1 / 23

CHAPTER 7. MONETARY INTEGRATION

CHAPTER 7. MONETARY INTEGRATION. TABLE OF CONTENTS INTRODUCTION DEFINITIONS AND MOTIVATIONS THE ORIGINAL ROME TREATY THE EMU EXPERIMENT ECONOMISTS VERSUS MONETARISTS THE EUROPEAN MONETARY SYSTEM (EMS) THE EUROPEAN CURRENCY UNIT (ECU) CONVERGENCE AND ASSESSMENT. 1. INTRODUCTION.

lamis
Download Presentation

CHAPTER 7. MONETARY INTEGRATION

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 7. MONETARY INTEGRATION TABLE OF CONTENTS • INTRODUCTION • DEFINITIONS AND MOTIVATIONS • THE ORIGINAL ROME TREATY • THE EMU EXPERIMENT • ECONOMISTS VERSUS MONETARISTS • THE EUROPEAN MONETARY SYSTEM (EMS) • THE EUROPEAN CURRENCY UNIT (ECU) • CONVERGENCE AND ASSESSMENT

  2. 1. INTRODUCTION • ROME TREATY DOES NOT PREVENT MEMBER STATES TO PROCEED UP TO THE “ECONOMIC AND MONETARY UNION” LEVEL OF ECONOMIC INTEGRATION. • ONCE YOU ARE ON THE ROAD OF ECONOMIC INTEGRATION IT IS DIFFICULT TO STOP.

  3. 2. DEFINITIONS AND MOTIVATIONS • ECONOMIC UNION IS AN ECONOMIC INTEGRATION WHERE MEMBER STATES BECOME REGIONS OF A BIGGER STATE • MONETARY UNION IS THE ULTIMATE LEVEL OF ECONOMIC INTEGRATION. IT HAS FULL CONVERTIBILITY, FIXED EXCH. RATES, EVEN A SINGLE CURRENCY • MAASTRICHT AGREEMENT IN 1992 CHANGED THE ROME TREATY FOR THE SECOND TIME TO INCLUDE THE MONETARY UNION

  4. 2. DEFINITIONS AND MOTIVATIONS (CONT.) • FIVE ESSENTIAL ELEMENT OF MONETARY UNION • FREE MOVEMENT OF GOODS AND SERVICES AMONG MEMBER STATES • COMMON TRADE POLICY IN TRADE WITH NON-MEMBER STATES 3. FREE MOVEMENT OF LABOR AND CAPITAL 4. FULLY CONVERTIBLE AND FIXED EXCHANGE RATES 5. ECONOMIC POLICIES TO BE COORDINATED 6. INTER-REGIONAL TRANSFERS

  5. 2. DEFINITIONS AND MOTIVATIONS (CONT.) • MAIN MOTIVATIONS FOR MONETARY UNION 1. BENEFITS OF FIXED EXCHANGE RATES 2. BETTER ALLOCATION OF RECOURSES 3. SINGLE CURRENCY WILL ELIMINATE THE COST OF TRANSACTIONS 4. IF UNION CURRENCY BECOMES AN INTER- NATIONAL ASSET, FURTHER BENEFITS 5. BETTER CONTROL OVER AGGREGATE DEMAND 6. UNION BUDGET WILL ELIMINATE INSTABILITIES IN MEMBER STATES

  6. 2. DEFINITIONS AND MOTIVATIONS (CONT.) • TWO MAIN DISCOURAGING FACTORS 1. FIXED EXCHANGE RATES WILL ELIMINATE THE USE OF EXCHANGE RATE POLICIES AS A TOOL TO SOLVE B.O.P. PROBLEMS 2. THEY WILL SACRIFICE THEIR SOVEREIGNTY

  7. 3. THE ORIGINAL ROME TREATY • ROME TREATY CONTAINS ARTICLES RELATED TO COORDINATION OF MACROECONOMIC POLICIES • ART. 103: MEMBER STATES SHOULD CONSULT TO THE MEMBERS AND TO THE COMMISSION • ART. 105: CALLS MEMBERS TO COORDINATE THEIR MACRO ECONOMIC POLICIES

  8. 3. THE ORIGINAL ROME TREATY (CONT.) • ART. 106: ASKS MEMBERS TO REMOVE THE EXCHANGE RATE CONTROLS • ART. 103 AND ART 109: MEMBER STATES ARE REQUESTED TO CONSULT TO THE COMMISSION BEFORE THEY TAKE PROTECTIVE MEASURES • CONSULTATION AND COORDINATION SHOULD NOT BE EXAGGERATED. IT IS MORE OF CONSULTATION RATHER THAN COORDINATION

