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Euro 111221222500 Phpapp02
Euro 111221222500 Phpapp02
Euro 111221222500 Phpapp02
The Euro: how did we get there? What is EMU? What are the costs and benefits of having a single currency? Benefits of EU versus euro membership? How is economic policy made in a monetary union? What is the current economic situation in the Euro Area? How should Europe deal with the current economic and financial crisis? And what does the crisis mean for EMU?
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The original goal behind the integration of Europe was to prevent the devastating wars of the first half of the twentieth century from ever happening again
back at the start of European integration in 1950s It was always seen as the next logical step after the single market The idea gained academic attention through the work of economist like Robert Mundell (Optimal Currency Areas) Break-up of the gold standard in the 1970s led to creation of the forerunners of the euro, European Monetary System (EMS) and Exchange Rate Mechanism (ERM) German reunification (1990) and currency crisis of 1992 as catalysts for push toward the euro leading to Maastricht Treaty in 1992/93?
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What is EMU?
EMU is a Treaty objective shared by all 27 EU Member States The euro is a reality for 16 Member States (the euro area) What about the E in EMU?
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1) The euro countries give up their own currency when they join the euro area. The ECB sets interest rates for the euro area (16) 2) The single market all countries participate in the single market, with free movement of goods, services, capital and people (27) 3) Enhanced policy coordination countries retain sovereignty over other economic policies but commit to coordinate more closely at the European level (27/16)
Euro area: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain. EU Member States obliged to adopt the euro eventually: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Sweden. EU Member States with an opt out from adopting the euro: Denmark, United Kingdom.
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A Member State must fulfill the convergence criteria laid down by the Maastricht Treaty: Low inflation Low interest rates Low government deficit Low government debt Stable exchange rate (ERM II)
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Countries that adopt the euro can no longer change their INTEREST RATE or their EXCHANGE RATE. In a monetary union, you cannot have an INDEPENDENT MONETARY POLICY.
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More competition more choice, lower prices for consumers More competition promotes efficiency
Larger market firms can exploit economies of scale
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Larger firms enjoy cost advantages over smaller firms (e.g. purchasing, marketing) EU firms can produce for a market of 500m consumers
Eliminates exchange rate uncertainty stimulates investment Euro leads to increased trade and investment flows
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Monetary policy
Federal Reserve Chairman Ben S. Bernanke ECB President Jean-Claude Trichet
Fiscal policy
Treasury Secretary Timothy Geithner Eurogroup Finance Ministers
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The euro has helped to bring Europeans together It has fostered greater economic integration (reinforcing the Single Market) It has contributed to macroeconomic stability (e.g. lower inflation) But now the euro area is confronted by a very dire economic situation
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2008 0.8
2009 -4.0
2010 -0.1
Inflation
Unemployment rate
(percentage of labor force)
3.3
7.5
0.4
9.9
1.2
11.5
US and euro area economies are closely connected Many European banks bought securities tied to US subprime loans German exports have fallen sharply Spanish and Irish housing bubbles have burst Euro area economy is less flexible, has lower productivity growth Toto, I dont think were in Kansas anymore Exposure to Eastern Europe?
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The ECB reduces interest rates to historically low levels (1.25%) and begun quantitative easing
Oct 08: euro area governments adopt concerted action plan to support their financial systems
Dec 08: EU governments adopt European Economic Recovery Plan - a coordinated fiscal stimulus
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Conclusions
The launch of the euro was a tremendous achievement for the EU But EMU is still a work in progress (especially for the E part) The euro area is in its first recession; how will it cope? Will the crisis lead to further divergence in EMU, or will it encourage countries to speed up reforms? Can you have a monetary union without a complete economic union? Political union?
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