Transcript European Monetary Integration

European Monetary
Integration II.
Dana Viktorová
Stability and Growth Pact
(1997)
 fiscal stability/discipline is a cornerstone of
stable EMU
 sound government finances strengthen the
price stability and strong sustainable growth
and thus employment creation
 fiscal discipline mentioned in the Maastricht
Treaty (EDP)
 full provisions took affect as euro launched
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Stability and Growth Pact
 if national fiscal instruments are a source of
externalities, they should be subjected to
collective control
 income externalities via trade
 borrowing costs externalities
 budget deficits financed by government bonds
issue create undesirable movements on
financial markets
 threat for disciplined states
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SGP - Three Elements
 political commitment to budget surveillance
 preventive elements
preventing budget deficit going
above 3% reference value
submission of stability and
convergence programmes
early warning mechanism if
significant slippage in a budgetary
position
 dissuasive elements requiring to make
immediate corrections, allowing sanction
imposing ? excessive deficit procedure
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Stability and Growth Pact
 end of independent fiscal policy ??
 controversial issues
 pro-cyclical effects
 asymmetry (binding during bad years)
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Code of Conduct of stability
and convergence programmes
 SCP submitted to Council & COMM
 updated annually
 euro area – stability programmes
 non euro area – convergence programmes
 assumptions on economic development
 assessment of medium-term objectives and their
effect on the budget (medium-term = length of
business cycle)
 when assessing budgetary position cyclicaladjusted balances in addition to nominal
balances
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Case of the Czech Republic
 CP
 public finance development
 ongoing procedure under Article 104
of the EC Treaty (EDP) – 2004

COMM report 12.5.2004

COMM opinion 24.6.2004

Council decision +
recommendation 5.7.2004
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Public Finance Situation in CR
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Public Finance Situation in CR
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European System of Central
Banks
ESCB (1998)
 Statute of the ESCB (Treaty protocol)
 General Council (ECB + EU NCBs)
 independency
 Eurosystem (ECB + euro area NCBs)
 euro area (MS that adopted euro)
ECB (1998)
 supranational body
 Executive Board
 Governing Council
Decision making process
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European Central Bank (1998)
 supranational body – MP authority
 loss of full influence in MP and ER policy
 authority in MP over the national governments
of participating MSs and other European
supranational institutions
 central bank independency vs. anti-inflationary
performance (more independent ? lower
inflation rate), correlation between CB
independency and price stability
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Monetary policy
strategy/conduct
 primary objective – maintain price stability
 “The primary objective of the ESCB
shall be to maintain price stability.
Without prejudice to the objective of
price stability, the ESCB shall support
the general economic policies in the
Community with a view contributing
to the achievement of the objectives of
the Community as laid down in Article
2”.(Art.105, the Treaty)
 fighting the inflation is absolute
priority
 supporting growth and employment
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come next
13
Monetary Policy Strategy
(1998)
 two pillars strategy (money base M3
targeting + monitoring of nonmonetary indicators)
 provisions of single monetary policy in the
Constitution
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Monetary Policy Conduct
 1998-2003 quantified definition of
price stability defined as a year-onyear increase in the HICP in the euro
area between 0 – 2 percentage rate
over a medium term
 redefinition of quantitative expression
of price stability
 5/2003 – onwards inflation objective
defined as below but close to 2,0
percentage level
 room for interpretation ?
2%, medium term
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close to
15
ECB’s Challenges
 increase of oil prices (2000)
 movements in the FX and stock markets
(2002)
 worldwide economic slowdown
 geopolitical tension because of Sept. 11
 maintaining of the low inflation –
price stability
 little volatility in ST IR
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National Shares of GDP at Current
Market Prices in Enlarged Euro Area
1996 1997 1998 1999 2000 2001 2002 2003 2004
Belgium
3,60
3,57
3,54
3,57
3,56
3,50
3,47
3,50
3,51
Czech Rep.
0,82
0,82
0,86
0,84
0,87
0,93
1,04
1,03
1,07
Germany
31,84 30,81 30,36 29,98 29,19 28,53 28,00 27,61 27,26
Estonia
0,06
0,07
0,08
0,08
0,09
0,09
0,10
0,11
0,11
Greece
1,66
1,77
1,73
1,79
1,77
1,81
1,88
1,99
2,05
Spain
8,15
8,19
8,33
8,57
8,78
8,99
9,28
9,66
9,87
France
20,76 20,52 20,56 20,53 20,42 20,30 20,28 20,21 20,22
Ireland
0,97
1,17
1,23
1,36
1,48
1,59
1,70
1,75
1,82
Italy
16,46 17,03 16,94 16,79 16,77 16,76 16,74 16,88 16,87
Cyprus
0,13
0,12
0,13
0,13
0,14
0,14
0,14
0,15
0,15
Latvia
0,07
0,09
0,09
0,10
0,12
0,13
0,13
0,13
0,14
Lithuania
0,11
0,14
0,16
0,15
0,18
0,19
0,20
0,21
0,22
Luxembourg
0,24
0,25
0,27
0,28
0,31
0,31
0,30
0,31
0,32
Hungary
0,60
0,67
0,66
0,68
0,73
0,80
0,92
0,95
1,01
Malta
0,05
0,05
0,05
0,06
0,06
0,06
0,06
0,06
0,06
Netherlands
5,50
5,50
5,57
5,67
5,78
5,91
5,91
5,89
5,78
Austria
3,16
3,05
3,03
3,03
3,02
2,97
2,94
2,93
2,90
Poland
2,05
2,24
2,38
2,34
2,60
2,85
2,69
2,40
2,42
Portugal
1,50
1,55
1,59
1,64
1,66
1,69
1,71
1,69
1,67
Slovenia
0,27
0,28
0,30
0,30
0,30
0,30
0,31
0,32
0,32
Slovakia
0,28
0,31
0,31
0,29
0,32
0,32
0,34
0,37
0,40
Finland
1,71
1,79
1,83
1,82
1,87
1,86
1,86
1,85
1,83
Enlarged Euro Area 100,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00
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New Decision-Making Process
in Enlarged ECB
 new decision-making – changes in allocation
of votes if more than 15 NCB or 22 NCB

