ECONOMIC AND MONETARY UNION Flashcards
what is European Exchange Rate Mechanism (ERM)
The stabilizer of the currency of EU
what is The Delors Report?
from the late 80s
laid the groundwork for the European Economic and Monetary Union (EMU) - generally a more stable economy
- MS without the Euro joined the European Exchange Rate Mechanism (ERM)
- Economic policy coordination to narrow currency fluctuation bands
- National currencies eventually locked together: the euro—managed by the European Monetary Cooperation Fund (EMCF)
what is the Convergence criteria (criteria for stability)
After the reunification of Germany, they advocated for strict convergence criteria to ensure stability
- budget deficit below 3% of GDP
- Public debt under 60% of GDP
- Inflation capped at 1,5% above the best-performing EU economies
- Stable exchange rates in the ERM
EMU? - implemenatition (Britain, Italy, Germany)
European Monetary Union
Coordination of economic and fiscal policies
Formalized through the Maastricht treaty. Implementation proved difficult: Britain and Italy faced currency attacks.
Germany’s economic dominance enabled it to shape the EMU around fiscal discipline
ERM?
(European) Exchange Rate Mechanism
Maastricht Treaty: General: When, what
(1992) TEU
Greatest revision of treaties
Economic progress, european citizenship, QMV:
- Formalized the EMU
- Paved the way for the Euro and EU citizenship - passports
- QMV is extended to more areas
ECB?
European Central Bank
The Euro Group: When, Function
From 1998
Coordinate fiscal policy among eurozone finance ministers
Function is to ensure compliance with fiscal rules - management of fiscal coordination
Problems of Monetary union: + year of launch of Euro
Launch of Euro: 1999
Euro depreciated (devalue) against the dollar
Economic imbalances within the eurozone became clear
- therefore challenges in managing (for ECB) a unified monetary policy
SGP? (+germany/france - function)
The stability and growth pact
A part of the Maastricht treaty
Aimed to enforce fiscal discipline
In the beginning more stricht, but Germany and France breached the limits and a revision of the SGP was made to be more flexible
what is the European Central Bank (ECB) - function
Manages eurozone monetary policy - focusing on price stability through inflation control
operates independently
(to prevent political interference)
Though Germany and France ex have different opinions on how the ECB should manage the finances
Crisis management (Greece)
The EU’s initial response (particularly regarding Greece) was slow
EU leaders agreed to a huge bailout for Greece, which was co-financed by the EU and IMF
The support package included:
- The European Financial Stability Facility (EFSF)
- The European Financial Stabilization Mechanism (EFSM)
- The IMF’s contribution
IMF?
International Monetary Fund
Long-Term Reforms: ESM + TSCG - what is that?
European Stability Mechanism (ESM) replaced a temporary crisis fund in 2012
Countries seeking aid through ESM must agree to austerity measures
Treaty on stability and governance (TSCG) was another long term reform, where the countries must only have a 0,5% of their GDP deficit
what is the six-pack and two-pack legislation?
Some legislative packages introduced to strengthen fiscal discipline
what is European Banking Union? (EBU)
a union to supervision banks and better manage banking crisis
EMU (European Monetary Union) explained through theories and critic
Spillover - single market led naturally to monetary union
Liberal Intergovernmentalism: Economic issues is important to MS
Critic: Economists disagree whether the monetary union was nesscessary
Cultivated Spillover: Some MS might benefit from the monetary union and has therefore pushed others into it
What happens when inflation is high (overheated economy)
Banks increase interest rates! in order to reduce money flow in society by making it more expensive to loan money
Definition of Fiscal policy
Policy used by a government to affect the economy in order to change the status quo
Definition of Monetary policy
Policy used by a central bank to cool down or increase activity in the economy
How can u increase sales of national goods?
Subsidies and Tariffs
Devalueating your currency - decreasing value of your goods sold in your currency cheaper
Why is there free movement of labour in the EU?
To keep inflation low: It’s easier to employ and to lay off
what is the Convergence criteria
Path to EMU involved Convergence criteria that candidate countries should follow.
This was voted through in the Maastricht treaty
Criteria:
- Price stability (controlled inflation rate - max inflation: 2%)
- Sound public finances: Annual budget deficit: max 3% of GDP. Public debt: Max 60% of GDP
- Currency stability
Arguments for the Euro?
- Reduction of transaction costs and exchange rate risks - Likely more trade within EU because of this
- Avoiding competitive devaluations
- Providing a low-inflation anchor for macroeconomic policy
Problems of a single exchange rate
Instead of devaluing the currency, the countries can be forced to lower prices (which is not great during recession)
- Therefore the countries may want to increase public spending to restore, but this is supposed to be restrained
- Government borrowing money may exceed the SGP (stability and growth pact) limit due to a recession
- States with high levels of government debt may have difficulty refinancing the debt (as they cannot devaluate or print money)
what is Ordoliberalism
Ordoliberalism is the german variant of economic liberalism: Emphasizes the need for government to ensure that the free market produces results
What is political legitimacy?
Power given to someone by being appointed or voten for
Why is it good for a country to produce inelastic goods?
Because these inelastic goods are not as sensitive to market shocks
what is the ‘snake’ (in the tunnel)
the ms’s currency can fluctuate (but only a little, and according to the us dollar - which is the tunnel)
So, the currency can go up and down, limited by how the dollar is going
