European Monetary Union

Question 1

Gold standard (1870-1914)

Answer 1

Gold parities determined exchange rates

• > Internal convertibility
• > External convertibility
• > Automatic balance of payments adjustment

Question 2

Bretton Woods Agreement

Answer 2

Fixed peg between the US$, which was convertible to gold and a number of international currencies

-> lasted from 1944-1971 until Germany began to let its exchange rate with the USD flow

Question 3

Werner Report (1971)

Answer 3

Werner proposed realisation of EMU in 3 phases:

• Fixing of exchange rates
• Centralisation of monetary policy
• Further elimination of trade barriers

Question 4

European Monetary System (EMS) (1979)

Answer 4

• answer to Bretton Woods collapse
• ongoing Bundesbank domination made EMS as a new system attractive
• Today: EMS mostly entry point for future monetary union members

Question 5

Maastricht Convergence Criteria

Answer 5

• Inflation
• Long-term interest rate
• ERM membership
• Budget deficit
• Public debt

Question 6

Optimum Currency Areas (OCA)

Answer 6

Mundell´s analysis suggested that:

• if the impact of shocks on particular areas is similar (i.e. symmetric), fixed exchange rates, or a monetary union, is appropriate
• if the impact of shocks is asymmetric, high labour mobility and/or wage flexibility (more particularly in a downward direction) are the main prerequisites
• McKinnon: degree of openness in an economy
• Kenen: high degree of product diversification, fiscal transfers/fiscal integration

Question 7

Problem of deficit bias

Answer 7

• capital outflows and a weak euro

- pressure on other MS and Eurozone to help out

Question 8

EU answers to Deficit Bias

Answer 8

• Maastricht Treaty provisions

- Stability and Growth Pact

Question 9

Stability and Growth Pact

Answer 9

• meant to avoid excessive deficits upon entry into euro area
• reform in 2005 with relaxation of rules

Question 10

Greek debt crisis

Answer 10

• public debt amounted to 180% of GDP

- until 2015, three bailouts were agreed

Question 11

Resulting from the Eurozone Crisis:

The Treaty of Stability, Coordination and Governance (Fiscal Compact)

Answer 11

e. g.:
- Economic Surveillance Mechanism
- European Stability Mechanism
- Common banking supervisor (SSM)
- Common resolution framework (SRM)
- Common deposit guarantee (proposal)

Question 12

The EU Commission’s Corona Recovery Plan

Answer 12

Three pillars:

• ESM/EIB: crisis support and guarantee fund for workers and businesses
• Next Generation EU: Temporary EU Recovery Instrument
• Increase in the EU budget from 1.2% of GDP to 1.4%