European Monetary Union

Transcription

1 European Monetary Union Chapter 20 1 Macroeconomic Performance of Europe in the 1980 s Average Annual Growth Rates, W. Europe US Japan Jobs Output Chapter 20 1

2 Comparison of U.S. and Europe U.S. no internal tariffs capital mobility one currency low benefits low regulation weak unions Europe tariffs currency controls many currencies high benefits high regulation strong unions 4 Benefits of Trade Jobs? - No Comparative Advantage Economies of Scale 5 Degrees of Monetary Integration Flexible E E varies with supply & demand Fixed E Normally central banks buy & sell currencies to stabilize E, but devaluations are possible Unified currency Only one currency, no possibility of devaluation, the next step after fixed exchange rates 6 Chapter 20 2

3 Acronyms EMS - European Monetary System Group of 8-12 countries w/ mutually fixed E. Evolved into the EMU EMU European Monetary Union Group of 12 countries with a unified currency EU - European Union Group of 15 countries w/ no tariffs or import quotas. 7 EMU - Ins & Outs 11 members initially 12 now 8 EMU - Ins & Outs 9 Chapter 20 3

4 Figure 20-1: Members of the Euro Zone January 1, Comparisons - Population 12 Chapter 20 4

5 Comparisons - GDP 13 Currency Unification Benefits Reduced risk & transactions cost 14 Currency Unification Benefits Monetary union with Germany helps reduce inflation & nominal interest rates Enhanced European role in the world monetary system. Euro replaces $ as a reserve currency 15 Chapter 20 5

6 Figure 20-2: Inflation Convergence Of Six Original EMS Members Currency Unification Costs Reduced ability to deal with regional disparities in demand What happens if Germany booms while Italy slumps 17 Figure 20-9 Divergent Inflation in the Euro Zone 18 Chapter 20 6

7 Optimum Currency Areas Region where it is best (optimal) to have a single currency. Optimality depends on degree of economic integration. The US is an optimal currency area, but economic integration in Europe is much lower 19 Comparison of EU to US Less internal trade Less labor mobility No fiscal federalism 20 California in the last recession 1993 unemployment U.S. 6.5% Cal 8.6% 35% less federal taxes - 8% more transfers for every lost dollar of income Subsidies for conversions of military bases 250,000 net out migration (compared to 200,000 per year in migration) 21 Chapter 20 7

8 Figure 20-8: Intra-EU Trade as a Percent of EU GDP 22 Comparisons - Trade 23 History of EMS EMS was started in 1979 The EMS suffered a major setback in 1992 Britain & Italy dropped out because of contractionary German monetary policy 24 Chapter 20 8

9 Chapter 20 9

10 Maastricht & the EMU The EMU would have a unified currency called the Euro A single European central bank (ECB) would be established. Established convergence criteria Established a timetable for unification Chapter 20 10

11 31 Changeover to the Euro January 1999 January 2002 July January 1999 Euro was introduced for non cash transactions Conversion rates irrevocably fixed ECB started operation 33 Chapter 20 11

12 January 1999 Foreign-exchange & money markets switched Other financial markets started switch All new debt issues in euros Individuals could open euro bank accounts 34 January 2002 Euro notes & coins brought into circulation National-currency notes & coins gradually withdrawn Euro used for salaries, social welfare services and retail transactions 35 Eight Coins 36 Chapter 20 12

13 100 Euro Note Front Reverse 37 July 2002 Transition complete for public authorities and services National-currency notes and coins no longer legal tender 38 Stumbles & Controversies Along the Way EMU faced (faces) stiff political opposition Some countries have had trouble meeting the Maastricht criteria Dispute over the name of the currency Dispute over the head of the new central bank 39 Chapter 20 13

14 40 Challenges What happens during recessions? Does the ECB abandon price stability? (Germany rebels) Does the ECB pursue a Laissez Faire Policy? (Especially hard hit countries rebel) What happens if performance does not improve? 41 Figure 20-9 Unemployment Rates in Selected EU Countries 42 Chapter 20 14

15 Figure 20-3: The Euro s Exchange Rates Against Major Currencies Chapter 20 15