Transcript Document

Single Currency
Topics






What is “international money”?
European Monetary System (EMS)
The Economics of Currency in the 1980’s
and 1990’s
EMU
Treaty of Maastricht
The Process
What is International Money?

The idea of exchange rates on either side of
Bretton Woods
–
–

Bretton Woods (up to 1973): fixed but adjustable
exchange rates – a high degree of stability of
currency values
After Bretton Woods (post-1973): freely
fluctuating exchange rates – instability of currency
values
The factors affecting exchange rates
What is International Money? (cont’d)

The effects of changing exchange rates
–
–

“Correct” policy measures affecting exchange rates
–
–

The relative value of your currency rises (appreciation)
The relative value of your currency falls (depreciation)
Rate of interest
Level of prices
“Incorrect” policy measures affecting ex. Rates
–
Exchange controls
European Monetary System (EMS)

The “Debate” since the late 1960s
–
–


The ‘economists’: Germany, Netherlands
The ‘monetarists’: France, Belgium, Luxembourg
The Werner Report 1970
The “snake in the tunnel” of 1972 on
–
–
–
The “tunnel” is the US dollar
2.25 per cent bands of fluctuation of intra-EEC exchange
rates, in terms of parity against $
An effective DM zone after 1974
European Monetary System (cont’d-1)

Establishment of EMS and ERM (1979)
–
–
–
“a system of fixed and periodically adjustable exchange
rates between EC currencies, operating within relatively
narrow margins of fluctuation.” (Tsoukalis, The New
European Economy Revisited p. 143)
The ECU
“Central rate” and bilateral exchange rates

Allowable margins of fluctuation of 2.25 per cent around
bilateral rates, except 6 per cent for Italian lira. Spanish peseta
and Portuguese escudo
European Monetary System (cont’d-2)
–
–

Divergence indicator
Britain within EMS, but not ERM
Implications of EMS
–
–
–
Instrument for fight against inflation
German policy sets the standard (strong currency,
anti-inflationary)
Zone of monetary stability
The Economics of Currency

In the1980s
–
–
Policy convergence
Control of inflation

–

Downward convergence of inflation rates
Intra-ERM exchange rate stability
In the 1990s
–
1992 crisis


Progressive currency realignments begin
Withdrawals from ERM (Britain, Italy)
The Economics of Currency (cont’d-1)



Currency instability and divergent policies
Deflationary bias of system
The central role of Germany (Bundesbank policy, the
DM)
–
–

Preference for high interest rates, even in recession
DM as the “defining” currency of the system
Necessity for a new flexibility
–
Wider margins of fluctuation
EMU

Origins
–
Committee for the Study of Economic and
Monetary Union (1988): Delors Report (1989)


Central bank governors, member of Commission,
independent experts
Three stages
–
–
–
1 July 1990: liberalization of capital movements
1 January 1994: Initiate economic convergence
1 January 1999: Decision on “in” and “out”
EMU (cont’d-1)

European Central Bank
–

Core of European System of Central Banks,
which includes ECB and national banks
EMU as economic centerpiece of Maastricht
Treaty
Treaty of Maastricht (TEU)


Single currency as centerpiece of a broader
debate about European Union
Debate crystallizes around two
developments
–
–

Referendums in Denmark and in France, 1992
Profound “disconnect” between political leaders
and elites, and their people
Results are deeply troubling for “Europe”
TEU (cont’d-1)
–
The Danish “no” (50.7%) June 2

–
Becomes a “yes” only after opt-out clause (May 1993)
The French razor-thin “oui” (51%) Sept. 20


Intense public debate precedes the referendum
The vote defies the logic of the political parties
The French Vote (Sept. 20, 1992)
Poll of 1,531 Persons
Source: Le Point
Oui
Political Party
Non
24%
PC (Communist)
76%
82%
PS (Socialist)
18%
68%
Generation Ecologie
32%
50%
Verts (Greens)
50%
64%
UDF (Liberal Right)
36%
42%
RPR (Gaullist Right)
58%
13%
FN (Extreme Right)
87%
The French Debate

Arguments against Maastricht
–
Relinquish control to Euro-technocrats and to an
authority independent of political control

–
Lose control of financial and budget policy

–
Prime example cited: single currency and ECB
Single currency imposes severe restrictions on the
economy and on economic policy
Relinquish national sovereignty and the
democracy that historically went with sovereignty
The French Debate (cont’d-1)

Arguments against (cont’d)
–
–
–

Economics dictates politics, whereas it should be
the opposite
The feeling of “being French” trumps “being
European”
Maastricht is a “sharp turn” (in another direction)
Arguments in favor of Maastricht
–
Maastricht is the culmination of a long process
that began with the end of World War II
The French Debate (cont’d-2)

Arguments in favor
–
–
–
–
Single currency is necessary for the functioning of
single market
Single currency can achieve a par with $ and yen;
without it, there is the danger of “feodalite” to
Japanese “invasion,” perhaps even American
Look to the future, not to the past
Multiple gains of efficiency, notably lower
transactions costs (business argument in favor)
The French Debate (cont’d-3)
Argument in favor:
“People worry today that the economic and
financial union might lead to the loss of
French sovereignty and independence. In
fact, at a time when capital moves about in
mere seconds, thanks to the computer, from
one financial location to another, one notices
that speculative movements are completely
ignorant of borders.”

The French Debate (cont’d-4)
Argument against:
“The [European] bureaucracy secretes rules,
by a law of nature, just as the horse
produces dung; increased rule-making
generates an extension of its personnel, who
for their own part … And thus on and on. As
long as those administered do not rise up,
this process goes on endlessly.

The French Debate (cont’d-5)
“Even our chocolates … are the target of a
directive some 70 pages in length and our
national identity is strongly threatened, at the
present time, on the matter of cheese.”
[Marie-France Garaud and Philippe Seguin, De
l’Europe en general et de la France en
particulier, 1992, p. 67]
Process


First Stage: Full freedom of capital
movements (achieved by end of 1993)
Second Stage: European Monetary Institute
created (precursor to ECB), to strengthen
cooperation between national central banks.
Prospective members get their economies “in
order” – especially by reducing excessive
budget deficits (1994-1999)
Process (cont’d -1)


Third Stage: Irrevocable fixed exchange
rates between participating currencies. ECB
begins operation. European Council decides
which countries meet criteria of convergence
(1999-2002). “Euro” becomes legal currency.
The five “Convergence Criteria”:
–
Inflation rate: not higher than 1.5 % above
average of 3 countries with lowest inflation rates
Process (cont’d-2)

Convergence criteria (cont’d)
–
–
–
–
Budget deficits: not in excess of 3% of GDP
Government debt: not in excess of 60% of GDP
Long-term interest rate: not more than 2% above
rates of 3 countries with lowest inflation rates
No currency devaluation within 2 years preceding
entrance into the union
Process (cont’d-3)

The core criteria
–
Inflation rates: converge at low end



–
Low: northern European countries
Average: France, UK, Ireland
Above average: Mediterranean region
Government deficit and debt: the signal of intent



Stability pact “enshrined” at Amsterdam 1997
Censure (by finance minister colleagues) and heavy
fines for violating 3% rule except for natural disaster
German insistence to enforce fiscal discipline