EB remains at 6 members

acc. GDP (5/6) and agg. balance
sheet (1/6) share MS divided into
groups

2-group rotation system ? 5
gov.= 4 votes & 11-16 gov.= 11
votes

3-group rotation system ? 5
gov.= 4 votes & half of gov.= 8
2004
votes© Viktorová,
& remaining
gov.= 3 votes
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Level of Difficulty in the Enlarged
Governing Council of the ECB
Euro
Area
EMU
I
EMU
II
EMU
III
EMU
IV
EMU
V
EMU
VI
Number of
Governors
Member
States
Governing
Council of
the ECB
11
17
9
Number of
Additional
Votes to
vote with
the
Executive
Board
3
12
13
14
15
18
19
20
21
9*
10
10*
11
3
4
4
5
25,0
30,8
28,6
33,3
16
17
18
16 - 21
22
23
24
21
11*
12
12*
11
5
6
6
5
31,3
35,3
33,3
39,6 - 61,9
22 - ?
21
11
5
? 65,1
Single
Majority
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Percentage
Level of
Difficulty
(%)
27,3
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New Member States
 economic position – emerging economies in
the middle of the catching-up processes
 economic differences – transformation
processes
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Meeting Maastricht Criteria
 euro area enlargement chronology
 political power behind convergence
assessment
 veto power trade off ??
 even fulfilling Maastricht criteria - NMS
remaining different from core-group (GDP
growth, inflation rate) because of the
catching-up
 though converging towards euro area average
over time, economic synchronization
 completion of convergence process
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Relationship between
Maastricht Fiscal Criteria
 D
PY
D
 (  g )
PY
 D is public debt
 Y is the GDP
 P is the price level


