Upload
katherine-craig
View
220
Download
1
Tags:
Embed Size (px)
Citation preview
European Economic and Monetary Union
The Eurosceptic perspective
<<Your Name>>
The EU Economy
The Development of the European Economic System
• 1957: Treaty of Rome, aimed to create a single European market
• 1968: Creation of a customs union for a single market for goods
• 1986: Single European Act signed, removing barriers to trade and creating the four economic freedoms of the single market
• 1992: Target date for the full completion of the single market (yet is it complete?)
• 1999: EMU launched• 2002: Euro notes and coins issued
The Gradient of European Economic Integration
1. The European Single Market.2. Economic and Monetary Union.
1. A country has full economic and monetary sovereignty.
Step 1. The country must lose a degree of economic sovereignty over trade
The Progression to the Single Market
2. The country joins a trade bloc or single market, e.g. the EU
The Process of Joining the Single Market
All countries that join the EU have access to the single market and input into how it is run.
Three processes must take place for a country to join the EU:
1. Stabilisation and Association Agreement2. Application and negotiation.3. Accession Treaty.
Countries in the EEA (Iceland, Liechtenstein and Norway) have access to some aspects of the single market, but have no input into how it is run.
Four Fundamental Economic Freedoms:
Free movement of:
1. Goods (customs union)
2. People
3. Services
4. Capital
How does the EU single market work?
The Benefits of the Single Market• Increased trade• Greater consumer choice • Jobs across Europe• Economic growth• Economies of scale
However...• Price differences still high in Europe.• Single market in many areas not complete.• Successes could be down to other factors e.g.
Globalisation.
The Costs of the Single Market
• Some people have lost jobs as businesses have moved abroad.
• There has been tension over immigration and the free movement of people.
• Some countries have struggled to compete with others which have benefitted more from the single market.
Step 2. To move from being part of a single market to being part of an EMU, further monetary powers must be transferred from
the national level to the supranational level
3. The country becomes a member of EMU
The Progression to Economic and Monetary Union
2. A country is a member of a trade bloc or single market, e.g. The EU
How does a country join EMU?
1. Become a member of the EU
2. Meet the Convergence Criteria
3. Hand control of national monetary policy to the ECB
4. Abide by the Stability and Growth Pact
There are currently 17 countries in the Eurozone.
How does the European Economic and Monetary Union work?
Introduction of EMU saw the ECB take over the monetary powers previously held by national central banks.
The ECB:
1. Sets a common interest rate.
2. Controls the growth of the money supply.
The Benefits of Being Part of EMU
1. End to exchange rate fluctuations and costs.
2. Same interest rates across EMU encourages investment.
3. Shields weaker countries from domestic political shocks.
4. End of speculation and competitive devaluations.
The Costs of Being Part of EMU
1. Loss of devaluation power.2. Loss of power to control interest
rates.
It is difficult to assess the pros and cons of being in EMU without looking at how it works in a particular situation.
The EMU: a good or bad thing for Europe?
1. Moral Hazard Problem -‘implicit guarantee’.2. Different microeconomic and macroeconomic
policies in different countries.3. Trade imbalances – some grow at expense of
others.
Some argue that these problems led to the current Eurozone crisis
Bad
Bad – Some Evidence
Country
Trade balance, 1998
(% of GDP)
Trade balance, 2008
(% of GDP) ChangeGermany -1.3 6.7 +5.4
Spain -2.9 -9.7 -6.8
Greece -3.6 -14.6 -11.0
Ireland -0.6 -5.2 -4.6
Portugal -7.2 -12.0 -4.8
These statistics suggest that some countries have seen a great increase in their trade deficit since before joining EMU
Bad – Some EvidenceCountry
Competitiveness position 2001
Competitiveness position 2011 Change
Germany 4 5 -1
Spain 23 42 -19
Greece 43 83 -40
Ireland 22 29 -7
Portugal 31 46 -15
Source: Global Competitiveness Index compiled by the World Economic Forum
These statistics suggest that some countries have seen a significant drop in competitiveness since the
beginning of the EMU
The Eurozone Crisis• A number of Eurozone states were particularly badly
hit by the global economic downturn which started in 2007.
• Resulting effects included: – increasing levels of government debt– unprecedented levels of unemployment– the introduction of significant austerity measures which led
to strikes and protests. • The crisis has led to financial bailouts for Greece,
Ireland and Portugal, with Italy, Spain and Cyprus also falling into dangerous economic territory.
