Transcript Lecture 6

Is it easier to join EU or EMU? Why?
Are the Criteria Good?
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Today’s Agenda
 EU enlargement
- Benefits and costs for new members
- Benefits and costs for old members
 EMU enlargement
- Benefits and costs for new members
• When should they join?
- Benefits and costs for old members
 Euro crisis and the future of EU
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EU Enlargement
 Several enlargements over the history of
EEC/EC/EU
- The ones in 2004 and 2007 different from
previous
• GDP/capita much lower in the new countries
• Large number of countries at once
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Benefits for New Members
 Credibility, attractiveness
- EU membership signals political and economic
stability
- More foreign investments
• technology diffusion
- Subsidies from EU budget
 Better opportunities for trade
- Technical barriers removed (free trade
agreement already before membership, though)
- Competition and scale effects
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Costs for New Members
 Transitional costs
- Conforming to EU rules
 Currency appreciation
- Demand for domestic currency increases
• Decreased exports
 Increased inflation
- Price level well below EU15
- Productivity (and wage) increases in export
sector
• Wage increase demands in other industries as
well (”Baumol’s disease)
 ”Dependence” from foreign investments
- Deep recession in 2008-2009 when investments
stopped
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Benefits for Old Members
 New markets, more trade
 More labor (to compensate the now retiring baby
boomers)
 Uniting Europe
- Political stability
 More political power globally?
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Costs for Old Members
 Potential unemployment
- Migration, firm relocation
 Pay more, receive less from the budget
 Reduced decision-making power
- As more countries join, the weight of any one
country in the DM process is diminished
 Institutional and administrative issues
- Voting schemes, official languages, etc.
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What has happened since 2004?
 Economic growth in the new members was strong
until late 2008; since then big problems
 Migration has not been a huge problem
- More migration from outside EU
- Some countries apply restrictions
 Some problems with Romania and Bulgaria
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Next Enlargements?
 Croatia, Turkey and Iceland officially candidate
countries
- Turkey’s membership debated a lot
 Macedonia submitted an application
 Others yet to come (Bosnia, Serbia, Kosovo, etc.)
 Similar issues apply to the forthcoming
enlargements as with the previous ones
- ”enlargement fatigue”
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EMU Enlargement
 All new EU members are required to join EMU at
some point
- Only UK, Denmark (and Sweden) have the option
to stay out
 The question is then, when can the EU countries
join EMU, and when should they do it
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Cost and Benefits of EMU
Enlargement
 The costs and benefits of EMU membership are
essentially the same as discussed in sessions 1 and
2
- larger union more likely to experience
asymmetric shocks
- The weight of one country in ECB’s decisions
grows smaller
• New voting rule of ECB council
 In addition, the transition to EMU can create
problems for the new members!
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Catching Up
 The EU12 are in a catching-up phase
- Productivity and price level behind EU15
 Increased trade increases productivity and
prices in the export sector
- Wage increases in all sectors  inflation
- Real currency appreciation due to inflation
• Trouble for export industries
 More foreign investments  nominal currency
appreciation
- Trouble for export industries, increased imports
 Leads to trouble with the Maastricht criteria!
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Convergence Criteria Once More





Public debt <60% of GDP
Budget deficit <3% of GDP
Long term interest rates
Inflation
Membership in ERM II
Based on
previous analysis,
we should expect
trouble here
 Compatibility of national legislation to that of EMU
treaties
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Convergence Criteria in 2014 (figures from
2013)
Price
Budget
Stability
deficit (%
(inflation) of GDP)
Debt (% of
GDP)
ERM II
Long term
interest
rate
Bulgaria
-0,8
-1,5
18,9
No
3,5
Czech Rep.
0,9
-1,5
46,0
No
2,2
Croatia
1,1
-4,9
67,1
No
4,8
Hungary
1,0
-2,2
79,2
No
5,8
Lithuania
0,6
-2,1
39,4
Yes
3,6
Poland
0,6
-4,3
57,0
No
4,2
Romania
2,1
-2,3
38,4
No
5,3
Reference
value
1,7%
-3,0%
60,0%
2 yrs
6,2%
Source: Convergence Report 2014 (European Central Bank)
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Criticism and Discussion on Criteria
 CEECs don’t understand why they have to fulfill all
the criteria even though most current members
didn’t
 Discussion if new criteria should be added
- E.g. health of financial sector
 However, difficult to change criteria (requires
unanimity)
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Future Developments
 Slovakia joined in 2009, Estonia in 2011, Latvia in
2014 and Lithuania in 2015
 Others at an undetermined date later
- Financial crisis and euro crisis made matters
more complicated
 The financial crisis made EMU membership more
attractive to Sweden and Denmark, but the current
debt crisis has made them wary again
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Current Euro crisis – a threat to the
future of EMU?
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Foundation for the crisis is laid with the
inception of EMU
 Advent of EMU brought down inflation levels in the
south to historical lows
Record low interest rates and access to capital
Increased borrowing, investments and
consumption
 Also governments borrowed money increasing the
debt ratio already years before the financial crisis
and the recession
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Private and public debt
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Wage increases above productivity
increases
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Loss of competitiveness leads to current
account deficits (devaluation of currency is not
possible)
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When the financial crisis hit…
 Banks were in trouble first, which meant that
borrowers were soon in trouble
- Real estate buble caused by borrowing and
investments burst
 Financial crisis lead to a recession, which together
with supporting banks forced the governments to
create large deficits in a situation when the debt
ratio was already high (except Spain)
 Credibility of governments was lost and interest
rates on bonds increased (also the ”default” of
Greece increased doubts for others)
- The revelation that Greece had falcified statistics
undermined credibility even further
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What has been done?
 The EMU countries have lent money to the countries
in trouble (without a guarantee to get any money
back)
- The money comes with conditions, though
 ECB has bought government bonds
 Both of these acts were forbidden (”no bailout”
clause of the Treaty) to make sure that governments
would behave responsibly and that the credibility of
the whole union would not be at stake if one country
is in trouble
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What next?
 No one knows
- EMU is unique in the history of economics, and
so is the current crisis
- There is no mention of how to leave the EMU in
the Treaty (the membership was assumed
irrevocable)
 The disintegration of EMU would lead to great
losses an instability for all members, so even the
ones with sound finances have an incentive to help
the others
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Final Group Work
 In your group, draw a new mindmap to organize
your thoughts on economic integration, the EU and
the EMU
- Again, you don’t have to restrict yourselves to
only economic aspects
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