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The European Union and the single currency in the global economy

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The European Union and the single currency in the global economy 1 historical background The road to the Euro 1992-1993 crisis in the ERM. – PowerPoint PPT presentation

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Title: The European Union and the single currency in the global economy


1
The European Union and the single currency in the
global economy
  • 1 historical background

2
Reconstruction and the Marshall Plan
  • The US encouraged co-operation when they extended
    the Marshall Plan. They acted to remove barriers
    to trade and payments, which were still paramount
    in Europe after the War, as they had been in the
    1930s.
  • However the American agenda for a swift
    integration of Europe into a single market,
    including West Germany was too ambitious.
    European Nations, particularly Britain, but also
    France, resisted it.

3
The Schuman Plan and the ECSC
  • France was worried by the resurgence of West
    Germany and it advanced its own proposals for
    pooling Franco-German coal and steel resources
    under a supranational authority.
  • The Schuman Plan was universally considered an
    enlightened act of offering integration and
    co-operation in the place of competition and
    distrust. With the Schuman Plan began the process
    of European integration. Although the Plan was
    primarily directed at West Germany, other
    countries, which were directly interested,
    joined. What emerged was a Community of 6
    countries - list - which was to play a key role
    in the process of integration. The UK, however,
    had decided not to be a part.

4
The Treaties of Rome
  • The next step towards integration was taken by
    the Six with the Treaties of Rome signed in
    March 1957, and it contained a mixture vertical
    and horizontal integration. The vertical element
    was Euratom, which pooled efforts to achieve
    atomic civil energy. Again the results, however,
    were limited. The military side of the nuclear
    programme was left out of it and jealously
    guarded by the French. The pooling of resources
    was only partial and countries continued to
    develop their own national strategy in this field
    alongside the European one.
  • The horizontal integration of the Treaties of
    Rome, namely the EEC (European Economic
    Community), was more important. Horizontal
    integration involves measures covering the
    entire economy. What the EEC Treaty did was to
    lay out a timetable for the achievement of a
    Customs Union among the Six. Over a period of 12
    to 15 years all barriers to trade, be it TARIFFS
    or QUOTAS would be progressively removed. At
    the same time a Common External Tariff was
    established.

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7
The Single European Act and the 1992 Programme
  • The 1992 program culminating in the Single Act of
    1987 dominated the 1980s. The central package in
    the re-launching of the Community was the bid to
    complete the internal market by 1992, eliminating
    all the remaining obstacles to the free movement
    of goods, persons, services and capital. The date
    1992 was chosen because it corresponded to
    lifetime of two commissions, which was thought
    necessary to achieve the objective.

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9
Background to the Single European Act
  • Evidence of a growing fragmentation of the EC
    market as a result of protectionist policies
    followed during the 1970s.
  • A sense that European producers were unable to
    compete with Japanese and American ones in new
    technologies etc.
  • Economic policy makers were increasingly
    convinced that the way to higher productivity and
    efficiency was in free-trade policies such as
    deregulation, privatisation and market
    discipline, together with a firm macro-economic
    framework.

10
The Single European ACt
  • The Single Act was a liberalisation program
    aiming at eliminating
  • non-tariff barriers such as - national
    standards, safety and health regulation etc.
  • state aid and subsidies designed to protect
    particular sectors or give an advantage to
    leading national firms.

11
SEA and capital liberalization
  • All restrictions to capital movement were also
    targeted for elimination.
  • France and Italy followed the example of Germany
    liberalising capital in 1990. In the next few
    years all the countries in Southern Europe
    followed suit.
  • The liberalisation of capital markets offered
    more opportunities for raising funds at the
    European level and brought about rationalisation
    and mergers in the financial sectors.
  • It allowed for faster and more dangerous
    speculative movements see currency upheavals of
    the early 1990s - with the devaluation of the
    pound and the lira.
  • Currency instability was yet another argument
    towards achieving European Monetary Union which
    came to the front of the European Union agenda in
    the 1990s.

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14
Towards monetary union ERM and EMU
  • The end of Bretton Woods meant fluctuating
    exchange rates which endangered European
    integration. Attempts at monetary union in the
    1970s failed because too ambitious.
  • At the end of the 1970s the French and German
    leadership, who were emerging as key leaders in
    Europe, agreed on a flexible arrangement, the ERM
    - Exchange rate mechanism, approved in 1978 by
    most EC members and started in 1979.

15
The Exchange rate mechanism
  • It was essentially a pragmatic agreement. Each
    currency was put into a common basket, called the
    ECU, and given a central exchange rate against
    the ECU. Each currency could move upwards or
    downwards in a narrow band in relation to its
    bilateral central rates. Once it reached the
    upper or lower limits of the band, there would be
    intervention by the combined Central banks and
    eventually realignment, which would have to be,
    however, negotiated. The mechanism functioned in
    such a way that the stronger currency would act
    as an anchor for all the others.
  • The ERM sanctioned the leading role of the DM. As
    a result Germany's anti-inflationary policies
    were transmitted through the mechanism to the
    other countries. Germany's monetary policy was
    tight and other countries would also have to
    tighten theirs.

16
The ERM how it worked
  • On the other hand, the ERM was not a rigid
    system, since it allowed for some flexibility and
    in the first few years especially many countries
    realigned their currencies within it.
    Increasingly it provided for exchange-rate
    stability in the EU.
  • The British initially did not to join the ERM,
    although sterling was part of the ECU. The
    reasons given were that sterling feared for its
    international status or reserve and
    petro-currency. However throughout the 1980s
    there was a long debate on whether to join or
    remain out. In the end Britain joined in 1990 at
    the worst possible time, with an overvalued
    currency. Two years later sterling fell under
    speculative attack and Britain left the ERM.

