EMU Lecture Notes PDF

Lecture Economic and Monetary Union !"#$%&'()$*("&+$$,  Stages of Economic Integration Free trade area (FTA) – Reduces tariffs to zero between members. Customs union – Reduces tariffs to zero between members and establishes a common exte...

Lecture Economic and Monetary Union !"#$%&'()$*("&+$$,  Stages of Economic Integration Free trade area (FTA) – Reduces tariffs to zero between members. Customs union – Reduces tariffs to zero between members and establishes a common external tariff. Single market – Establishes a free flow of factors of production (labour and capital, as well as goods and services). Economic (and monetary) union – Involves an agreement to harmonise economic policies. Political union – Involves a common government. !"#$%&'()$*("&+$$- !"#$%&'()$*("&+$$.  The Single Market The Treaty of Rome,1957 – An “ever closer union” among the peoples of Europe; – Sought to establish a customs union first, and a single market in time. The Single European Act, 1986 – Sought to establish a single market by 1992 Four freedoms: free circulation of goods, services, labour, and capital. – 1985 Delors Commission – 1988 Cecchini report: ‘The Cost of Non-Europe’ The report examined the costs and benefits of an EU common market. Negative integration measures – Eradicate all physical, fiscal and technical barriers to trade. Positive integration measures – Common standards: basic social, environmental, etc. rights and standards. Equalling out a level playing field for the economic factors. !"#$%&'()$*("&+$$/  Cassis de Dijon In 1979, the European Court of Justice ruled on the Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein case, or Cassis de Dijon. Considered a landmark case for the European Single Market. It set the principle of mutual recognition: an economic product sold in one member state should not be prohibited from sale anywhere in the EU. – However, exceptions can be made in cases of public health and safety. !"#$%&'()$*("&+$$0  Key Rulings for EU Law In 1963, the European Court of Justice ruled on the Van Gend en Loos v Nederlandse Administratie der Belastingen case, or Van Gend en Loos. – The ruling was of vital importance to the development of EU law. – It set the principle of direct effect by which provisions of EU law are to be enforced in national courts, and which imposes obligations on those against whom they are enforced. In 1964, the European Court of Justice ruled on the Flaminio Costa v ENEL case, or Costa v ENEL. – This ruling, is considered crucial in the development of EU law. – It set the principle of primacy of EU law which determines that in a conflict of EU law and Member State law, EU law prevails over Member State law. !"#$%&'()$*("&+$$1  The Eurosystem Fixed exchange rate system until 1973 under the Bretton Woods system. – Snake inside the tunnel: Each EC currency pegged against the other and the USD – Snake outside the tunnel: the USD is out of the picture, only pegged against each other. – Fluctuation rate +/-2.25. – European Currency Unit as a banking currency. !"#$%&'()$*("&+$$2 !"#$$%&'()$&%'*%'"$%+,- 1990 - 1993 Free movement of capital among Member States Closer cooperation of economic policies Closer cooperation central banks 1994 - 1998 Compliance with Maastricht convergence criteria Since 1999 European Central Bank (ECB) established Exchange rates are fixed Introduction of a single currency The political agenda of the time was to use the Maastricht plan to contain Germany after the end of the Cold War and German reunification. !"#$%&'()$*("&+$$3  Maastricht Convergence Criteria What is Inflation Budget Public debt Interest rate Exchange rate measured deficit stability How it is Consumer price Budget deficit Public debt as Long-term interest Deviation from measured inflation rate as % of GDP % of GDP rate a central rate Convergence Not more than Reference Reference Not more than 2 Participation in criteria 1.5 percentage value: not value: not percentage points ERM II for at points above the more than 3% more than above the rate of least 2 years rate of the three 60% the three best without severe best performing performing tensions Member States Member States in terms of price stability !"#$%&'()$*("&+$$4 !"#$%&'()$*("&+$$,5  Stability and Growth Pact 1997 Agreed upon in 1997, the Stability and Growth Pact (SGP) aims to ensure that member states continue their budgetary discipline efforts even after introducing the Euro. – Medium-term budgetary objective of positions close to balance or in surplus. The SGP involves multilateral budgetary surveillance and a deficit limit, the excessive deficit procedure (EDP). – Financial penalties in countries in excessive deficits; – Fear of high public debt; – Especially German fear that the Euro will be a weak currency, otherwise; – Fear of the ECB having to purchase government debt; – No bailout clause, governments will not take on each other’s debts. !"#$%&'()$*("&+$$,,  Theory: Optimum Currency Area An optimum currency area (OCA) is an area that is economically closely linked by trade in goods and services and factor mobility (capital and labour), that also will increase further intra-EU trade. – Countries should adopt a single currency only when they have mechanisms in place that can deal with transfer payments if one part of the currency union is affected by an economic downturn and the other part is not. – And when they no longer need the exchange rate instrument to make those adjustments. Thus, an OCA requires: – High factor mobility and similar economic structure. Consider: EU North-South economic structure difference – Fiscal federalism, ability to transfer economic resources from wealthy areas to those suffering setbacks. The Euro was hoping for closer fiscal cooperation. – Banking union. !"#$%&'()$*("&+$$,-  EU’s Economic Leverages The EU has three powers when it comes to economic leverage: I. Regulatory powers: facilitating market integration and liberalisation, while at the same time setting common standards — for health, environment and workers rights — and ensuring an even playing field between rival producers in the same industry (anti-trust regulations, merger controls, regulations of state aid, dumping ban). II. Redistributive powers: agricultural funds, cohesion funds, structural funds available through. III. Expenditure powers: by having an own budget (VAT, agricultural levies, customs duties and Gross National Product based own resources). But no fiscal union in which member states cover each other’s debts. !"#$%&'()$*("&+$$,.  Eurozone Crisis Greece’s financial crisis followed by those in other member states from 2009 on New institutions were created: – European Financial Stability Facility (EFSF) – European Stability Mechanism (ESM) Changes to rules of Stability and Growth Pact (Fiscal Compact): – The importance of deficit and debt was reinforced. – The role of European Commission was strengthened to supervise governments on public finances The Banking Union was to strengthen regulation of banking sector and centralised supervision of banks in Eurozone, through the ECB. !"#$%&'()$*("&+$$,/  Corona rescue package: Next generation EU Europe must come out of the Corona crisis stronger. Stimulus package for European economy to become stronger and more innovative. No member states should be facing the Corona crisis alone. A new solidarity mechanism Joint indebtedness on global financial markets European Union will go into depth in the global financial markets with joint bonds issued by the Commission, the European Central Bank (ECB) and European Investment Bank (EIB). 750 billion euro 386 billion in loans (needs to be paid back); 364 billion in grants (not to be paid back) The money will be used by member states, regions, and entrepreneurs Spending plans to be controlled by the European Commission and open to peer control. !"#$%&'()$*("&+$$,0  The next turn in the Single Market: European Green Deal and the digital single market Digitalisation of the single market to retain global competitiveness. Corona impact: rescue fund to be used for digital, innovative and green business. (Also online businesses do not close during lockdown.) European Green Deal launched late 2019. Climate targets merged into the single market. by 2050 to become first climate neutral/ net zero emission continent. 2 main tools: Regulatory tools (EU law) & financial instruments (incentives or taxation) Updated by 2030 target: to raise the 2030 greenhouse gas emission reduction target, including emissions and removals, to at least 55% compared to 1990 levels (fit for 55) and 90% reductions by 2040. Almost impossible while preserving the environment (and due to strong political opposition), now renamed ‘clean, just and competitive transition’. !"#$%&'()$*("&+$$,1