Monetary Integration By Michael Möhnle Table of Contents 1. 6-Stages of Economic Integration 2. International Monetary Integration - Bretton Woods 3. European Monetary Integration 4. European (Economic and) Monetary Union (EMU) 4.1 Convergence criteria 4.2 Examples 5. Conclusion
1. 6-Stages of Economic Integration 1. Preferential trading area weakest level of integration 2. Free trade area 3. Customs Union 4. Common Market 5. Economic and Monetary Union 6. Complete economic Integration strongest level of integration 1. 6-Stages of Economic Integration 1. Preferential Trading Area Preferential access to certain products from certain countries. By reducing, but not abolish tariffs 2. Free Trade Area A group of countries that have agreed to eliminate tariffs and quotas on goods between them May have different policies towards non-member states in terms of tariffs and quotas
1. 6-Stages of Economic Integration 3. Customs Union Free Trade Area with common external policies 4. Common Market Customs Union including free movement of land, capital, labour and enterprises 5. Economic and Monetary Union Common Market with a common currency Monetary Integration 6. Complete Economic Integration Integrated Units have no or negligible control of economic policy 2. International Monetary Integration Bretton Woods 1944-1971/73 a) Origins - The Great Depression 1930th - Wartime devastation of Europe and East Asia b) Mechanism - pegged rate currency regime - US linked the dollar at the rate of $35 per ounce of gold - Other countries had to peg their currencies to the US dollar and had to buy or sell US dollars to keep market exchange rates within +/- 1% of parity - Institutions established: IMF and World Bank
2. International Monetary Integration c) Crisis and Breakdown - US trade balance deficit - War in Vietnam more and more dollars were printed to pay for military expenses member states had to buy more and more dollars to keep the fixed rates system breakdown d) Aftermath - All major currencies were floating - Institutions remained (IMF, World Bank) - New monetary regimes emerged 3. European Monetary Integration 3.1 Aims Intensification of economic and political integration - Europe: a bunch of countries with different cultures, languages, currencies, political and economic policies - Representativeness of a common currency - Euro as a counter balance to the US-$ Declining of transaction costs - Costs of information - Costs of uncertainty - Costs of exchange (e.g.: trade, tourism) Economic stability - Improving monetary and fiscal credibility which leads to decreasing interests on capital
3. European Monetary Integration 3.2 European Monetary System (EMS) 1979-1998 Established in 1979 as the subsequent operation of the European currency snake Purposes: Launch of a fixed exchange rates regime Stability of currency (less currency risks) Boost trade between member-countries Increase of stability within all member-countries Idea of an European monetary union came up Strengthening of the international currency system Representativeness of a common currency Euro as a counter balance to the US-$ 3. European Monetary Integration 3.2 European Monetary System (EMS) 1979-1998 Member-countries: - All members of the European Union (EU) that introduced the European Exchange Rate Mechanism (ERM) Methodology: - fixed currency exchange rate margins, but variable within those margins (+/- 2,5%) - basement: ECU (European Currency Unit); a weighted average of the participating countries
3. European Monetary Integration 3.3 European Monetary System (EMS II) since 1999 Successor of the EMS: waiting room for joining the Economic and Monetary Union of the European Union Introduction of the ERM II for all European countries that where not member of the EMS at this point of time Launch of the EURO as a single European currency (national notes and coins still existed) Member-countries: 7
4. Europ. (Economic and) Monetary Union A condition of entry to the EU is to fulfill the requirements for the monetary union within a given period of time To adopt the EURO a country has to have its currency in the European Exchange Rate Mechanism II 1. Stage: - 1990: liberalization of all capital movements - 1992: treaty of Maastricht convergence criteria - 1993: treaty enters into force 4. Europ. (Economic and) Monetary Union 2. Stage - 1997: origin of the EURO and set up of ERM II Stability and growth pact - 1998: 11 countries that will participate the third stage are selected - 1998: European Central Bank (ECB) is created 3. Stage - 1999: the EURO is now a real currency fixed exchange rates - 2001: Greece joins - 2002: Coins and notes - 2007: Slovenia joins
4. Europ. (Economic and) Monetary Union 4.1 convergence criteria also known as the Maastricht criteria criteria for European member states to enter the third stage of EMU and adopt the euro Purpose: maintain price stability Criteria have to be fulfilled even after entered the EMU stability and growth pact In case of breaching one or more criteria, states are imposed a fine 4. Europ. (Economic and) Monetary Union 4.1 convergence criteria criteria: 1. Inflation rate: No more than 1.5 % points higher than the 3 bestperforming member states of the EU (based on inflation) 2. Government finance: - Annual government deficit must not exceed 3% of GDP - Gross government debt must not exceed 60% of GDP 3. Exchange rate: applicant countries have to join the ERM II for 2 executive years 4. Long-term interests: nominal long-term interest rate must not be more than 2% points higher than the 3 best-performing members
4.2 Examples member countries 2005 Inflation Interest rates Budget deficit Public deficit Belgium 2.5% 3.4% + 0.1% 93.3% Germany 1.9% 3.4% - 3.3% 67.7% Finland 0.8% 3.4% + 2.6% 41.1% France 1.9% 3.4% - 2.9% 66.8% Greece 3.5% 3.6% - 4.5% 107.5% Ireland 2.2% 3.3% + 1.0% 27.6% Italy 2.2% 3.6% - 4.1% 106.4% Luxembourg 3.8% 3.4% - 1.9% 6.2% Netherlands 1.5% 3.4% - 0.3% 52.9% Austria 2.1% 3.4% - 1.5% 62.9% Portugal 2.1% 3.4% - 6.0% 63.9% Slovenia 2.4% 2.4% -1% 29% Spain 3.4% 3.8% + 1.1% 43.2% Reference 2.5% 5.4% -3.0% 60.0% 4.2 Examples aspirant countries 2005 Inflation Interest rates Budget deficit Public deficit Denmark 2.1% 5.2% 3.6% 30.4% Slovakia 4.3% 4.3% 3.1% 34.5% Cyprus 2.0% 4.2% 1.5% 65.3% Estonia 4.3% 4.1% -2,3% 4.5% Latvia 6.7% 3.9% -0.1% 12.1% Lithuania 2.7% 3.7% 0.5% 19.7% Reference 2.5% 5.4% -3.0% 60.0%
5. Conclusion Pro: Is Euro-zone an optimum currency area? increase in stability boost in trade Euro became a successful currency with a good calling Contra: lack of homogeneity with regard to language, history, culture difficult monetary policy: problem of setting the right interest rate for both low-growth and high- growth Euro members Relative importance of total foreign trade 40 35 30 25 20 15 Import Export 10 5 0 1960 1970 1980 1990 2000 2005 EU-15: Percentage share of goods imports and exports in total GDP of member states (current prices), 1960-2005 Source: European Commission, Statistical Annex of Economy, 2006, Tables 38,39, 42,43.
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