International eco: International financial institutions, Bretton woods institutions Lect 20 part 4
Excursus-costs and benefits of the EMU
Facts:
1. No empirical study on the benefits of the Euro exist;
2. still, arguments in favor of the Euro:
appreciation of domestic currency would increase price of domestic goods on world markets –
less exports
monetary integration leads to political integration
Euro leads to more trade (less transaction costs) and more trade leads to more growth
What are the costs of having the Euro?
HOWEVER
intra–European trade has not increased relative to extra–European trade;
how important are transaction costs?
fixed exchange rate regime also before introduction of the Euro;
appreciation of domestic currency would make imports cheaper and would force domestic firms to become more productive
exchange rates not determined by market forces, fixed at level of 1
who pays for having artificially low/high exchange rate? Consumers (imports overly expensive) and workers (low real wages); weak countries would benefit from flexible exchange rates
EU countries outside EMU have not performed worse in last decade
higher inflation: real value of debt in debtor countries decreases, but real wealth in creditor countries decreases
Bretton Woods Institutions
IMF: assists international cooperation within the fields of monetary and exchange rate policy, short–term credits for international payments
World Bank:
support for economic development and poverty reduction
International Monetary Fund (IMF) and World Bank:
designed during Bretton Woods conference 1944
IMF and World Bank institutions within the UN system
managed by 184 member states of the UN
joint objective: increasing the standard of living of all member states
Bretton Woods Institutions cont.
future challenges of IMF and World Bank:
3. increasing debt burden of developing countries – decreases governmental capacity to act
4. population growth and urbanization – ceteris paribus less food per capita, especially in developing world
2. increasing importance of private financial capital as international source of finance – importance of IMF and World Bank decreases
1. increasing globalization and increasing integration of emerging markets and developing countries into the world economy: adjustment of rules on voting power?
Bretton Woods Institutions cont.
Bretton Woods institutions are managed by governments of member states:
could be that countries follow particular interests instead of following interests of developing countries (e.g., larger voting power of IL);
problems (from perspective of developing countries) of Bretton Woods institutions: