W4: Cooperation on International Monetary and Financial Affairs: IMF en EMU

Question 1

WHAT ARE IMF AND EMU ABOUT?

IMF functions

4 -

Answer 1

• stability of the international monetary system
• keeping track of the global economy and the economies of member countries
• lending to countries with balance of payments difficulties
• giving practical help to members

Question 2

WHAT ARE IMF AND EMU ABOUT?

EMU of the EU

Answer 2

• coordination of economic and fiscal policies
• common monetary policy
• common currency, the euro
• some countries adopterd the euro –> Eurozone/euro area

Question 3

MONETARY POLICY

monetary policy is about determining money supply

Answer 3

• usually done by central bank
• controlling inflation vs. promoting economic growth

Question 4

MONETARY POLICY

monetary policy has an impact on exchange rates; how?

Answer 4

• central banks buy and sell own and foreign currencies
• this influences prices on foreign exchange markets, i.e. exchange rates

Question 5

MONETARY POLICY

why cooperate?

Answer 5

• stabilise exchange rates to reduce transaction costs for trade and investment
• create lending mechanism for countries with foreign exchang shortage in a balance of payments crisis

Question 6

FORMS OF INTERNATIONAL MONETARY COOPERATION

stabilised flexible exchange rates through …

Answer 6

consultation, policy coordination, monitoring

Question 7

FORMS OF INTERNATIONAL MONETARY COOPERATION

fixed exchange rates

3 -

Answer 7

• central bank guarantees specific exchange rates
• may allow degree of flexibility/adjustability
• reduces transaction costs but ties down monetary policy

Question 8

FORMS OF INTERNATIONAL MONETARY COOPERATION

Monetary union

2 -

Answer 8

• irrevocability fixed exchange rates, no adjustments possible
• leads to single currency

Question 9

FORMS OF INTERNATIONAL MONETARY COOPERATION

arrangements that can provide support in case of crises

Answer 9

• simple agreements to porvide mutual assistance
• or institution that serves as ‘lender of last resort’

Question 10

incentives to free-ride

“beggar thy neighbor”

Answer 10

weaker currency makes exports more competitive: push down exchange rate, competitive devaluations

Question 11

incentives to free-ride

moral hazard

Answer 11

crisis lending mechanism leads to moral hazard: insurance against bad outcomes encourages risky behavior and therefor promotes those bad outcomes

Question 12

incentives to free-ride

the need for some institution or IO, bc…

Answer 12

• create perspective of continuing cooperation, enhance predictability, build trust
• create shared rules, monitoring, information, possibly enforcement
• ensure collective gain against individual incentives to defect

Question 13

IMF

origins

4 -

Answer 13

• pre-WW1: gold standard
• 1930s: great depression, competitive
• Bretton Woods Conference 1944: gold exchange standard –> US dollar linked to gold, all other currencies to US dollar, fixed ‘par value’, but adjustable
• Role of IMF: monitor exchange rates and members’ macroeconomic policies, provide leans to countries with BoP difficulties - “lender of last resort” (Breakdown and “Non-System)

Question 14

IMF

since 1960s

Answer 14

gold exchange rate standard under strain

Question 15

IMF

1971

Answer 15

Nixon suspends dollar convertibility into gold

Question 16

IMF

1976: Jamaica agreement

Answer 16

members are free to choose their preferred arrangement, but ‘promote stable system of exchange rates

Question 17

IMF

new role for IMF

Answer 17

monitoring and advice on macroeconomic policies, lender of last resort, coordination of debt restructuring -> development under the Non-System

Question 19

IMF

tendency of growing lean volume

Answer 19

increased use of conditionality,
including in terms of fundamental economic reforms,
concessional loans for low-income countries,
and also specific credit facilities for (more) developed countries,
with limitied or no conditionality

Question 20

IMF

different type of intergovernmental IO

Answer 20

• built-in equality
• governments decide - but voting based on quotes; 85% majority for amandments of Articles of Agreement and quota review, US veto, EU members ca. 33%, generally culture of consensus
• dissatisfaction amongst the underrepresented: also because of the power to shape what policies are considered ‘sound’
• 2010 reforms: total quotas doubled, increased weight for developing countries and emerging ecoonomic, ratification by US congress only in 2015

Question 21

EU’S ECONOMIC AND MONETARY UNION EMU

werner report 1970

Answer 21

• unification of monetary and economic policy
• monetary union: convertibility ad irrevocably fixed exchange rates, total capital mobiloity, and possibly a single currency, community system for the central banks
• economic union: ‘harmonisation and finally unification of economic policies”, center of decision for economic policy, politically responsible to EP
• three-stage process to reach EMU by 1980
• attempts to stabilise exchange rates fail (European Monetary System)

Question 22

EU’S ECONOMIC AND MONETARY UNION EMU

created in 1979 with 3 basic elements

Answer 22

1. exchange rate mechanism (fixed but adjustable)
2. credit facilities for defense of parities
3. European Currency Unit

Question 23

EU’S ECONOMIC AND MONETARY UNION EMU

succes, and forms basic for efforts at relaunching EMU

Answer 23

• treaty of maastricht: EU objective
  ‘to promote economic and social progress
  which is balanced and sustainable,
  in particular through the creation of an area without inernal frontiers,
  through the strengthening of economic and social cohesion
  and through the establishment of economic and monetary unoin,
  ultimately including a single currency

Question 24

EU’S ECONOMIC AND MONETARY UNION EMU

road to EMU: three stages

Answer 24

1. 90-93: total K mobility, closer coordination and cooperation
2. 94- 98: convergence of economic and moentary policies, criteria: inflation, gov. deficit, gov. debt, exchange rate stability, interest rates
3. 1999: irrevocably fixed exchange rates, introduction of euro, introduction of euro notes and coins since 2002

Question 25

EU’S ECONOMIC AND MONETARY UNION EMU

EMU today

Answer 25

• 19 members: Stability and Growth Pact - adhere to convergence criteria even after EMU is set up!
• ECB: executive Board, Governing Council, General Council, inflation goal is less that but close to 2%, fully independent from other EU or MS authorities
• National CBs: implement monetary policy, supervise payment systems
• ESCB: includes CB from non-Eurozone EU members