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

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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.

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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.

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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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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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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.

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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.

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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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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.

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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.

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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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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.

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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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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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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.

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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.

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FontiCommission, Eurostat, IMF, UNO.
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11 Key commercial trading partners of EU-15
(average 1999-2001)
(b) Imports
(a) Exports
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12 FDI inside the EU 15 as a share of total FDI
With the exception of reinvested profits
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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.

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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.

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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

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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.

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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?