The Euro. Slides are largely based on Baldwin-Wyplosz s ones (textbook) European Economic Integration. European Economic Integration

Transcription

1 Class verview 1. Maastricht 2. ECB 3. Instruments 4. First years The Eur Slides are largely based n Baldwin-Wyplsz s nes (textbk)

2 The Maastricht Treaty Mnetary unin is the utcme f a deal between Germany and the ther cuntries. As part f it, the Maastricht Treaty included: - a firm cmmitment t launch the single currency by January 1999 at the latest; - a list f five criteria fr admissin t the mnetary unin; - a precise specificatin f central banking institutins; - additinal cnditins mentined (e.g. the excessive deficit prcedure). Maastricht Treaty intrduced, fr the first time, the idea that a majr integratin mve culd leave sme cuntries ut. It specifies that all cuntries are expected t jin as sn as practical (Denmark and UK were given an exemptin; Sweden des nt have an exemptin but acts as if it did as it is nt member f the ERM II).

3 The Maastricht Treaty: Five entry cnditins A selectin prcess t certify which cuntries had adpted a culture f price stability (i.e., German-style lw inflatin): cuntries have t fulfill five cnvergence criteria: 1. Inflatin: nt t exceed by mre than 1.5 percentage pints the average f the 3 lwest inflatin rates amng EU cuntries; 2. Lng-term nminal interest rate: nt t exceed by mre than 2 percentage pints the average interest rate in the 3 lwest inflatin cuntries (lng-term interest rates mstly reflect markets assessment f lng-term inflatin); 3. ERM membership: at least 2 years in ERM withut being frced t devalue; 4. Budget deficit: deficit less than 3% f GDP. Histrically, all big inflatin episdes brn ut f runaway public deficits and debts! 5. Public debt: debt less than 60% f GDP (average f cuntries).

4 The Maastricht Treaty: Five entry cnditins

5 Tw-speed Eurpe

6 The Eursystem N cuntries with N Natinal Central Banks (NCBs) and a new central bank at the centre: the Eurpean Central Bank (ECB). The Eurpean System f Central Banks (ESCB): the ECB and all EU NCBs. The Eursystem: the ECB and the NCBs f eur area member cuntries.

7 The rtating vting system (since 2015)

8 Objectives The primary bjective f the ESCB shall be t maintain price stability. Withut prejudice t that bjective, it shall supprt the general ecnmic plicies in the Unin in rder t cntribute t the achievement f the latter s bjectives. (Article 282-2) Eursystem has chsen t interpret it as fllws: Price stability is defined as a year-n-year increase in the Harmnized Index f Cnsumer Prices (HICP) fr the Eurzne f belw but clse t tw per cent. Price stability is t be maintained ver the medium term. cmmnly understd as between 1.5 and 2%; cmmnly understd t refer t a 2 3 year hrizn.

9 ECB s mnetary plicy strategy Strategy relies n three main elements: Definitin f price stability as the primary gal: change in HICP belw but clse t tw per cent and tw pillars t identify risks t price stability: First pillar = ecnmic analysis. It cnsists f a brad review f recent evlutin and likely prspects f ecnmic cnditins (e.g., grwth, emplyment, prices, exchange rates, freign cnditins); Secnd pillar = mnetary analysis. It studies the evlutin f mnetary aggregates (M3, in particular) and credit.

10 Independence and accuntability A central bank must be free t perate withut utside interference but delegatin t unelected fficials needs t be cunterbalanced by demcratic accuntability. Eursystem is characterized by a great degree f independence (prbably the wrld s mst independent central bank). Eursystem perates under the cntrl f the Eurpean Parliament. Transparency cntributes pwerfully t accuntability.

11 Transparency

12 Independence and accuntability Independence and transparency indices:

13 Instruments Eursystem uses the shrt-term interest rate: its changes have a knck-n effect n lnger-term interest rates (and thus n the cst f credit), n asset prices (and thus n capital csts f firms) and n the exchange rate (and thus n freign demand fr dmestic gds and services). The Eursystem fcuses n the vernight rate EONIA (Eurpean Over Night Index Average, a weighted average f vernight lending transactins in the Eurzne s interbank market): - The Eursystem creates a ceiling and a flr fr EONIA by maintaining pen lending and depsit facilities at preannunced interest rates; - The Eursystem cnducts, usually weekly, auctins at a rate that it chses, thus prviding liquidity t the banking system and the chsen interest rate serves as a precise guide fr EONIA. Hwever, currently fixed rate full alltment plicy

14 Instruments

15 The first years (until the Great Crisis) A difficult perid: il shck in 2000; September 11 in 2001; il prices t recrd level and US financial crisis start in mid Result: inflatin almst always abve 2% but clse t target (until 2007) and lwer than perceived. Grwth has been generally slw in the Eurzne, prmpting criticism f the ECB, including by sme member gvernments.

16 The first years (until the Great Crisis)

17 The first years (until the Great Crisis)

18 The first years (until the Great Crisis)

19 The first years (until the Great Crisis) Lasting differences in inflatin:

20 The first years (until the Great Crisis) Still, large inflatin differentials have ccurred: - lwer than average: Germany, France and Finland; - higher than average: Ireland, Spain, Prtugal, Netherlands and Italy. Pssible causes: - catching up in prductivity levels; - wrng initial cnversin rates; - autnmus wage and price setting; - plicy mistakes, such as fiscal expansin; - asymmetric shcks, such as il price effects.

21 The first years (until the Great Crisis) Diverging current accunt: