STEPS TO INTEGRATION

1. STEPS TO INTEGRATION • FREE TRADE AREA    -  free movement of goods and services • CUSTOMS UNION - free movement of goods and services and factors of production- common external tariff (and policies) • COMMON MARKET     - customs union + common policies e.g. taxation, transport, social etc. • ECONOMIC INTEGRATION     - common market + centralised control of monetary and fiscal policies  (EMU) • POLITICAL INTEGRATION • EMU + other common policies e.g. democratic institutions, defence policy etc.

2. BARRIERS TO INTEGRATION • FRAGMENTATION OF MARKET - physical frontiers - technical restrictions - differing tax regimes - non-tariff barriers - public purchasing policies • FINANCIAL RESTRICTIONS - barriers on capital movements - exchange controls - exchange rate instability - lack of harmonisation of financial market - differing bank regulations • SOCIAL- differing levels of development - special problems

3. EXCHANGE RATES • Fixed - absolutely fixed - adjustable pegs - crawling pegs • Floating - pure - managed • Basket of Currencies • - composite mix of currencies - examples

4. FIXED RATES • Advantages - creates more certain environment for trade - reduces speculation • Disadvantages - creates strains in terms of managing Balance of Payments - not in keeping with market approach - can lead to instability and damaging devaluations (and revaluations)

5. FLOATING RATES • Advantages - automatic adjustment of Balance of Payments - freedom to choose domestic policies - consistent with free market approach • Disadvantages - exchange rate instability - reduce international trade

6. EXCHANGE RATES (con) • Factors determining exchange rates - demand for exports and imports- inflationary pressures- changes in interest rates- speculation- political factors • Intervention on Foreign Markets - using reserves- borrowing abroad- raising interest rates- deflationary policy- supply-side policies- controls on imports

7. FIRST EMU EXPERIMENT • Background • 1970 - Werner Report • Economists v Monetarists • 1972 - The Snake Agreement • 1973 - Setting up of EMCF • Breakdown of system • Setting up of EMS

8. EUROPEAN MONETARY SYSTEM (EMS) EMS comprised three elements • ECU (EUROPEAN CURRENCY UNIT) • ERM (EXCHANGE RATE MECHANISM) • EMCF (EUROPEAN MONETARY COOPERATION FUND) EMS WAS A PRECURSOR OF ECONOMIC AND MONETARY UNION

9. EUROPEAN CURRENCY UNIT (ECU) • ECU was a composite currency made up of a basket of member countries • USES - Used as denominator of community transactions - All currencies in ERM linked to ECU - Used in supporting currencies - Had considerable value as a private asset - Servedas basis for single European currency

10. EXCHANGE RATE MECHANISM (ERM) • Cornerstone of EMS - Fixed exchange rate system with both adjustable and crawling pegs • Problems - not all member countries participated in system - currency bands were far too wide(after ’92) - system not able to deal with currency pressures in 92 and '93 - in some respects present ERM did work effectively - had very important consequences for Ireland

11. EXCHANGE RATE CRISIS 92-93 • Causes - rigidity in system - poor response to Maastricht - doubts about monetary union - abolition of exchange controls - nature of the way the system worked - lack of willingness to support currencies • Irish Experience - reasons for crisis - efforts to support currency - effects of attempted support

12. EUROPEAN MONETARY COOPERATION FUND (EMCF) • Founded in 1974 - On joining members submitted 20% of gold and foreign reserves in return for ECU's • Funds were used for settling transactions - very short-term lending facilities - short-term loans - medium-term loans - functions transferred to EMI in 1994