The Eurozone Crisis - Greece• 2001: Greece joined the Eurozone• 2009: budget deficit: 12.7% of GDP• 2010: public debt: 142.8% of GDP• 2010: tough austerity measures announced • April 2010: credit rating downgraded to just above ‘junk’
status• May 2010: three killed in violent protests during general
strikes in Athens• May 2010: Eurozone leaders agree to a €110 billion bailout
for Greece• July 2011: Eurozone leaders agree to a second bailout for
Greece, amounting to an additional €109 billion
The Eurozone Crisis - Ireland• 1999: Ireland joins the Eurozone• July 2010: Irish banks pass ‘stress tests’• September 2010: Ireland’s budget deficit increases
from an alarming 12% of GDP to a terrifying 32%. • September 2010: the Irish Government announces
extreme austerity measures• November 2010: Eurozone leaders agree to an €85
billion bailout for Ireland• July 2011: Ireland’s credit rating downgraded to
‘junk’ status
The Eurozone Crisis - Portugal• 1999: Portugal joins the Eurozone• 2010: Portuguese debt reaches 93% of GDP• 2010: The Portuguese Government announces strict
austerity measures in the annual budget• Nov 2010: EU leaders deny that Portugal is in line for a
bailout• March 2011: Opposition parties in Portuguese
parliament defeat austerity measures as too severe• April 2011: Portugal asks the EU for financial help• May 2011: Eurozone leaders agree to a €78billion
bailout for Portugal
The Eurozone Crisis – Spain, Italy and Cyprus
SPAIN ITALY CYPRUS•The last of the EU’s ‘major’ economies to be in recession.•2010: government deficit comparatively low at 60.1% of GDP•2011: unemployment rate reaches 21.0%•August 2011: ECB recommences purchasing bonds from Spain and Italy to increase flow of money around Eurozone.
•Third largest economy in the EU•2010: government deficit at 119.0% of GDP•August 2011: Italy deemed likely to default on its debts; crisis talks of Eurozone leaders commence.•Prime Minister Silvio Berlusconi denies that Italy is facing an economic crisis.
•2008: Cyprus joins the Euro•July 2011: a hoard of confiscated ammunition explodes•The explosion is estimated to reduce Cypriot GDP by 14-17% in 2011•July 2011: The Cypriot Government resigns amid the economic troubles: the country’s credit rating is downgraded
Good – Some evidence
1. Stable interest rates and low inflation.
2. Benefits for weaker economies, greater access to large market.
3. Euro currency stability and strength
4. Growth in trade?
Who is right?
• The failings of EMU countries in terms of growth, competitiveness, and deficits is down to other factors.
• Moreover the EMU can provide a good safety net and the appropriate conditions for further economic reforms.
BAD• The EMU is the cause of the problems of reduced
competitiveness, trade deficits, public debt and poor growth.
• The experiment that has been EMU is in the process of failing due to the Eurozone crisis.
GOOD
The Political Angle
Perhaps the European EMU was driven by politics:
1. Political bargaining between countries.2. Countries think that disbanding it would
be politically embarrassing.3. The EMU as a political symbol.
What does the public think?
Series1
-20
-10
0
10
20
30
40
50
60
70
58
42
3128
23 21 21 20
63 2 0
-2 -2 -4
-10
In general, does the eurozone have a positive or negative effect upon the national economy? Results from 15 eurozone countries.
Source - Flash Eurobarometer Survey 251, Sept 2008
MaltaIrelandLuxembourgCyprusBelgiumAustriaFinlandSloveniaSpainGermanyEurozone averageGreeceFranceItalyNetherlandsPortugalCountries, overall effect score is displayed. Mean Score (positive effect -
negative effect)
Sc
ore
Respondents 09/2005
Respondents 05/2008
Respondents 05/2010
0%10%20%30%40%50%60%70%80%90%
100%
6 10 9
3137 39
3527 28
18 12 14
11 13 11
Are people happy that the Euro will replace their national currency? Results from 8 EU, but non-Eurozone, countries.
Source - Flash Eurobarometer Survey 296, May 2010
D/K, N/A
Very Unhappy
Rather Unhappy
Rather Happy
Very Happy
Month/Year
% o
f re
spo
nd
ents
Totally agree Tend to agree Tend to disagree Totally disagee DK0
5
10
15
20
25
30
35
10
2926
18 17
“Overall the Euro has mitigated the negative effects of the current financial and economic crisis.”
Eurobarometer: Europeans and the Economic Crisis, Feb 2009 EU27
%
Optimism about the Eurozone Crisis
What do the Public Think about the EU’s Response to the Crisis?
In spring 2011:• 22% of EU citizens consider the European Union to be the
best organisation to take effective action against the effects of the economic crisis, with 20% answering that their national government would be best.
• More than 70% of EU citizens feel that the measures proposed by the EU to tackle the Eurozone crisis would be effective.
• 79% believe that stronger economic cooperation between all EU member states would be an effective way of tackling the Eurozone crisis.
• 45% of EU citizens believe the EU did not act effectively to combat the crisis up until now.
Conclusions• EMU was an ambitious experiment in
taking the Single Market one step further – but is it a step too far?
• The Eurozone crisis has highlighted the limitations of EMU across so many economically and politically diverse countries – could it be doomed to failure?