european policies

Question 1

What are the principles of a monetary union?

Answer 1

Price stability, central bank independence, fiscal discipline

Question 2

What are the entry conditions of the EMU?

Answer 2

• inflation should be similar and with a low value -> related to competitiveness
• nominal interest rate should be similar and with a low value
• country must have belonged to the ERM for <2y without devaluing currency
• budget deficit < 3% of GDP
• public debt < 60% of GDP

Question 3

What happens when a poor country joins the EMU?

Answer 3

1. • productive -> prediction of higher income -> more consumption today -> + investment -> + imports and exports
2. lower interest rates -> increased debt levels -> increase in consumption -> + investment -> + imports, = exports -> CA deficit

TLDR: country doesn’t have enough competitiveness to keep up

Question 4

What are the five elements of the SGP?

Answer 4

1. excessive debt definition
2. Preventative arm
3. Corrective arm
4. European semester
5. sanctions

Question 5

What is the preventative arm meant to do?

Answer 5

submit finance ministers to a collective discussion of one another’s fiscal policy to constraint the deficit bias and support budgetary discipline

Question 6

What is the corrective arm meant to do?

Answer 6

adopt recommendations that are increasingly detailed and urgent to help solve an excessive deficit

Question 7

What is the European semester and how does it work?

Answer 7

annual process where the EU coordinated and monitors countries’ economic policies

• beginning of the year: annual growth survey
• march: key challenges in economic policy
• april: member states report their measures + commission makes proposals for each member state
• june: member states discuss the recommendations and adopt them

Question 8

Why were risks neglected leading up to sovereign debt crisis?

Answer 8

• role of the central bank was just controlling price inflation
• financial regulation and supervision was restricted at ensuring the solvability of institutions
• assumption that financial markets could be disciplined through auto-regulation

Question 9

What is the motivation of the banking union?

Answer 9

reduce fragmentation in financial markets and break correlation of banking and sovereign risk

Question 10

What are the building blocks of the banking union?

Answer 10

• single supervision mechanism
• single resolution mechanism
• european deposit insurance scheme

Question 11

What is the goal of the SSM?

Answer 11

kill financial fragmentation and adopt common supervisory rules

Question 12

What are the principles of the SRM?

Answer 12

• uniform rules for banking resolution
• funding for any cash injection to which banks contribute
• bank deposits by households and SMEs are fully protected up to 100 000€

Question 13

What is the purpose o the EDIS?

Answer 13

provide a stronger and more uniform degree of insurance cover in the euro area, as to ensure that the level of depositor confidence in a bank would not depend on the bank’s location

Question 14

The banking union wants to make European banking…

Answer 14

… more transparent (common rules and procedures)
… unified (same treatment of banking activities regardless of country)
… safer (intervening early and resolving efficiently)

Question 15

What were the ingredients that led to a financial bubble in Europe?

Answer 15

• countries with CA deficits
• risky behaviors
• financial fragmentation
• correlation between sovereign risk and private risk
• connection between countries defaulting and financial institutions defaulting

Question 16

What was neglected leading up to sovereign debt crisis?

Answer 16

• excessive credit growth and leverage
• inefficient output composition: excessive expansion of some sectors
• excessive maturity mismatch of assets and liabilities in banks’ balance sheets

Question 17

What was the impact of the sovereign debt crisis on monetary policy?

Answer 17

• low interest environment complicate the role of monetary authority -> lower banks’ profitability
• costs of borrowing higher in distressed countries

Question 18

What are the pillars of the macroeconomic imbalance procedure?

Answer 18

1. alert mechanism report
2. in depth reviews
3. specific monitoring
4. excessive imbalance procedure

Question 19

What is the alert mechanism report?

Answer 19

annual report which analyses the economies of all member states and identifies those who need deeper analysis

Question 20

What are in-depth reviews?

Answer 20

provide the analysis for the identification of the presence of macroeconomic imbalances and the degree of their severity

Question 21

what is specific monitoring?

Answer 21

dialogue between the commission and member states that aims to help them address macroeconomic imbalances that could affect their stability

Question 22

what happens under the EIP?

Answer 22

member states experiencing excessive imbalances may b required to submit corrective action plans to address their situation

Question 23

Imbalance: definition

Answer 23

any trend giving rise to macroeconomic developments which are adversely affecting the proper functioning of the economy of the country or of the union as a whole

Question 24

what is the mission of the european stability mechanism?

Answer 24

provide financial assistance to the euro area countries experiencing severe financing problems

Question 25

what instruments does the european stability mechanism use?

Answer 25

• loans within a macroeconomic adjustment programme
• primary and secondary market purchases
• precautionary credit line
• loans for indirect bank recapitalization
• direct recapitalization of institutions