Transcript Introduction to EMU and the euro

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
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?
1
What EMU isn’t
Sorry to disappoint you, but . . .
HELLO, MY NAME IS
Dromaius Novaehollandiae
. . . EMU is not a bird!
2
What does EMU stand for?
Does EMU stand for:
European Monetary Union?
Or:
Economic and Monetary Union?
3
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?
4
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)
5
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.
6
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)
7
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.
8
The challenge of asymmetric shocks
Massachusetts: recession
(1) Federal fiscal system
(2) High labour mobility
Real world example of a
single currency area
Asymmetric shock: oil
prices . Affects Texas and
Massachusetts differently.
Texas: boom
Euro area less
good at coping
with shocks?
9
Economic policy in EMU
10
Economic policy making - the euro area and the US
Monetary policy
Federal Reserve Chairman
ECB President
Ben S. Bernanke
Jean-Claude Trichet
Fiscal policy
Treasury Secretary
Eurogroup Finance Ministers
Henry M. Paulson
Economic policy co-ordination more difficult?
11
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?
12