Economic Monetary Union

Question 0

Bretton Woods

Answer 0

instable international monetary system
…because of declining power of US dollar and rising inflation

late 60s interest

Question 1

benefits of single currency/present eurozone membership

Answer 1

monetary STABILITY (global reserve currency)

price TRANSPARENCY (elimination of exchange risk)

more CONVENIENT

PSYCHOLOGICAL benefits

global economic and political benefits
decrease bureaucratic BARRIERS

Federalists support currency since 1950s

Question 2

development to EMU (informal)

Answer 2

Werner Report 1970
end of Bretton Woods 1971
snake introduced Spring 1972
OPEC oil shock was more important than ending the snake
European countries voluntarily decreased permitted exchange rate from $ (less than the IMF), but they could not maintain the high standard they set

Question 3

development to EMU (formally)

Answer 3

EMS created 1977, operation 1979
non obligatory system
first formal attempt to EMU

Exchange Rate Mechanism–attempt to keep ER within certain range
ECU–Economic Currency Unit
dominated by large currencies
some stability success of ER/iR in 1980s

EMU mentioned in SEA preamble
SEA freed capital, removal of exchange controls
pressure for single currency
changes in late 80s/early 90s

Maastricht (3 stages)

Question 4

launching the euro (how, timetable, public support)

Answer 4

1) liberalize movement of capital, inclusion of all ERM, measures for economies convergence (begin 1990)

2) Convergence Criteria–limits on ER, iR, budget, deficit, public debt, and central bank (pg 160) (begin 1994)
est EMI and Central bank (opt outs-UK and Denmark)

3) qualifying fixed ER and est European Central Bank (begin 1999)

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Question 5

Maastricht Convergance Criteria

Answer 5

national BUDGET deficit of less than 3% GDP

public DEBT less than 60% GDP

consumer INFLATION rate between 1.5% of the avg of the 3 countries with the lowest rates

a long term INTEREST rate within 2%of the avg of the 3 countries with the lowest rates

a RECORD of keeping exchange rates within ERM fluctuation margin for 2 years

Question 6

European Central Bank Structure

Answer 6

est as EMI 1994, ECB 1998 Frankfurt (bc Germany had strongest currency, political move)

European System of Central Banks=ECB+28 NCB
Eurosystem=ECB+18NCB

consists of a president, executive board (P+VB+4), governing council (exec board+28 euro NCBs) and general council (P+VP+18NCBs)

politically independent; neither ECB nor NCBs can take instruction from EU

Question 7

European Central Bank Responsibilities

Answer 7

responsible for eurozone monetary policy
prime objective: maintain price stability (inflation)
…“support the general economic policy in the EU”

currently…
long term refinancing
outright monetary transactions
european fiscal compact

Question 8

Stability and Growth Pact (SGP)

Answer 8

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Question 9

Managerial Issues (Asymetrical shocks, optimum currency area, etc.)

Answer 9

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Question 10

Causes of current eurozone crisis

Answer 10

globalization of finances
easy credit opportunities from 2002-2008
bursting of real estate bubbles
financial crisis of 2007
approaches used to bail out banks
violation of the treaty of Maastricht
population reaction
political problems
slow reaction from government

Question 11

Impact of the eurozone crisis

Answer 11

sovereign debt rose to keep functioning economies
global trade has declined rapidly
deepening social and political unrest
government agrees to cut spending
use of monetary and fiscal tools
interest rates have soared on sovereign bonds
Germany increased exports—large portion of relief
controversy between monetary union and fiscal union

Question 12

Institutional Reform (fiscal pact, european stability movement)

Answer 12

European Financial Stability Facility
European Stability Mechanism
European Central Bank
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