  9. 3. THE ORIGINAL ROME TREATY (CONT.) • TRANSITION (1958 – 1968) WAS A SUCCESS. EMU WAS NOT POSSIBLE IN THIS PERIOD BECAUSE: 1. MEMBERS WERE BUSY IN STRUCTURING THE EU i.e. MAJORITY VOTING SYSTEM 2. FRENCH WAS BUSY TO KEEP UK OUTSIDE THE EU 3. PROBLEM OF AGRICULTURAL SURPLUSES i.e. BUTTER MOUNTAINS, WINE LAKES 4. AGRICULTURAL MYTHOLOGY

  10. 4. THE EMU EXPERIMENT (1968 – 1977) • MOTIVATIONS 1. TO MAKE THE ACHIEVEMENTS OF EC SECURE 2. NATIONAL INTEREST IS BEST MET WITH EMU 3. POLITICAL MATTERS • HAUGE SUMMIT (1969) DECIDED THAT THE COMMUNITY SHOULD WORK TO CREATE EMU • BARRE PLAN : 1. COMPULSORY CONSULTATION 2. AUTHORIZE CENTRAL BANKS FOR SHORT TERM SUPPORT

  11. 5. ECONOMISTS VERSUS MONETARISTS • THEY DIFFER IN THE ULTIMATE FORM OF THE EMU AND ALSO IN THE WAY TO ACHIEVE IT • ECONOMIST SCHOOL SUPPORTED BY GERMANS • MONETARIST SCHOOL BY FRENCH, LUXEMBURG, BELGIUM • BASIC DIFFERENCE BETWEEN THE TWO SCHOOL 1. MONETARIST SCHOOL: LOCK THE EXCHANGE RATES i.e. HAVE FIXED EXCH. RATES RIGHT AWAY. IT WILL BRING MONETARY DISCIPLINE 2. ECONOMIST SCHOOL: CONVERGENCE OF THE ECONOMIC PERFORMANCES i.e. GROWTH RATE, INFLATION etc. BEFORE ANY STEPS TO TAKE

  12. 5. ECONOMISTS VERSUS MONETARISTS (CONT.) • MAIN STEPS OF ECONOMISTS TO ACHIEVE EMU 1. A BASE FOR COORDINATION OF MACROECONOMIC POLICIES 2. MORE BALANCED GROWTH RATES 3. MORE SUPRA NATIONAL ELEMENTS 4. A CENTRALIZED AUTHORITY ON FINANCIAL AND ECONOMIC MATTERS

  13. 5. ECONOMISTS VERSUS MONETARISTS (CONT.) • AT THE END OF THESE STAGES THERE WILL BE: 1. A SYSTEM OF SUPRA-NATIONAL CONTROL 2. FIXED EXCHANGE RATES 3. SINGLE EUROPEAN CURRENCY 4. A COMMITTEE OF EUROPEAN CENTRAL BANK GOVERNORS. EUROPEAN COUNCIL OF CENTRAL BANKS

  14. 5. ECONOMISTS VERSUS MONETARISTS (CONT.) • ALL THE EFFORTS FAILED (1968 - 1977) BECAUSE: 1. INTERNATIONAL MONETARY SYSTEM WAS VERY UNSETTLED. OIL CRISES AGGRAVATED THIS. 2. IMPORTANCE OF COORDINATING THE MACRO-ECONOMIC POLICIES WAS UNDERESTIMATED.

  15. 6. THE EUROPEAN MONETARY SYSTEM (EMS) • IT HAS THREE BASIC COMPONENTS: 1. THE EUROPEAN CURRENCY UNIT (ECU) 2. THE EXCHANGE RATE MECHANISM (ERM) 3. EUROPEAN MONETARY COOPERATION FUND • ATTEMPTS IN (1957 - 1968) AND IN (1968 – 1977) TO ACHIEVE EMU FAILED. NOW A MODEST ATTEMPT OF HAVING EMS.

  16. 6. THE EUROPEAN MONETARY SYSTEM (EMS) (CONT.) • THE MAIN MOTIVATIONS 1. DISSATISFACTION WITH THE FLOATING EXCHANGE RATES 2. EXPECTED BENEFITS OF FIXED EXCHANGE RATES 3. FLEXIBLE EXCHANGE RATES WERE SUBJECTED TO OVERSHOOTING

