Lecture on Fiscal and Monetary Institutions in the Eurzone (Pt 2)

Question 1

What are three principles of the European Monetary Union (mainly on German requests)?

Answer 1

1. Price stability
2. Central bank independence
3. Fiscal discipline

Question 2

What were 4 main elements of the Maastricht Treaty regarding the European Monetary Union?

Answer 2

• A firm commitment to launch the single currency by January 1999 at latest
• Five explicit criteria for admission to the monetary union
• A precise specification of central banking institutions
• Additional conditions mentioned

Question 3

What were the five entry conditions to the EMU?

Answer 3

1. Inflation not exceed by more than 1.5 points the average of the 3 lowest inflation rates among EU countries
2. Long term nominal interest rate not to exceed the average interest rate in the 3 lowest inflation countries by more than 2 percentage points
3. ERM membership for at least 2 years without being forced to devalue
4. Budget deficit less than 3% of GDP
5. Public debt less than 60% of GDP

Question 4

What is the European System of Central Banks? (ESCB)

Answer 4

The ECB and all eu NCBs

Question 5

What is a NCB?

Answer 5

National Central Bank

Question 6

How is the index computed for each country regarding power in the rotation system?

Answer 6

• Based on its GDP (5/6 of the weight)
• And the size of its financial sector (Remaining 1/6)

Question 7

Why should the votes in the rotation system be limited to 21?

Answer 7

It follows from Maastricht logic with EU15 at the time and 6 ECB board members

Question 8

What is the primary objective of the ESCB?

Answer 8

Maintain price stability. Without prejudice to that objective, it shall support the general economic policies in the Union in order to contribute to the achievement of the latter’s objectives’.

Question 9

How is the price stability maintenance over the medium term often understood?

Answer 9

This is commonly understood as the inflation between 1.5 and 2%and to refer to a 2-3 year horizon.

Question 10

What are two pillars to identify risks to price stability?

Answer 10

First pillar = economic analysis (growth, employment, prices etc)

Second pillar = monetaty analysis (monetary aggregrates and credit)

Question 11

What is the average inflation in the Eurozone?

Answer 11

Has been 1.7 per cent

Question 12

How must the delegation of unelected officials in a central bank be counterbalanced?

Answer 12

Democratic accountability

Question 13

What are the four dimension of independence?

Answer 13

• Institutional independence
• Personal independence
• Independence with respect to policy objectives and instruments
• Financial independence

Question 14

In what two ways is ECb accountability exercised?

Answer 14

• Reporting
• Transparency