Transcript Slide 1

Mr. Massimo M Beber
Senior Tutor
College Lecturer in Economics
Sidney Sussex College
Cambridge CB2 3HU
[email protected]
http://people.ds.cam.ac.uk/mb65/
Arts, Humanities and Social Sciences Summer School 2013
One Market, One Money?
The Economics and Politics of European Monetary Union
(http://people.ds.cam.ac.uk/mb65/OneMarketOneMoney.htm)
ECONOMIC INTEGRATION: A CLASSIFICATION
Trade in Goods and Services
Mobility of
Capital and
Labour
Microeconomic
Common
Policy CoMacroeconomic
ordination
Policy
No internal
tariffs
Common
External Tariff
FREE TRADE AREA
y
n
n
n
n
CUSTOMS UNION
y
y
n
n
n
COMMON MARKET
y
y
y
n
n
SINGLE MARKET
y
y
y
y
n
EMU
y
y
y
y
y
Source: a version of a Table introduced by Bela Balassa in The Economics of Integration (1961)
Europe – A Phase Chronology
• 1945-51: “hegemon-led integration” (Marshall
Plan, OEEC-OECD, EPU)
• 1951-1973: “Golden Age regionalism” (ECSC to
EEC – customs union, single market in agricuture
and coal/steel, first MU blueprint – Werner and
MacDougall Reports)
• 1973-1984 “devil take the hindmost”
• 1985-1999: “one market, one money”
• 2008-?? “Make (banking & fiscal union) or Break”
Landmarks en route to EMU
Jul-50
The European Payments Union begins its operation, facilitating clearing of intra-European payments
Dec-59
With the generalized introduction of "external convertibility", the Bretton Woods system of fixed exchange rates
begins to operate.
Dec-69
At the first European Summit in The Hague, the heads of state and government commission the "Werner Report"
on a possible European Monetary Union (George Pompidou and Willi Brandt as French President and
German Chancellor respectively).
Dec-71
The Smithsonian Agreements effectively signal the demise of the international monetary order based on the "dollar
standard".The Agreements included (1) a devaluation of the US $ against other currencies; (2) the abolition of
the fixed link between dollar and gold, substituted by one with the SDR; (3) wider fluctuation bands (4.5%).
Dec-72
After 9 months of operation of the "snake in the tunnel", European Summit adopts the goal of economic and
monetary union.
Dec-78
European Council's resolution on "creating a zone of monetary stability in Europe".
Mar-79
The European Monetary System (EMS) begins to operate on the basis of an agreement between central banks.
Britain does not join the Exchange Rate System (ERM) of the EMS, and remains a floating currency.
Jul-85
Palermo Agreement between Central Bank Governors: the ERM "hardens".
Jun-89
The Madrid European Council endorses the Delors Report commissioned a year earlier at the Hanover Council.
Jun-90
Dublin European Council establishes two ICGs (on political as well as economic and monetary union), with the aim
of having new treaties ratified by December 1992.
Oct-90
The UK joins the ERM weeks before Mrs Thatcher's removal from office.
Sep-92
"Black Wednesday": Britain, Italy and France suspend their membership of the narrow-band ERM
Feb-92
Following political agreement in Rome (11-12th December 1991), the Maastricht Treaty on Economic and Monetary
Union is signed and ratified in all member countries during the rest of the year.
Jan-93
Stages One of the Convergence to EMU begins, leading through Stage Two to the choice of irrevocable parities
and the 1998 Convergence Report, leading to the approval of 11 member countries for initial EMU
membership.
Jan-99
EMU Stage Three launched: national currencies remain in circulation at their irrevocably fixed exchange rate
against the euro - effectively, as non-rounded denominations of the same monetary unit.
Jan-01
Conversion of national currencies into Euro notes and coins.
TRADE-OFFS IN THE INTERNATIONAL FINANCIAL
ARCHITECTURE
C’
B
C’’, C
A,D
Free Mobility of Capital
A:
B:
C:
C’, C’’:
D:
the Gold Standard as an “anchor” to the price level
the Bretton Woods compromise
the German model, Mrs Thatcher’s monetarist experiment
the Keynesians’ Last Hurrah between autarchy and stagflation
back to the anchor: EMU, currency boards, dollarisation...
PRODUCTIVITY SLOWDOWN AND RECOVERY
Source: The Kok Report (2004)
AVERAGE EU INCOME PER PERSON AS % OF THAT OF USA
Source: High Level Group (2004): Figure 1
EMU: Costs and Benefits
Costs
Costs and Benefits of monetary
union
(1971)
Benefits
(2010)
Costs
(2010)
Benefits
(1971)
Trade Integration
Nominal
Real
Source: AMECO Ch. 15 (accessed Dec. 05)
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
1995=100 - exchange rate against EU-14
REAL AND NOMINAL EXCHANGE RATES - ITALY
400
350
300
250
200
150
100
50
Floating Exchange Rates and Volatility
1
K (1  ih )  K  (1  iw )  E (e1 )
e0
Δih
ΔE(e1)
Δe0
If total expected returns are quickly
equalised by arbitrage...
…any change in the exchange rate
expected to prevail in the future will
generate an immediate change in
today’s interest rate and/or exchange
rate: expected depreciation causes
either an immediate monetary
contraction or immediate depreciation
Income Disparities and EU Widening
Source: Commission of the European Union (2003) Second Progress Report on Economic and Social Cohesion.
Communication from the Commission, Brussels, Commission of the European Union: COMM (2003) 34 Final): Maps
The Growth of Structural Funds, 1975-2006
0.45
Berlin
0.4
Delors II
37%
39%
Agreement
35%
0.35
32%
30%
% of EU Budget
0.3
Delors I
25%
0.25
0.2
0.15
9%
0.1
7%
0.05
5%
0
1975
1981
1987
1992
1998
2002
Source: adapted from Allan (2003), p. 244
2002(enl.)