  17. 7. THE EUROPEAN CURRENCY UNIT (ECU) • SIX INITIALLY ADOPTED “UNIT OF ACCOUNT” • IT HAD A GOLD CONTENT EQUAL TO US $ • FOLLOWED BY “EUROPEAN UNIT OF ACCOUNT” • IT WAS A COMPOSITE CURRENCY • IN 1979 ECU WAS INTRODUCED WITH EMS. IT IS ONE OF THE ESSENTIAL ELEMENTS OF EMS. • THREE AREAS OF USE (ROLES) OF ECU: 1. DENOMINATOR IN COMMUNITY TRANSACTIONS 2. DENOMINATOR IN EXC. RATE MECHANISM 3. USE IN PRIVATE TRANSACTIONS

  18. 7. THE EUROPEAN CURRENCY UNIT (ECU) (CONT.) • ECU IS A COMPOSITE CURRENCY. CONTRIBUTION OF EACH MEMBER IS DETERMINED BY ITS: 1. SHARE IN THE TOTAL COMMUNITY GNP 2. SHARE IN THE TOTAL COMMUNITY EXPORTS • SIZE (POPULATION / GEOGRAPHICAL) • 1 ECU = 2 DM • 1 ECU = 100 LIRET • 1 ECU = 5 Fr 1 DM = 50 LIRET = 2.5 Fr

  19. 7. THE EUROPEAN CURRENCY UNIT (ECU) (CONT.) THE EXCHANGE RATE MECHANISM (ERM) • AT THE BEGINNING 8 COUNTRIES PARTICIPATED IN THE ERM. UK, GREECE, PORTUGAL, SPAIN STAYED OUTSIDE • ONCE THE EXCHANGE RATES ARE FIXED, IT STAYS UNTIL ANOTHER COLLECTIVE DECISION • ITALY WAS ALLOWED TO FLUCTUATE ITS CURRENCY UP TO 6%, OTHERS 2.5 % WITHOUT THE APPROVAL OF PARTICIPATING MEMBERS • DEVALUATIONS AND REVALUATIONS WERE NO MORE UNILATERAL • THE SYSTEM WAS NOT AS RIGID AS IT LOOKED • RICH COUNTRIES HELPED TO RELATIVELY POOR i.e. IRELAND AND ITALY BUT NOT UK

  20. 7. THE EUROPEAN CURRENCY UNIT (ECU) (CONT.) EUROPEAN MONETARY COOPERATION FUND • TO SUPPORT CURRENCIES FINANCING WAS ESSENTIAL • ULTIMATE AIM IS TO CREATE EUROPEAN MONETARY FUND (EMF) • UNTIL THEN, EUROPEAN MONETARY COOPERATION FUND (EMCF) WOULD PROVIDE THE FINANCING

  21. 8. CONVERGENCE AND ASSESSMENT • MEMBER STATES AGREED IN THE IMPORTANCE OF THE CONVERGENCE OF THE MACRO-ECONOMIC POLICIES. • CONVERGENCE WAS ESSENTIAL IN IMPLEMENTATION OF THE MACRO-ECONOMIC POLICIES. • SINGLE EUROPEAN ACT (1987) WAS A STEP IN THE RIGHT DIRECTION. IT ASKS CONVERGENCE.

  22. 8. CONVERGENCE AND ASSESSMENT (CONT.) ASSESSMENT OF THE EMS (1979 – 1989) 1. 11 RE-ALIGNMENTS TOOK PLACE. SO MANY RE-ALIGNMENTS SHOWED THE DIVERGENCE IN THE ECONOMIES (THOSE WITH LOWER RATE OF INFLATION REVALUATED AND THOSE WITH HIGHER DEVALUATED) INFLATION DEVALUATED THEIR CURRENCIES 2. EXTERNAL FACTORS WERE AFFECTING THE STABILITY OF THE ECU (US $, DM, ECU). 3. INTERNAL FACTORS WERE ALSO AFFECTING THE STABILITY OF THE ECU (FRENCH STRIKE). 4. RECENT OBSERVATION SHOWED CONVERGENCE IN THE ECONOMIC PERFORMANCES. ECONOMIC GAP WAS NARROWING.

  23. 8. CONVERGENCE AND ASSESSMENT (CONT.) RECENT DEVELOPMENTS • EUROPEAN CENTRAL BANK IS ESTABLISHED IN MID-1998. • THIRD STAGE OF EMU STARTED ON 1 JAN. 1999. • EURO AND LOCAL CURRENCY WILL BE USED TOGETHER DURING 1 JAN. 2002 – 1 JULY 2002. • AFTER 1 JULY 2002, EURO WILL BE THE SINGLE CURRENCY IN EUROPE. • EXCHANGE RATES OF 11 COUNTRIES WERE FIXED IN MAY 1998, RATHER THAN IN JAN. 1999. • UK, SWEDEN, DENMARK, GREECE ARE OUTSIDE THE EUROLAND.

More Related