Download The European Union and the single currency in the global economy

The European Union and the single
currency in the global economy
1 – historical background
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 EU’s monetary management? This
consideration was particularly strong in France.
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 reunification 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.
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)
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.
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.
Fonti:Commission, Eurostat, IMF, UNO.
11 –Key commercial trading partners of EU-15 (average
1999-2001)
(b) Imports
(a) Exports
12 – FDI inside the EU 15 as a share of total FDI
*With the exception of reinvested profits
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.
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.
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
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.
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?