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Euro

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    • 1. EMU, the Euro, and the Current Economic Situation in the Euro Area Presentation by BABASAB PATIL
    • 2. What are we going to cover?
      • The Euro: how did we get there?
      • What is EMU ?
      • What are the costs and benefits of having a single currency ? Benefits of EU versus euro membership?
      • How is economic policy made in a monetary union?
      • What is the current economic situation in the Euro Area?
      • How should Europe deal with the current economic and financial crisis ? And what does the crisis mean for EMU ?
    • 3. A Brief History of European Economic Integration
      • The original goal behind the integration of Europe was to prevent the devastating wars of the first half of the twentieth century from ever happening again…
      • Dresden, Germany, 1945.
    • 4. A Brief History of European Economic Integration
      • Political end by (mainly) economic means
        • European Coal and Steel Community 1951; European Economic Community 1957 (Treaty of Rome)
        • Customs Union (1968): Free trade area + common external tariff
        • Single (or Internal) Market (launched 1986, “completed” in1992): breakdown of all tariff and non-tariff barriers to trade and business
        • Single currency (approved1993 Maastricht Treaty, euro launched 1999, notes and coins 2002): eliminated exchange rate transaction costs and risk
    • 5. A Brief History of European Economic Integration
      • The euro was already envisaged as a goal back at the start of European integration in 1950s
      • It was always seen as the “next logical step” after the single market
      • The idea gained academic attention through the work of economist like Robert Mundell (“Optimal Currency Areas”)
      • Break-up of the gold standard in the 1970s led to creation of the forerunners of the euro, European Monetary System (EMS) and Exchange Rate Mechanism (ERM)
      • German reunification (1990) and currency crisis of 1992 as catalysts for push toward the euro leading to Maastricht Treaty in 1992/93?
    • 6. What is EMU?
    • 7. What does EMU stand for?
      • Does EMU stand for:
      • European Monetary Union?
      • Or:
      • Economic and Monetary Union?
    • 8. EMU vs. the euro area
      • EMU is a Treaty objective shared by all 27 EU Member States
      • The euro is a reality for 16 Member States (“the euro area”)
      • What about the “E” in EMU?
    • 9. What are the three parts of EMU? 1) The euro – countries give up their own currency when they join the euro area. The ECB sets interest rates for the euro area (16) 2) The single market – all countries participate in the single market, with free movement of goods, services, capital and people (27) 3) Enhanced policy coordination – countries retain sovereignty over other economic policies but commit to coordinate more closely at the European level (27/16)
    • 10. Which countries are in the euro area?
      • Euro area: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain.
      • EU Member States obliged to adopt the euro eventually: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Sweden.
      • EU Member States with an opt out from adopting the euro: Denmark, United Kingdom.
    • 11. How does a country join the euro?
      • A Member State must fulfill the “convergence criteria” laid down by the Maastricht Treaty:
      • Low inflation
      • Low interest rates
      • Low government deficit
      • Low government debt
      • Stable exchange rate (ERM II)
    • 12. What are the benefits of the euro? And the costs?
      • CITIZENS benefit from greater price transparency , which should stimulate competition and reduce prices and from the elimination of currency exchange costs
      • For BUSINESSES it is easier to make investment decisions (no exchange rate risk )
      • The ECONOMY benefits from price stability , and lack of exchange rate risk
      Countries that adopt the euro can no longer change their INTEREST RATE or their EXCHANGE RATE. In a monetary union, you cannot have an INDEPENDENT MONETARY POLICY.
    • 13. The benefits of EU membership – the single market
      • Larger market -> more competition
      • More competition -> more choice , lower prices for consumers
      • More competition -> promotes efficiency
      • Larger market -> firms can exploit economies of scale
    • 14. The single market – economies of scale
      • Larger firms enjoy cost advantages over smaller firms (e.g. purchasing, marketing)
      • EU firms can produce for a market of 500m consumers
      • And pass on lower costs to consumers
      • This should encourage economic efficiency and stimulate economic growth
    • 15. The euro and the single market
      • The euro eliminates currency transactions costs
      • Leads to greater price transparency -> price convergence
      • Eliminates exchange rate uncertainty -> stimulates investment
      • Euro leads to increased trade and investment flows
      “ One market, one money”
    • 16. Economic policy in EMU Single monetary policy set by the ECB Fiscal and other policies set by Member States (but subject to common rules)
    • 17. Economic policy making - the euro area and the US Monetary policy Federal Reserve Chairman Ben S. Bernanke ECB President Jean-Claude Trichet Fiscal policy Treasury Secretary Timothy Geithner Economic policy co-ordination more difficult? Eurogroup Finance Ministers
    • 18. 2009: Happy 10 th Birthday, euro!
      • The euro has helped to bring Europeans together
      • It has fostered greater economic integration (reinforcing the Single Market)
      • It has contributed to macroeconomic stability (e.g. lower inflation)
      • But now the euro area is confronted by a very dire economic situation
    • 19. The Euro Area Economic Situation: Not Good! Source: European Commission Spring Forecast May 2009 Real annual % change unless otherwise stated 2008 2009 2010 Real GDP growth 0.8 -4.0 -0.1 Inflation 3.3 0.4 1.2 Unemployment rate (percentage of labor force) 7.5 9.9 11.5
    • 20. Why is the euro area so affected?
      • US and euro area economies are closely connected
      • Many European banks bought securities tied to US subprime loans
      • German exports have fallen sharply
      • Spanish and Irish housing bubbles have burst
      • Euro area economy is less flexible, has lower productivity growth
      • Exposure to Eastern Europe?
      “ Toto, I don’t think we’re in Kansas anymore”
    • 21. Europe’s response to the crisis The ECB reduces interest rates to historically low levels (1.25%) and begun “quantitative easing” Dec 08: EU governments adopt European Economic Recovery Plan - a coordinated fiscal stimulus Oct 08: euro area governments adopt concerted action plan to support their financial systems
    • 22. The financial crisis: Other ways Europe should respond? Speed up economic reforms (Lisbon Strategy) http://ec.europa.eu/growthandjobs/index_en.htm Make the single market work better (especially for Services)
    • 23. EMU and the financial crisis
      • Crisis exposes persistent divergences in the euro area
      • “ One size fits all monetary policy” problematic?
      • Countries need to use fiscal stimulus, just as in US
      • But difficult to coordinate fiscal response of 16 Member States
      • Break-up of EMU?
    • 24. Conclusions
      • The launch of the euro was a tremendous achievement for the EU
      • But EMU is still a work in progress (especially for the “E” part)
      • The euro area is in its first recession; how will it cope ?
      • Will the crisis lead to further divergence in EMU, or will it encourage countries to speed up reforms ?
      • Can you have a monetary union without a complete economic union ? Political union ?