is inflation
 g is the growth rate
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Real Convergence
 closing a gap of income levels
 measured by GDP per capita
 by means of higher economic
performance
 real GDP growth in national currency
vs. in euro currency
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Real GDP per Capita in PPP,
Comparative Levels (EU15=100)
100
90
80
70
60
50
40
30
20
10
0
Euro zone 12
1996
1997
1998
New MS
1999
2000
2001
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Real GDP per Capita in PPP,
Comparative Levels (EU15=100)
1996
Euro zone 12
Cyprus
Czech Republic
Hungary
Estonia
Latvia
Lithuania
Malta
Poland
Slovakia
Slovenia
New MS
1997
1998
1999
2000
2001
2002f
2003f
2004f
2005f
99,3
74,2
.
44,7
32,3
27
32
.
39,1
41,7
62,3
98,9
73,1
.
45,8
35,0
28,9
33,7
.
37,8
43
63,7
99,0
73,6
.
46,8
35,8
29,7
35,4
.
40,4
43,4
64,4
98,9
74,5
.
47,8
35,2
30,1
34,3
71,3
41,8
42,9
66,6
98,7
76,2
59,6
48,8
37,5
31,5
35,1
70,9
41,8
43,7
66,4
98,6
78,4
60,6
51,5
38,6
33,4
37,2
69,5
41,9
44,7
67,9
98,2
76,8
61,9
53,4
40,2
34,8
39,1
69,1
41,7
47,1
69,0
97,9
78,0
62,7
55,3
42,2
36,6
41,4
69,2
42,9
49,1
69,7
97,8
78,8
63,2
56,6
44,7
37,8
43,2
69,8
43,7
49,5
70,6
97,7
79,9
64,1
57,9
47,0
39,2
45,0
69,9
44,8
50,1
71,8
.
.
.
.
45,7
46,6
47,3
48,7
49,6
50,7
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Equation to Express a Real GDP
Growth Rate in the Euro Currency
y EUR  y DC - er  p N - p EMU
( yEUR ) … real GDP growth rate in euro currency
right hand side … sum of real GDP growth rate in domestic currency (yDC ), relative
change of nominal exchange rate DC/EUR and the difference of national inflation rate
( pN ) and inflation rate in euro area (pEMU )
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Real GDP Growth, National
& Euro Currencies
CZE
HUN
POL
SKV
SLO
EMU
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Avrg.
-0.1
2.6
4.8
3.9
0.3 -2.2 -0.4
3.3
3.1
2.0
2.9
3.3
1.9
-2.3
2.9
1.5
1.3
4.6
4.9
4.2
5.2
3.8
3.5
2.9
3.3
3.0
3.8
5.2
7.0
6.1
6.8
4.8
4.1
4.0
1.0
1.4
3.7
4.0
4.3
-4.1
4.9
6.8
6.6
6.5
4.1
1.9
2.2
3.3
4.4
4.0
4.5
3.8
1.3
4.9
4.1
3.3
4.6
3.8
5.2
4.6
2.9
2.9
2.2
3.4
3.6
-0.8
2.4
2.2
1.4
2.3
2.9
2.8
3.5
1.6
0.9
0.4
1.8
1.8
CZE
HUN
POL
SLO
SKV
EMU
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Avrg.
.
8.1 11.7 11.0 -5.5 15.8 -2.6
8.0 14.3
2.8 -1.6
.
6.2
. -1.7 -4.5
8.2 11.7
4.2 13.4
9.0 17.6 10.8 -5.7
.
6.3
. 10.1 26.1 10.9 11.3 10.2
8.4 19.6 12.7 -13.0 -14.9
.
8.1
. 13.3 14.8
5.9 14.0 -3.1 11.5 10.4 10.8
8.4 11.2
.
9.7
.
.
.
.
.
.
.
4.0
6.4
3.0
2.9
.
4.1
-0.8
2.4
2.2
1.4
2.3
2.9
2.8
3.5
1.6
0.9
0.4
1.8
1.8
© Viktorová, 2004
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Nominal Convergence
 decrease of disparities in price levels
 through two channels (combination of
both channels)
 ER channel – ER appreciation
 inflation channel – higher domestic
inflation
 case of CR – 1. infl.ch., 2. ER ch.
 inflation pressures due to transition …
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Comparative Price Levels of
(EU15=100)
100
80
60
40
20
0
1995
1996
Euro zone 12
1997
1998
1999
New MS
2000