2006
2006(enl.)
“GREED IS GOOD”
From Intermediation to Securitization
The Single Capital Market at Work
(lending to the private sector)
Source: Lane (2012) “The European Sovereign Debt Crisis”, p. 52.
The Single Capital Market at Work
(external borrowing)
Source: Lane (2012) “The European Sovereign Debt Crisis”, p. 53.
The Single Capital Market Frozen
while Germany is running a big trade surplus with the rest of the eurozone
which Germany's private sector is no longer willing to finance, transfers of
one sort or another are inevitable. But no-one should be under any
illusions about how difficult this is for politicians to explain to their
electorates, even if they understand themselves. In the public's eyes and in
the minds of many politicians, a trade surplus just shows that their country
is more competitive. What could be wrong with that?
Simon Tilford, July 2012
The Lender of Last Resort (LLR)
• Liquidity: money back today
• Solvency: money back in full
• The fire-sale problem
• “to lend freely on good security at a time of
crisis” (Walter Bagehot, Lombard Street)
The Politics of Lending of Last Resort
The central bank creates its own IOUs. As a result it does not need equity at
all to support its activities. Central banks can live without equity because
they cannot default. The only support a central bank needs is the political
support of the sovereign that guarantees the legal tender nature of the
money issued by the central bank. This political support does not need any
equity stake of the sovereign. In fact it is quite ludicrous to believe that
governments that can, and sometimes do, default are needed to provide
the capital of an institution that cannot default
Paul De Grauwe (July 2012)
Eurozone Sovereign Debt Crisis:
Greece
•
•
•
•
Focus on ECB’s liquidity management 2007-9
October 2009 – Greek general election
Budget revises deficit from 6 to 12.7% of GDP
Earlier years’ budgets (and thus debt) also
revised up
• Rising cost of servicing debt forces first Greek
bailout in May 2010
Eurozone’s Sovereign Debt Crisis:
continued
•
•
•
•
Ireland (November 2010)
Portugal (April 2011)
Greece again (March 2012)
Spain, Cyprus (June 2012)
EUROPEAN REDEMPTION (GSP MK II)
in November 2011, the GCEE suggested a bridge between short-term
stabilisation and long-term governance: The European Redemption Pact,
one element of which is the European Redemption Fund. In fact, the
European Redemption Pact (henceforth “the Pact”) rests on three pillars,
(i) a European Redemption Fund (henceforth “the Fund”), relying on
mutualizing part of Eurozone debt; (ii) the Fiscal Compact, in particular a
commitment to national debt brakes preferably at the constitutional level;
and (iii) the installation of a crisis resolution mechanism, with provisions
for the possible involvement of the private sector in future crises.
Bofinger, July 2012
ECB’S COSTLY INDEPENDENCE
In contrast to the central banks of the US, the UK and Japan, the ECB is not
allowed to finance treasuries in the member states. It cannot therefore act
as a lender of last resort for governments. This dividing line between
monetary and fiscal policy was drawn by the Maastricht Treaty to ensure
price stability and, given the experience with monetisation of fiscal deficits
in Europe’s history, should remain in place. But it induces an implicit
insolvency risk for investors financing sovereign debt of EZ countries...
Peter Bofinger, July 2012
The trouble with consolidation
• The “denominator effect” of low growth, low
inflation limit the “natural” fall in debt-to-GDP
ratios
• “Adjustment fatigue” leads to protests
• “Financial repression” within the single market is
increasingly difficult – residents cannot be forced
to buy government bonds
• Persistent, significant risk praemia raise the cost
of servicing existing debt in the Eurozone’s
periphery
European Financial Stability Facility
• Established in 2010 to avoid another “Greece
I” bailout (Euro 110bn hard to cobble
together)
• Hopes that it would merely deter bank runs by
its existence
• Yet needed for Ireland and Portugal within
months
• Euro 440bn not enough
The Banking Union Proposal
• A true banking union removes all national
differences in the policy and regulatory
environments in which banks operate
• Crisis Prevention
– Regulation
– Supervision
• Crisis management: LLR
• Crisis resolution: bailing in/out
THE “MUTUALIZED” DEBT CAKE
Adjustment I: price flexibility
Adjustment II: FDI – Perhaps, but...
Adjustment III: Migration – really?
“either poor countries will become richer, or
poor people will move to rich countries.
Actually, these two developments can be seen
equivalent. Development is about people: either
poor people have ways to become richer where
they are now, or they can become rich by
moving somewhere else. “ (Milanovic 2012)
Fiscal transfers? Not really (yet?)
we frown upon the transmission of familyacquired wealth to offsprings if two different
individuals belong to the same nation [but] we
take it as normal that there is a transmission of
collectively acquired wealth over generations
within the same nation, and if two individuals
belong to two different nations, we do not even
think, much less question, such acquired
differences in wealth, income and global social
position. (Milanovic 2012)
CAN THE EU FACE THE TRUTH?
European policy-makers have been reluctant to accept that the eurozone's
decentralised nature makes it an inherently unstable currency union that
forces its constituent states and 'their' banks into a pernicious and deadly
embrace.
On the face of it, all that changed at the June 29 summit, when memberstates agreed to consider establishing a banking union. Among the
features of such a union would be: a shared supervisory authority; a
collective deposit protection scheme for the currency union; and a
common resolution framework for dealing with weak banks.
... The idea of a banking union is sometimes spoken of as an easier route
to 'mutualisation' (or federalisation) than issuing common debt – partly,
the reasoning goes, because citizens do not understand what a banking
union entails.
Philip Whyte, July 2012