Transcript Euro area

EMU, the Euro, and the
Current Economic Situation
in the Euro Area
Presentation by Amy Medearis
Senior Economist, Delegation of the European Commission
Seminar on EU and the Euro,
organized by EUCE at UNC-Chapel Hill
May 8th, 2009
What are we going to cover?
• The Euro: how did we get there?
• What is EMU?
• What are the costs and benefits of having a single
currency? Benefits of EU versus euro membership?
• How is economic policy made in a monetary union?
• What is the current economic situation in the Euro
Area?
• How should Europe deal with the current economic
and financial crisis? And what does the crisis mean
for EMU?
1
A Brief History of European Economic Integration
The original goal behind the integration of Europe was to
prevent the devastating wars of the first half of the
twentieth century from ever happening again…
Dresden, Germany, 1945.
2
A Brief History of European Economic Integration
Political end by (mainly) economic
means
• European Coal and Steel Community 1951;
European Economic Community 1957 (Treaty of
Rome)
• Customs Union (1968): Free trade area +
common external tariff
• Single (or Internal) Market (launched 1986,
“completed” in1992): breakdown of all tariff and
non-tariff barriers to trade and business
• Single currency (approved1993 Maastricht
Treaty, euro launched 1999, notes and coins
2002): eliminated exchange rate transaction
costs and risk
3
A Brief History of European Economic Integration
• The euro was already envisaged as a goal
back at the start of European integration in
1950s
• It was always seen as the “next logical step”
after the single market
• The idea gained academic attention through
the work of economist like Robert Mundell
(“Optimal Currency Areas”)
• Break-up of the gold standard in the 1970s
led to creation of the forerunners of the euro,
European Monetary System (EMS) and
Exchange Rate Mechanism (ERM)
• German reunification (1990) and currency
crisis of 1992 as catalysts for push toward the
euro leading to Maastricht Treaty in 1992/93?
4
What is EMU?
5
What does EMU stand for?
Does EMU stand for:
European Monetary Union?
Or:
Economic and Monetary Union?
6
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?
7
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)
8
Which countries are in the euro area?
Euro area: Austria, Belgium,
Cyprus, Finland, France,
Germany, Greece, Ireland,
Italy, Luxembourg, Malta,
Netherlands, Portugal,
Slovakia, Slovenia, Spain.
EU Member States obliged
to adopt the euro
eventually: Bulgaria,
Czech Republic, Estonia,
Hungary, Latvia, Lithuania,
Poland, Romania, Sweden.
EU Member States with an
opt out from adopting the
euro: Denmark, United
Kingdom.
9
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)
10
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.
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The benefits of EU membership – the single market
• Larger market → more
competition
• More competition →
more choice, lower
prices for consumers
• More competition →
promotes efficiency
• Larger market → firms
can exploit economies
of scale
12
The single market – economies of scale
• Larger firms enjoy cost
advantages over smaller firms
(e.g. purchasing, marketing)
• EU firms can produce for a
market of 500m consumers
• And pass on lower costs to
consumers
• This should encourage
economic efficiency and
stimulate economic growth
13
The euro and the single market
• The euro eliminates
currency transactions costs
• Leads to greater price
transparency → price
convergence
“One market, one money”
• Eliminates exchange rate
uncertainty → stimulates
investment
• Euro leads to increased
trade and investment flows
14
Economic policy in EMU
15
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
Timothy Geithner
Economic policy co-ordination more difficult?
16
2009: Happy 10th Birthday, euro!
• The euro has helped to bring
Europeans together
• It has fostered greater economic
integration (reinforcing the Single
Market)
• It has contributed to
macroeconomic stability (e.g.
lower inflation)
• But now the euro area is confronted
by a very dire economic situation
17
The Euro Area Economic Situation: Not Good!
Real annual % change
unless otherwise stated
2008
2009
2010
Real GDP growth
0.8
-4.0
-0.1
Inflation
3.3
0.4
1.2
Unemployment rate
7.5
9.9
11.5
(percentage of labor force)
Source: European Commission Spring Forecast May 2009
18
Why is the euro area so affected?
US and euro area economies are
closely connected
Many European banks bought
securities tied to US subprime
loans
German exports have fallen sharply
Spanish and Irish housing bubbles
have burst
Euro area economy is less flexible,
has lower productivity growth “Toto, I don’t think we’re in
Kansas anymore”
Exposure to Eastern Europe?
19
Europe’s response to the crisis
The ECB reduces interest rates to
historically low levels (1.25%) and begun
“quantitative easing”
Oct 08: euro area governments adopt
concerted action plan to support their
financial systems
Dec 08: EU governments adopt
European Economic Recovery Plan - a
coordinated fiscal stimulus
20
The financial crisis:
Other ways Europe should respond?
Speed up economic reforms
(Lisbon Strategy)
http://ec.europa.eu/growthandjobs/index_en.htm
Make the single market work
better (especially for Services)
21
EMU and the financial crisis
• Crisis exposes persistent
divergences in the euro area
• “One size fits all monetary
policy” problematic?
• Countries need to use fiscal
stimulus, just as in US
• But difficult to coordinate
fiscal response of 16 Member
States
• Break-up of EMU?
22
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)
• The euro area is in its first recession; how will
it cope?
• Will the crisis lead to further divergence in
EMU, or will it encourage countries to speed
up reforms?
• Can you have a monetary union without a
complete economic union? Political union?
23