E uropean Common policies Prepared by Dr. Endre Domonkos (PhD)

1. European Common policiesPrepared by Dr. Endre Domonkos (PhD) 2013/2014. Academic Year, Spring Semester

2. I. The evolution of monetary integration I. • The Treaty of Rome: it did not include any provisions on the monetary integration of the Community. • Reasons: stability of the international monetary system + supremacy of the dollar and its convertibility into gold. • Hague Summit in 1969: the creation of an economic and monetary union emerged as an official goal of integration. • A special Committee (Werner group) was set up to draw up a report on how this goal might be achieved.

3. I. The evolution of monetary integration II. • It envisaged the achievement of economic and monetary union in several subsequent stages between 1971 and 1980. • Ultimate goal: irrevocable fixing of exchange rates between the currencies. • Collapse of the Bretton Woods system in 1971. • Because of the problems occurred by the floating exchange rate system in the 1970s, the Member States decided to establish a common monetary system. • European Monetary System was set up in 1979.

4. II. The European Monetary System I. • The main objective of the EMS: to create exchange rate stability within the Community. • EMS consisted of three elements: • Exchange Rate Mechanism (ERM): • European Currency Unit (ECU): • The central banks could draw on the short-term ECU credit facilities of the European Monetary Cooperation Fund.

5. II. The European Monetary System II. • Recession started at the beginning of the 1990s, which severly hampered the EMS. • Monetary crisis in 1992. • Positive elements of EMS: • Negative effects of EMS: • ECU: accounting currency between financial institutions + in trading transactions and reserve currency.

6. III. The Treaty of Maastricht and the EMU I. • The Treaty of Maastricht: the program of the monetary union + introduction of a single currency. • Denmark and the United Kingdom: opt-out by the Treaties. • The final objective of the Economic and Monetary Union (EMU) was the introduction of a single currency by 1 January 1999 the latest. • Institutional framework: European Central Bank (ECB) and the European System of Central Bank (ECB) • Realisation of EMU in three different stages.

7. III. The Treaty of Maastricht and the EMU II. • Stage one was completed by 1 January 1994. • Stage two of the EMU was launched on 1 January 1994 by the establishment of the European Monetary Institute (EMI). • Stage two had to be completed by 1 January 1999 the latest. • Stage third: it started on 1 January 1999 with the introduction of the single currency. • But it was essential fulfill the so-called Maastricht convergence criteria for those Member States that wanted to adopt the single currency.

8. III. The Treaty of Maastricht and the EMU III. • The Maastricht convergence criteria are the followings: 1. Price stability: 2. The convergence of interest rates: 3. Exchange rate stability: 4. The sustainability of the government’s financial position:

9. III. The Treaty of Maastricht and the EMU IV. • Article 126 of the TFEU: Member States were also obliged to avoid excessive government deficits. • The role of the Commission: it monitors the development of the budgetary situation + stock of government debt in the Member States in order to identify gross errors. • EC Treaty: distinction between Member States which participate in the euro area and those which have derogation. • Financial sanctions cannot be imposed on Member States with derogations.

10. IV. The EMU after Maastricht – the introduction I. • Madrid Summit in 1995: it specified which Member States could participate in the third stage + it established of ECB and appointed its Executive Board at the earliest possible time. • The Treaty of Amsterdam: adoption of the Stability and Growth Pact. • To guarantee budgetary discipline in the long-run in the Member States. • Clarifying the procedure applicable to Member States for non-compliance of the Stability and Growth Pact.

11. IV. The EMU after Maastricht – the introduction II. • Sanctions can be imposed on any Member State participating in the third stage that breaches the reference value of the deficit. • In a view of the Commission’s recommendations, on 2 May 1998 in Brussels, the Head of State or Government decided that the 11 countries may enter the third stage of EMU on 1 January 1999. • On 1 January 2001, Greece entered the third stage of the EMU. • Euro notes and coins were introduced as legal tender in 12 Member States on 1 January 2002.

12. IV. The EMU after Maastricht – the introduction III. • By 1 March 2002, national notes and coins of these countries were withdrawn from circulation. • New members in the euro area: • On 1 January 2007, Slovenia entered the euro area. • On 1 January 2008, Cyprus and Malta joined the eurozone. • On 1 January 2009, Slovakia became the member of the euro area. • On 1 January 2011, Estonia joined the euro area.

13. V. Decision-making in the field of monetary union • Decisions are adopted by the Council (consultation with the EP) acting by qualified majority, but in some cases, unanimously. • The monetary policy of Member States in the euro area is defined and implemented by the European System of Central Banks (ECB), and within that framework, mainly by the European Central Bank. • The objectives of the European System of Central Banks:

14. VI. The advantages of the single currency I. • The single currency: key element for creating a truly single market. • The complete elimination of exchange rate fluctuations and risks. • Market speculation can be avoided with the introduction of single currency. • Elimination of the transaction costs incurred by currency exchanges between the Member States.

15. VI. The advantages of the single currency II. • The prices in the Member States become easily comparable. • To encourage competition and enhance economic growth and employment in the Member States of the EU. • The importance of the euro in international economy and politics. • Monetary union also facilitates political union.

16. VII. The economic and political dimensions of the EMU I. • The EMU is both an economic and monetary union and, not just a monetary union. • The programme of the EMU: it laid down the foundations for economic union. • Economic union: coordination of economic policies + harmonisation and finally their transfer into Community competence. • Monetary policy and fiscal policy: close inter-relation.

