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The Economic and Monetary Union - The Basis of European Economic…
The Economic and Monetary Union - The Basis of European Economic Integration
Beginnings of economic and monetary integration
Treaty of Rome
Monetary cooperation
of
Member States
important but not key
for
European integration
Provided
coordination of
internal/external monetary policy
Objectives
enshrined in
Articles
of
Community states
Task of Monetary Committe
coordinates
monetary policy of Member States
each state
conducts economic policy
to
ensure balance of payments
monitor policy
of
non-inflationary economic growth
look after
confidence in own currency
Provided
legal basis
for
creation of common market
Bretton Woods System
established in
July 1944
collapsed in
1971
by the end of
exchangeability of dollar for gold
by USA
Should guarantee stability
force every country
to conduct
monetary policy
exchange rates within margin of 1%
To observe/monitor
established
International Monetary Fund (IMF)
International Bank for Reconstruction and Development (IBRD)
Common Market
initial goal
lower prices of goods
easier access
improve competitiveness
remove barriers
hamper economic development
Free trade area
came into force with
Treaty establishing the European Economic Community (1958)
as consequence
better European Integration
constitutes
one pillar of the EU
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complemented with
establishment of Customs Union (1968)
with
no internal borders
Monetary Union
established in
Conference in The Hague
on
1-2 December 1969
Schools of thought
German and Netherlands school
French and Belgian
deepen cooperation between members
key role
for
economic convergence
by
medium economic programmes
coordinated by
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Council of Ministers of the European Communities (1970)
appointed
group of experts
headed by
Minister of Finance Pierre Werner
to
devise the concept
execute the monetary policy
Werner Plan
limit
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suspended in 1974
Optimum currency area
emerged in
1961
discussion on consequences
of
floating and fixed currency exchange rates
by
Robert Mundell
defined it as
region where 1+ currencies
with
exchange rates fixed to each other
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led to
development of fundamental criteria
for
countries of the common monetary area
to
constitute stable economic area
function without great disturbance
Macroeconomic cost
of
fixing the currency exchange rate
in
monetary union
is
loss of control over monetary (exchange-rate) policy
constitute an
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Important criterion
degree of openness of the economy
considerable amount of openness
to
international trade & foreign investment
creates
favourable conditions
for
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greater the degree of openness
less useful the exchange in restoring balance
greater the savings from its fixing
European Monetary System as a stage in the creation of the monetary union
created by
politicians of the EEC
using
previous mechanism for stabilising exchange rates
including
currency snake
Use
to
answer to growing fluctuations
in
exchange rates of currencies of Member States
established under
Council Regulation (EEC) No 3181/78
December 18, 1978
to be
area of stable currencies in the EEC
Main Pillars
Exchange-Rate Mechanism (ERM)
currency exchange rates
were
set between the countries
change within a set fluctuation range
no more than 2.25%
6% for weaker currencies
currency snake
European Currency Unit (ECU)
preceded by
European Unit of Account (EUA)
1975
common feature
defining their values
by
means of basket standard
international cashless currency
value
calculated on
basis of the basket of currencies of member states
reference unit
to determine
degree of fluctuation of the individual currencies
Loan mechanism
members acquired funds quickly
to
intervene in currency market
overcome difficulties in balance of payment
Single European Act - a step towards the Economic and Monetary Union
Community
officially became
European Union
in
November 1, 1993
Single European Act (SEA)
signed in
February 1986
in
Luxembourg
entered into force
July 1, 1987
first treaty
amending
treaties establishing the European Communities
provided for establishment
of
area of free movement
to
goods
services
persons
capital
Single Market
ensured
progress in
increasing convergence of the monetary policy of Member States
transfer of assets to other Member States
by
means of different types of financial instruments
Treaty of Maastricht - a new quality in monetary integration
in
1992
Major provisions
concerning
Economic and Monetary Union
stages
specification of macroeconomic criteria
later included in
Stability and Growth Pact
in
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establish
European Monetary Institute (EMI)
deepened
cooperation between independent ccentral banks of Member States
determine
Euro
new common currency
establish
framework for ERM II
is
exchange rate mechanism for no Member States
establish
legal basis
to create
European Central Bank (1998)
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Criteria
Monetary
Price stability (inflation stability)
admissible inflation rate
Interest rate
Exchange rate
Fiscal
not be subject
to
Excessive Deficit Procedure
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Ratio of government deficit to GDP
not exceed 3%
Euro area - challenges for the European Union
Euro
introduced
January 1, 1999
as
non-cash transactions
in
11 Members of EU
January 1, 2002
as
cash form
Principal Benefits
lower currency risk
and
eliminates problems
caused by
sudden fluctuation of exchange rates
eliminates costs of currency exchange
lower interest rates
resulted in
increase of GDP
lower political and currency risk for foreign investors
resulted in
increase inflow of capital
more pressure
lower unit labor costs
increase labor productivity
Risks
Inflation
from
effect of rounding up prices
higher in long term
limited sovereignty of the state
in
monetary terms
increase of real state prices
costs from adjustment to new currency
POV of citizens
eliminate
barriers to move cash between states
smooth transfer of loans in euro
comparability of prices and services
Crisis in euro area
role of ECB
became
subject of discussion
whether to extend its prerogatives
require
amending Treaty of Lisbon
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Reasons
non-observance of Maastricht criteria
several Member States (PIIGS)
conducted
irresponsible debt policies
failed to
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not the same as
crisis in euro currency
Most serious threat
to
common currency
is
differences between structures
connected with
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ECB
cannot
indulge everyone
because
conduct a policy of single interest rate
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Solution
'real convergence'
when
reduction in differences in levels of development
and
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if not
common currency
at
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Jose Manuel Barroso
is
President of the European Commission
said
principles of cooperation
enshrined in
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European System of Central Banks
Key stage for Economic and Monetary Union
transformation of EMI
to
European Central Bank (ECB)
January 1, 1999
constitutes
European System of Central Banks (ESCB)
has
General Council
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Key to Eurosystem
Main tasks
maintain
stable level of prices
implement
common monetary policy
conduct
monetary operations and foreign exchange reserves of euro
Instruments
reserve requirement ratio
open market operations
interest rates set by Bank for loans/deposits
has
own budget
seat
in
Frankfurt am Main
no influence from EU representatives
Main task
is
monetary policy and monetary stability