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21
The road toward EMU economic arguments
  • Basically the desire to achieve EMU and a single
    currency was fed both by political and economic
    arguments. On the economic side the argument was
    that the ERM was insufficient to create
    conditions of stability. Currencies were still
    open to speculative attack if the markets
    perceived that they were weak. A single market
    if it is truly integrated, it was argued, cannot
    function properly without a single currency.
  • The dominance of the DM meant that other
    currencies such as the franc or the lira (let
    alone the smaller ones) had very little room for
    independence anyhow. They were compelled to
    follow the policies of the Bundesbank. Why not
    create a Central European Bank, in which other
    countries could hope to have a say on Germany's
    and EUs monetary management? This consideration
    was particularly strong in France.

22
The road towards EMU political arguments
  • Crisis in the Community when German
    re-unification took place. One or the touchstones
    of the Community since the Schuman Plan was to
    keep Germany within Europe, particularly by
    securing a good balance between Germany and
    France. The risk was that Germany would
    disengage herself from Europe and start playing a
    nationalist role again. Such fears were
    particularly strong in France and were
    articulated by President Mitterand.
  • In Germany, on the other hand, Chancellor Kohl
    did not want to go it alone and that particularly
    after re-unification there was a need to work
    together with the other European partners to the
    point of surrendering the much valued DM for a
    European currency.

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24
EMU and the Maastricht Treaty
  • The combination of economic and political
    pressures rapidly led to a proposal for EMU
    becoming part of the new 1991 Maastricht Treaty.
    Strict convergence criteria were set. Member
    countries had to bring down their inflation
    levels, their budget deficits and their national
    debt to established criteria within 5 to 7 years
    and qualify to become members of EMU.
  • Convergence criteria
  • maximum 3 budget deficit
  • a max. 60 government debt
  • No devaluation for 2 years
  • Inflation kept down (no more than 1.5 above
    lowest inflation country)
  • Interest rates kept down (no more than 2 above
    best performing economy)

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26
1990s the road toward the Euro
  • The 1990s were marked by a consistent policy of
    deflation carried out throughout the European
    Union. in order to achieve the convergence
    criteria. The Stability and Growth pact of 1996
    tightens the criteria further, by establishing a
    system of penalties.
  • Many countries struggled to meet the convergence
    criteria. Italy was only allowed in at the last
    moment. In more than one cases the convergence
    criteria set at Maastricht were fudged. Clearly
    following tight policies aggravated the
    unemployment problems and kept growth rates low.
  • On the 1st of January 1999 the Euro was launched,
    with the ECB assuming the function of setting
    interest rates for the whole Euro area. Britain,
    Denmark, Sweden, Greece remained outside, but for
    the other 11 countries after a 3-year transition
    the Euro was to completely replace their national
    currencies.

27
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28
Eastern Enlargement
  • April 16 2003 the Treaty of enlargment is
    signed. !0 new countries join the EU from May 1,
    2004
  • 10 New Member States the three Baltic States
    (Estonia, Latvia, Lituania), Poland, Hungary,
    Czech Republic, Slovakia, Slovenia, Cyprus and
    Malta.
  • January 1, 2007 Bulgaria e Rumania become EU
    members.

29
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30
FontiCommission, Eurostat, IMF, UNO.
31
11 Key commercial trading partners of EU-15
(average 1999-2001)
(b) Imports
(a) Exports
32
12 FDI inside the EU 15 as a share of total FDI
With the exception of reinvested profits
33
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34
The road to the Euro
  • 1992-1993 crisis in the ERM. Devaluation in
    Italy and the UK. Italy, beset by political as
    well as economic crisis, commits to emergency
    budget.
  • Summer of 1996. New economic measures in Italy to
    match the Mastricht Treaty convergence criteria.
  • March 1998 The European Commission rules that
    eleven countries qualify for membership of the
    single currency. Greece and Sweden remain out,
    while the UK and Denmark exercise their option
    not to take part.
  • May 1998 Wim Duisenberg appointed to become the
    first President of teh ECB..
  • Greece is admitted in the euro in 2001, Slovenia
    in 2007, Malta and Cyprus in 2008 and Slovakia
    in 2009.

35
From Nice to Lisbon developments in European
Union
  • The results of the Nice Treaty were judged to be
    unsatisfactory. There were also signs of growing
    unease on the part of the citizens of the Union.
    The Treaty was actually rejected in a referendum
    held in Ireland in June 2001
  • The European Council of Laeken in December 2001
    decided to convene a Constitutional Convention on
    the future of Europe in view of framing a new
    Treaty.

36
From Nice to Lisbon developments in the European
Union
  • The Constitutional Convention was followed by a
    Intergovernmental Conference, which drafted a
    Constitutional Treaty (October 2004)
  • Referenda held in May 2005 in Holland and in June
    2005 in France reject the Treaty
  • After this rejection member states decide to
    take a less ambitious route in drafting a new
    treaty. The outcome is the Treaty of Lisbon,
    approved by the European Council in December 2007

37
The Treaty of Lisbon
  • Less ambitious that its forerunner. It consists
    of 70 articles (as opposed to the 448 of the
    Constitutional Treaty).
  • The Lisbon Treaty establishes new rules on the
    composition and functioning of the three main EU
    Institutions The Commission, the Council of
    Ministers and the European Parliament.
  • The Treaty establishes a permanent president of
    te European Council and a Foreign High
    Representative of the EU.
  • The Treaty has come into force on December 2009.

38
Current issues in the European Union
  • External problems
  • Relationship with the US tensions over a wide
    range of issues.
  • The war on terrorism and multicultural Europe
  • Enlargment to include Turkey?
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