Monetary Union

Question 1

reason for currency cooperation on Europe

Answer 1

Until 1973: Bretton woods system; fixed exchange rates against the USD & between other currencies taking part in the Bretton woods system

Declining confidence in the US to place international monetary responsibilities ahead of national interests

willingness to enhance Europe’s role in the world monetary system

hope to be able to defend more effectively European economic interest

Exchange rate uncertainty was seen as major factor reducing trade in Europe

Fear the fluctuating exchange rates causing large challenges in relative prices might cause politicians to be against free trade

Conviction that truly unified European market only reachable with fixed exchange rates

Question 2

European Monetary system 1979-1998

Answer 2

8 original members: Fra, Ger, It, Bel, Ned, Lux, Dk, Ire
1989: spain
1990 UK
1992 Pt

The ECU (European Currency Unit) = weighted average of the currencies of MS
EMS: fixed but adjustable exchange rate system, all currencies floating jointly against the USD (max 2.25 %, 6% for Spain and Pt and UK)

1992 –> UK and Italy left EMS –> problem for other –> allowed fluctuation up to 15% and European Monetary cooperation fund, help in case of problems

Question 3

Evolution of the EMS

Answer 3

11 currency realignments
High-inflation counties Italy, france (ultill 1987) had to periodically devalues the currency in order to maintain competitiveness to low-inflation counties

Question 4

From EMS to EMU

Answer 4

3 stage:
convergence of economic performance, cooperation in monetary & fiscal policy, removal restriction to intro EEC capital movements

Creation of European Monetary instate to centralize macroeconomic policies of MS & reduce exchange rate marking

Single European Currency and ECB

Question 5

Maastricht convergence Criteria

Answer 5

Inflation rate ≤ 1.5% above that of 3 counties with lowest inflation rate

Budget deficit ≤ 3% of GDP

Overall government debt ≤ 60% of GDP

Long-term interests rate ≤ 2% above that of the average of the 2 counties wit lowest inflation rate

Average exchange rate mustn’t fall by more that 2.25% of the average in EMS in last 2 years

Question 6

Maastricht convergence Criteria: Result

Answer 6

although member did not meet all the conditions for entering EMU –> launch of EMU in 1999 (11 members)
they wanted to be stronger in the world market,
it was a political decision

UK and DK opted out, Sweden referendum –> no

Greece joined in 2001
Slovenia 2007
Malta and Cyprus 2008
Slovakia 2009
Estonia 2011
Croatia 2013 

18 Members

Question 7

Inflation

Answer 7

Persistent increase of prices

Question 8

Inflation rate

Answer 8

% by which prices of G&S rest above their average level

Calculation: consumer prices index, cost of living index, produces prices index, commodity prices
[ ( P1 - P0 ) / P0]* 100 p0= last year p1=today

Question 9

Causes of inflation

Answer 9

Increase of monetary supply (printing to much money, exp monetary policy –> prices rises –> high lending levels –> declines in exchange rate)

Decrease of good supply: causes: increase of production costs, increase in labour costs, decrease in availability of limited resources (oil crisis)

Question 10

Inflation: problem

Answer 10

social and economic problems

• purchasing power decreases (problem especially for low-income groups)
• Real value of money decrease –> interest rate rises, saving rise, inverstments decrease
• Unemployment may be reduces (reduces costs because of reduces real wages)
  but: if investments are reduces and wages star to rise, unemployment rises

Question 11

GDP

Answer 11

Total value of the final G&S produced in one economic territory in a specific time
3 method of calculation

Production: Output - intermediate consumption = grows valued added + taxes on product - subsidies of product = GDP

Expenditure: Y=C+I+G+NX

Distribution: Compensation of employees residents + property and entrepreneurial income = national income
+ government taxes of production and imports - subsidies of production and imports + consumption of fixed capital = GNI
- primary income form the rest of the world = GDP

Question 12

Government budget

Answer 12

summarized version of anticipated revenues and anticipated expenses of the government

Question 13

Budget deficit

Answer 13

public expenditure > public revenues

–> public dept increase –> interests rate on ferment bonds increase

Question 14

Overall government debt

Answer 14

= accumulated debts
problem: even in no new debt, overall debt increase because of interest rate on existing debts

Government debt should be seen in relation to growth rate: if growth in higher that real interest rate in not a big problem