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From Europe to the Euro


From Europe to the Euro Erica Edwards Center for European Studies ... for 2 consecutive years and should not have devalued its currency during the period. – PowerPoint PPT presentation

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Title: From Europe to the Euro

From Europe to the Euro
  • Erica Edwards
  • Center for European Studies
  • University of North Carolina at Chapel Hill

Plan of Attack
  • Stewart and Colbert on the Euro
  • Quiz The Nuts of Bolts of the Euro
  • National preferences and international
    institutions negotiating the Maastricht Treaty
    and EMU
  • Transitioning to the Euro
  • QA

Nuts and Bolts of the Euro
  • A quiz

1. What was the start date of Economic and
Monetary Union?
  • Jan 1980
  • The first major monetary policy initiative (1970
  • Werner Plan) called for EMU by Jan 1980, but
  • adverse economic conditions doomed the
  • b) Jan 1999
  • Correct. EMU officially started on Jan 1,
  • 1999. Conversion rates were irrevocably
  • fixed and legislation related to introduction
  • of the euro came into force.
  • c) Jan 2002
  • Circulation of euro banknotes began.

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2. How many countries are currently in the euro
  • 27
  • Number of current EU member states.
  • b) 11
  • Number of countries that originally joined
  • in 1999.
  • c) 16
  • Correct. As of 2009, 16 EU member
  • states are part of the euro area

1999 Belgium, Ireland, Spain, France, Luxembourg, the Netherlands, Austria, Portugal, Finland
2001 Greece
2007 Slovenia
2008 Cyprus, Malta
2009 Slovakia

The Outs
  • Britain, Denmark, Sweden,
  • and most of Eastern Europe
  • remain outside of euro
  • To join would need popular support and low budget
  • Britain and Sweden unlikely to join unless
    economy tanks
  • Eastern European countries
  • perhaps more likely to join as they
  • meet criteria

3. What were the set of rules set out for entry
into the European Monetary Union?
  • Copenhagen Criteria
  • The political, economic, and legislative
  • that countries must meet to join the EU.
  • b) Stability and Growth Pact
  • Pact enacted in 1997 to ensure that fiscal
  • would be maintained and enforced in the EMU.
  • c) Convergence Criteria
  • Correct. The 1992 Maastricht Treaty set out
  • 5 criteria that countries needed to meet
  • prior to joining the EMU.

The So-Called Maastricht Criteria
  • Inflation rates No more than 1.5 percentage
    points higher than the average of the 3 best
    performing (lowest inflation) member states of
    the EU.
  • Government finance
  • Annual government deficit Ratio of the annual
    government deficit to GDP must not exceed 3 at
    the end of the preceding fiscal year.
  • Government debt Ratio of gross government debt
    to GDP must not exceed 60 at the end of the
    preceding fiscal year.
  • Exchange rate Applicant countries should have
    joined the exchange-rate mechanism (ERM II) under
    the European Monetary System (EMS) for 2
    consecutive years and should not have devalued
    its currency during the period.
  • Long-term interest rates The nominal long-term
    interest rate must not be more than 2 percentage
    points higher than in the 3 lowest inflation
    member states.

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4. Who sets interest rates in the EMU?
  • The European Council
  • Determines membership in the eurozone.
  • b) Member States
  • Manage national fiscal policies within EU limits.
  • .
  • c) The European Central Bank
  • Correct. ECB controls interest rates for
  • euro. Independent of political
  • authorities goal is low inflation.
  • d) The European Parliament
  • Not important here.

The European Central Bank
  • Established under the
  • Amsterdam Treaty (1998)
  • Modeled after the German
  • Bundesbank
  • Headquartered in Frankfurt
  • Current president Jean-Claude Trichet
  • The primary objective of the ECB is to maintain
    price stability within the Eurozone, or in other
    words to keep inflation low!!

5. What is the current dollar-euro exchange rate?
  • 86 cents
  • January 2002
  • b) 1.59
  • July 2008 .
  • c) 1.27
  • Correct.

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National preferences international institutions
  • Negotiating the Maastricht Treaty

  • Why would governments agree to abandon their
    national currencies,
  • and thus their ability to implement an
    autonomous monetary policy, in favor
  • of a single currency?
  • Answer the benefits outweighed the costs

Benefits of Monetary Union
  • Benefits of a single currency include
  • Promote trade and investment
  • Eliminates competitive devaluations
  • Tied Germany to west after unification
  • Insulates EU from rest of world
  • Locks in objectives of low inflation and smaller
    budget deficits

Costs of Monetary Union
  • Countries joining monetary union must
  • Agree to share authority over interest rates, the
    single most important tool of economic policy
  • Give up ability to devalue currency
  • Agree to EU limits on overall fiscal policy
    stance (i.e. limit budget deficits)

A Single Currency - Competing Models
  • Technocratic
  • Priority of monetary integration should be to
    maintain low inflation.
  • Authority over monetary policy should be invested
    in a political independent central bank directed
    to keep inflation low.
  • EU should have strict rules limiting size of
    budget deficits.
  • Politicized
  • Priority of monetary integration should be to
    promote growth and employment.
  • Governments need to coordinate all tools of
    economic policy fiscal, monetary, exchange rate
    to achieve these goals.

And the winner is.
  • Outcomes of negotiations for the Maastricht
  • Treaty favored the technocratic German view
  • Politically independent ECB tasked with keeping
    inflation low
  • Convergence criteria
  • Only Britain and Denmark allowed not to
    participate (French victory)
  • Deadline for creation of single currency (small
    victory for the French)

Why did Maastricht So Closely Match German
  • Two possible explanations
  • Idea Diffusion
  • Domestic Politics Bargaining Power

Transition to Monetary Union
  • Rough Seas or Smooth Sailing?

The backlash begins
  • 1992/93 marks end of publics permissive
  • European project finally starts to hit home for
    citizens (i.e. touches their daily lives)
  • ? react by objecting to technocratic, elite-
    driven nature of integration process
  • Ratification problems
  • the Danish no
  • the French petit oui
  • German constitutional woes

Joining the Euro
  • As late as 1995, only 3 countries had met the
    convergence criteria
  • Ireland, Luxembourg, Finland
  • In 1998 decided that all countries wanting to
    join passed musterwith the exception of Greece.

How did countries like Italy, Belgium, France,
Germany meet the most important fiscal criteria?
  • Cheating
  • Large-scale privatization to increase income
  • Italy introduced a euro tax
  • Fear of exclusion from euro to gain domestic
    political support for cuts
  • Pro-European government in Italy with supports
    that wanted to reduce deficits
  • France ran a deficit of 3.07 of GDP and dared
    anyone to keep them out!

Designing the Euro Sign
Inspiration for the symbol itself came from
the Greek epsilon (?) a reference to the cradle
of European civilization  and the first letter
of the word Europe, crossed by two parallel lines
to certify the stability of the euro.
European Commission
Designing the Currency
Designing the Currency