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2001
2002p
29
Comparative Price Levels of
(EU15=100)
1995
Euro zone 12
Cyprus
Czech Republic
Hungary
Estonia
Latvia
Lithuania
Malta
Poland
Slovakia
Slovenia
New MS
102,0
79,2
.
42,1
38,3
33,5
27,9
.
.
38,1
72,8
43,0
1996
101,7
78,3
.
42,4
44,1
37,5
33,1
.
.
38,6
70,0
45,0
1997
98,8
79,1
.
44,5
46,1
42,2
39,5
.
.
40,6
70,2
47,0
1998
98,1
79,7
.
44,0
49,7
43,7
41,8
.
.
40,9
72,6
48,0
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1999
97,4
80,6
.
44,9
51,3
45,9
43,1
68,6
48,0
38,7
71,8
48,0
2000
96,1
81,4
45,3
46,6
51,2
51,7
48,4
71,8
54,0
42,5
70,4
51,8
2001
96,8
81,2
48,8
50,2
54,0
52,6
49,9
72,9
60,7
43,2
70,6
56,3
2002p
30
97,2
83,1
53,1
54,9
56,1
50,4
51,1
71,9
57,4
43,5
72,6
56,1
Development in the Czech
Republic, 1993-2003
1993
Real GDP growth in CZK
Inflation rate in CR
Inflation rate in EMU
Inflation differential
Nominal exchange rate CZK/EUR
Nominal change CZK/EUR
Real change CZK/EUR
Real GDP growth in EUR
Real GDP growth in CZK
Inflation rate in CR
Inflation rate in EMU
Inflation differential
Nominal exchange rate CZK/EUR
Nominal change CZK/EUR
Real appreciation CZK/EUR
Real GDP growth in EUR
1994
1995
1996
- 0.9
20.8
3.2
17.6
33.58
.
.
.
2.6
10.0
2.7
7.3
34.17
1.8
-7.1
8.1
4.8
9.1
2.5
6.6
34.06
-0.3
-6.4
11.7
3.9
8.8
2.1
6.7
33.91
-0.4
-6.6
11.0
1999
2000
2001
2002
-0.4
2.1
1.1
1.0
36.13
3.2
-1.0
-2.6
3.3
3.9
2.1
1.8
35.09
-2.9
-1.8
8.0
3.1
4.7
2.4
2.3
31.98
-8.9
-2.3
14.3
© Viktorová, 2004
2.0
1.8
2.2
- 0.4
31.60
-1.2
0.4
2.8
1997
0.3
8.5
1.6
6.9
38.22
12.7
-6.7
-5.5
2003
2,9
0,1
2.1
- 2,0
32.41
2.5
2.0
-1.6
1998
- 2.2
10.7
1.1
9.6
35.02
-8.4
-9.6
15.8
Average
1993-98
1.7
11.2
2.7
9.1
34.83
1.1
-7.3
8.2
Average Average
1999-03 1993-03
2.2
1.8
2.5
7.3
2.1
2.1
0.5
5.2
33.44
34.19
-1.5
-0.2
-0.5
-3.9
4.2
6.2
31
Balassa-Samuelson Theorem
% RER CZK  % NER CZK   CZK   EUR 

increase in productivity in tradable sector (TS)

increase in wages in TS

increase in wages in non-tradable sector (NTS) due to
wage contagion without adequate increase in productivity

increase in NTS prices

increase of the national inflation rate

national currency ER pegged

then RER appreciation
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Comparison of Income and Price Levels in 1996
and 2002 for New Member States and Euro Area
(EU15=100)
105
EUR
Nominal convergence
95
85
CYP
Price Level
75
SLO
MAL
65
NMS
55
Real convergence
POL
45
EST
35
CZE
HUN
SKV
LAT
LIT
25
25
35
45
55
65
75
Level2004
©Income
Viktorová,
85
95
105
33
Enlargement of the Euro Area under
the Economic Conditions of 2003
10,0
8,0
6,0
H
I
C
P
4,0
2,0
0,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
-2,0
Real
GDP Growth
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2004Rate
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Maastricht Constraints for
Nominal and Real Convergence
 aspiration to fulfil Maastricht criteria
might induce distortions into economy
 too restrictive monetary policy
 appreciation of nominal ER due to
investment inflows ? RER
appreciation
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