how to complete a monetary union (monetary and fiscal)

Question 1

what are the two levels that collective action can be taken?

Answer 1

at the level of the central bank or at the level of national government

Question 2

what is the aim of the central banks actions in monetary union?

Answer 2

deal with crisis situations

Question 3

what is the aim of the national governments ?

Answer 3

solution to strengthen the union

Question 4

how does being a lender of last resort decrease the fragility of the monetary union?

Answer 4

liquidity crises can be avoided if the central bank can be forced to provide all the necessary liquidity to the soverign. if the common central banks in the monetary union is willing to provide the necessary liquidity in the different soverigns bond markets than it will reduce the fragility of an incomplete monetary union

Question 5

what are the three options of a country experiencing debt crisis ?

Answer 5

restructure its public debt
turn to IMF and be subject to standard procedures for conditional support
other euro area member states find ways to provide temporary conditional assistance

Question 6

what is the issue with the liquidty of govt assets and liabilities?

Answer 6

Governments’ liabilities (e.g. debt/bills) are liquid while most of their assets are illiquid (e.g. infrastructure, tax claims).When bondholders massively sell bonds, govts may not beable to generate enough cash to pay out bondholders at maturity.

Question 7

what is the european financial stability facility?

Answer 7

created in 2010, the EFSF provides loans penalty rates to countries such as greece, Ireland and Portugal who were facing a withdrawal of liquidity from their govt bond markets. it obtains resources through the issuance of EFSF bonds and other debt instruments on capital markets

Question 8

what was the issue of the EFSF?

Answer 8

it didnt have sufficient funds to stop contagion as it cannot bail out large countries such as italy

Question 9

what are outright monetary transactions?

Answer 9

it is the unlimited buying of government bonds in the times of crisis by the ECB, the ECB attached a number of conditions on application to the OMT facility, countries that apply must commit themselves to further austerity programs

Question 10

was the OMTs succesful?

Answer 10

the program was very sucessful; yields declined fast after announcement and the ECB did not have to buy government bonds

Question 11

what are the three critisms of the OMT?

Answer 11

inflation risk, moral hazard, fiscal implications

Question 12

what was the pandemic emergency purchase program?

Answer 12

it is a temporary asset purchase programme of private and public sector securities. on 4 june 2020, the governing council decided to increase the original 750 billion envelope for the PEPP by 600 billion, on 10 December 2020, it decided to increase the envelope by a further 500 billion. on 16 December 2021, the governing council discontinued net asset purchases under PEPP at the end of march 2022.

Question 13

why should the parts of the national budgets and debt be consolidated into one central component?

Answer 13

consolidation creates a common fiscal authority that can issue debt in a currency under the control of that authority. by consolidating national governments budgets into one central budget, a mechanism of automatic transfers can be organised.

Question 14

what are the small steps can be taken to increase the degree of political and fiscal union?

Answer 14

set constraints on national budgets and economic policies of member states as these produce divergent movements in wages and prices within the eurozone.
jointly issue eurobonds. participating countries become jointly liable for the debt issued.

Question 15

what is the preventitive arm?

Answer 15

the requires all countries to achieve country-specific, medium term objectives (MTO) set in structural terms

Question 16

what is the corrective arm?

Answer 16

the possibility of extending the deadline for EDPs was introduced for countries that have taken effective actions but were in bad economic circumstances

Question 17

what are examples of the lack of fiscal discipline between 1999 to 2008?

Answer 17

greece misreported budgetary data and flouted the European fiscal discipline rules
European commissions decision on nov 2003 to allow france and Germany to hold excessive deficits significantly weakened credibility of European fiscal framework
from 1999-2008 six countries out off twelve were in an excessive deficit position
the 2008-2009 economic and financial crisis had a massive impact on deficits due to the depth of the recession and bank recapitalisation needs in some member states.
In some cases (i.e. Greece and Ireland) deficits reached double digit levels and at the aggregate EU level exceeded 6% of GDP in 2009-2010.24 out of the then 27 Member States entered the EDP for breaching the Treaty’s deficit criterion of 3% GDP.

Question 18

what were the six pack measures?

Answer 18

a new set of rules set out in December 2011, for economic and fiscal surveillance, the so called six pack was proposed to finance the SGP.
a new expenditure benchmark was defined which placed a cap on the annual growth of public expenditure to a medium term rate of growth
it introduced a debt reduction benchmark that requires public debt to diminish per year by 1/20th of the gap between its debt level and the reference value of 60% of GDP on average over 3 years

Question 19

what was the purpose of the two pack reform of 2013

Answer 19

strengthened the surveillance framework
to achieve closer budgetary coordination, the reform obliged euro area member states to submit their draft budgetary plans to the European commission and the council before national parliaments adopted them
the reform also brought in the procedure of assessing the aggregate euro area fiscal stance

Question 20

has the SGP ensured sound public finances?

Answer 20

all countries have brought their headline deficits below 3% if GDP and have become subject to the SGPs preventive arm which requires countries to make progress towards their MTOs before COVID19 crisis
biggest structural adjustments took place between 2011 and 2013.
most countries benefitted from a negative snowball effect since 2014, with the impact of low nominal growth offset by historically low interest rates on soverign debt
since 2014, the average fiscal effort of countries with the highest initial debt levels have slowed down
countries with lower debt have continued to adjust, even when a structurally balanced budget or even a surplus was reached

Question 21

what is the pro cyclical fiscal stance from 2011 to 2019?

Answer 21

national fiscal stances have been largely pro cyclical since 2011
most countries implemented sizeable fiscal adjustments in the period immediately following the debt crisis.
fiscal consolidation has ground to a halt since 2014 when economic growth has picked up

Question 22

what is the conclusion of how to complete a monetary union?

Answer 22

the long run success of the eurozone depends on continuing the process of political unification. intermediate steps to make the euro area more stable. these include ECBs role of lender of last resort and better coordinated fiscal policy