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EMU and the euro . . . (for dummies?)

The 2009 Euro Challenge | EMU and the euro . . . (for dummies?). EMU and the euro . . . (for dummies?). Presentation by Nigel Nagarajan Faculty Orientation for the 2009 Euro Challenge New York, November 25 th 2008. What are we going to cover today?. What is EMU ?

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EMU and the euro . . . (for dummies?)

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  1. The 2009 Euro Challenge | EMU and the euro . . . (for dummies?) EMU and the euro . . . (for dummies?) Presentation by Nigel Nagarajan Faculty Orientation for the 2009 Euro Challenge New York, November 25th 2008

  2. What are we going to cover today? • What is EMU? • What are the costs and benefits of having a single currency? • How is economic policy made in a monetary union?

  3. What EMU isn’t HELLO, MY NAME IS Dromaius Novaehollandiae • Sorry to disappoint you, but . . . . . . EMU is not a bird!

  4. What does EMU stand for? • Does EMU stand for: • European Monetary Union? • Or: • Economic and Monetary Union?

  5. 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?

  6. 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)

  7. Which countries are in the euro area? • Euro area:Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Spain. • EU Member States obliged to adopt the euro eventually:Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Sweden. • EU Member States with an opt out from adopting the euro: Denmark, United Kingdom.

  8. 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)

  9. 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.

  10. Massachusetts: recession Texas: boom The challenge of asymmetric shocks (1) Federal fiscal system (2) High labour mobility Fiscal transfers:  Taxes:  Real world example of a single currency area Fiscal transfers:  Taxes:  Euro area less good at coping with shocks? Asymmetric shock: oil prices . Affects Texas and Massachusetts differently.

  11. Economic policy in EMU Single monetary policy set by the ECB Fiscal and other policies set by Member States (but subject to common rules)

  12. Economic policy making - the euro area and the US Eurogroup Finance Ministers Monetary policy ECB President Jean-Claude Trichet Federal Reserve Chairman Ben S. Bernanke Fiscal policy Treasury Secretary Henry M. Paulson Economic policy co-ordination more difficult?

  13. 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) • How will the euro area cope with its first recession? • Can you have a monetary union without a complete economic union? Without a political union?

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