 9

• As the UK is a net contributor to the EU budget it contributes more than it receives in benefits from EU central funds. This is due to how the UK has a smnall agriculture market compared to other EU countries
  -however this benefit is equal to less than 1% of the UK GDP so is not a large burden but some eurosceptics argue any net loss is bad for the UK
• The political agenda is that the UK cant make desicions for itself as some eurosceptics believe that the trasnfer of power from the westminister to brussels is unacceptable