Transcript European Debt Crisis - University of Victoria

Topics in EU Political Economy
By Ivan F Dumka
Presentation Outline
• Economic and Monetary Union
(EMU)
– EMU in Overview
– Key events
– The Maastricht Treaty and the Design
of EMU
– EMU and the economic crisis
EMU in Overview (What is
EMU?)
• Set of agreements that brought about
the euro and related
policies/institutions:
– Stability and Growth Pact
– European Central Bank (ECB)
The Eurozone
EMU in Overview (Why?)
• Economics explanations
– EMU suitable if optimum currency area
(OCA)
• OCA is economically integrated so no need
for ERM
• Some argue that EU is not an OCA → EMU
bad move
• Some take broader view of OCA → less
critical
• Political/Institutional Explanations
– EMU is needed to buttress other EU
programmes
Key Events Shaping EMU
•
•
•
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•
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1970: Werner Report
1977: MacDougall Report
1989: Delors Report
1992: Maastricht Treaty
1999: creation of the Eurozone
2009: beginning of the Eurozone
Crisis
The Maastricht Treaty and
the Design of EMU
• Today’s EMU goes much further than
past attempts, but…
• What’s in the name ‘EMU’?
– ‘Monetary Union’
– ‘Economic Union’
The ‘Monetary’ in EMU
• Highly developed:
– Created a single ECB with a mandate to
pursue low inflation
– Created ‘irrevocably locked exchange
rates’ and a single currency
• This represents a significant transfer of
responsibility from national institutions
to European ones
The ‘Economic’ in EMU
• The Maastricht Convergence Criteria:
– Budget deficits no more than 3% of GDP
– National debt no more than 60% of GDP
– Inflation no more than 1.5% within “best
performing members”
– Long term interest rates no more than 2%
within “best performing members”
• This entails rules for governments but
far less coordination at European level
• Less advanced than the ‘Monetary’
side of EMU, and less ambitious than
past designs
So What?
• These design choices in EMU limit
significantly the options to
governments in reacting to the Global
Financial Crisis
– Currency devaluation is not possible
– Fiscal policy is constrained
– QE is more contentious
• These design choices have also been
blamed for contributing to the
Eurozone Crisis
Underlying problems
• Monetary union has the ECB, but there is
no corresponding supranational
institution that sets economic policies for
the same area
– Budgetary and fiscal policies remain in the
hands of national governments
• Internal imbalances in euro area are
difficult to correct
• Breaches of Stability & Growth Pact
– Visible and hidden, punitive arm of ECB not
very strong
• Housing bubble and interest rates
• Some of these problems were wellunderstood well prior to EMU
Recent Developments
• “Troika” involved in economic recovery:
– EC, ECB, and IMF
• Differing perspectives on austerity and
bailouts
• Loose consensus that maintaining EMU is
important
– No precedent / procedure for members
leaving the Euro-zone
– Potential instability and loss of investor
confidence arising from abandoning the euro
– How to move forward? France-German
negotiations, different perspectives on new
course of integration.
• “Window of opportunity” for further political union
Questions