17. VI. The economic and political dimensions of the EMU II. • Within the framework of the coordination of economic policies, the Council formulates so-called broad economic policy guidelines (BEPGs) for the Member States. • The Council also adopts employment policy guidelines. • Article 121 of the TFEU: multilateral surveillance procedure. • Economic policy coordination and BEPGs have been dominated by objectives serving the implementation of the Lisbon Strategy.

18. VI. The economic and political dimensions of the EMU III. • On 22-23 March 2005, decision was taken that the Council should adopt three-year integrated policy guidelines. • On the basis of integrated guidelines, the Member States would elaborate national reform programmes and the Commission would draw up a Community Lisbon programme. • At the end of each three-year programme, the integrated guidelines would be renewed. • The European Semester: the implementation of the Europe 2020 Strategy.

19. VI. The economic and political dimensions of the EMU IV. • Reform of the Stability and Growth Pact on 22-23 March 2005. • Take into consideration the specific economic conditions of individual countries, developments and trends in the economy + flexible approach in the case of recessions. • ECOFIN: main forum of economic policy coordination in order to outline broad economy policy guidelines to be followed by the Member States of the EU. • EuroGroup: informal forum for the reconciliation of the economic policies of the eurozone Member States.

20. VII. Monetary policy under TFEU I. • The monetary policy of Member States whose currency is the euro is an exclusive Union competence. • The TFEU introduces a number of modifications to the relevant provisions of the EC Treaty. • It established the Eurogroup in order to formalise the co-operation which already exists among the members of the euro area. • According to the TFEU, Eurogroup became an official Council formation.

21. VII. Monetary policy under TFEU II. • Modifications were introduced in the provisions governing the excessive deficit procedure on two points. • Enforcement of the role of the European Commission in the procedure. • Article 126 (5) of the TFEU: • The Council decides with qualified majority in most areas. • Exceptions:

22. VII. Monetary policy under TFEU III. • The Lisbon Treaty abolished the co-operation procedure applied in four areas of the economic and monetary union. • The establishment of detailed rules for the multilateral surveillance procedure now belongs to the area of co-ordination of economic policies and not monetary policy. • In this area ordinary legislative procedure is applied. • Expansion the scope of ordinary legislative procedure to the following two areas:

23. VIII. The current situation of the monetary union in the light of the sovereign debt crisis I. • World economic crisis in 2008. • Problems: economic downturn + raising unemployment in the eurozone. • Excessive budget deficit + raising gross government debtin the EU Member States. • The Greek financial crisis broke out, which ultimately led to the eurozone crisis. • Problems with Portugal, Spain and Ireland.

24. VIII. The current situation of the monetary union in the light of the sovereign debt crisis II. • Repair and safeguard measures – financial sector repair • The creation of European Systemic Risk Board (ESRB) for macro-prudential oversight of the financial system. • Financial assistance to Greece and later to Ireland and Portugal • The ESM: only operational from 1 July 2012. • In March 2011, the Euro+ Pact was signed by 23 Member States.

25. VIII. The current situation of the monetary union in the light of the sovereign debt crisis III. • Surveillance of economic and fiscal policies: • The main elements of the „Six-Pack”: 1. Stronger preventive action through a reinforced Stability and Growth Pact (SGP) and deeper fiscal coordination. 2. Stronger corrective action through a reinforced SGP. 3. Minimum requirements for national budgetary frameworks. 4. Preventing and correcting macroeconomic and competitiveness imbalances.

26. VIII. The current situation of the monetary union in the light of the sovereign debt crisis IV. • The signature of the ESM Treaty on 2 February 2012. • ESM: international financial institution based in Luxembourg. • The Treaty on stability, coordination and governance in the Economic and Monetary Union on was signed on 2 March 2012. • Its aims are the followings: to strengthen fiscal discipline + introduce stricter surveillance within the euro area. • Establishment of „balanced budget rule”.

27. IX. Conclusion • The introduction of the single currency: it resulted a closer cooperation between the participating Member States in every area of the economy and politics. • Monetary union plays a key role in strengthening European integration and political union. • To enforce the economic governance between the Member States, to reduce high budget deficit and gross government debt + to provide the application of the rules of Stability and Growth Pact appropriately.

28. X. Literature I. - Zoltán Horváth (2011): Handbook on the European Union, Hungarian National Assembly, Fourth Edition, Chapter 8., The economic and monetary union, Hvgorac, pp. 305-335. - Zoltán Horváth – Bálint Ódor (2010): The Union after Lisbon. The Treaty Reform of the EU, Chapter 8., The Union’s policies, pp. 295-311. - The European Commission, Economic and Financial Affairs: EU economic governance. In: http://ec.europa eu/economy_finance/economic_governance/index_en.htm Downloaded on 12 February 2012. - The European Commission, Economic and Financial Affairs: EU economic governance. In: http://ec.europa eu/economy_finance/economic_governance/index_en.htm Downloaded on 12 February 2012.

29. X. Literature II. - Council of the European Union. In:http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127736.pdf Downloaded on 12 February 2012. - Council of the European Union. European Stability Mechanism Treaty signedIn:http://www.consilium.europa.eu/homepage/showfocus?lang=en&focusID=79757 Downloaded on 12 February 2012. - European Commission, Economic and Financial affairs. Fiscal compact signed: Strengthened fiscal discipline and convergence in the euro area. In: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/128454.pdf Downloaded on 2 March 2012.