Download Monetary Integration and the Euro

Monetary Integration and the Euro
EUROPEAN ECONOMIC INTEGRATION
Oldřich Dědek
Institute of Economic Studies, Charles University
Major themes in cost-benefit debate

Absorption of asymmetric shocks

Restoration of external price
competitiveness

Autonomous monetary policy in face of
growing capital mobility

Theory of optimum currency areas
2
Asymmetric shock – SD diagram
P
SF
EF
P
SG
EG
DG
DF
Q
France



Q
Germany
DF, DG … French, German demand curves (rising prices P
discourage demanded quantity Q)
SF, SG … French, German supply curves (rising prices P encourage
supplied quantity Q)
EF, EG … French, German market equilibrium
3
Asymmetric shock – primary adjustment
P
SF
P
SG
E’G
D’G
EF
EG
E'F
D’F
France

DG
DF
Q
Q
Germany
Autonomous demand shift from French to German goods
 France: declining production, rising unemployment  pressure
for lower wages and lower inflation
 Germany: rising production inflationary pressures
4
Asymmetric shock – use of exchange rate
P
SF
P
SG
E’G
EF
EG
E’F
D’F
France

DG
DF
Q
Q
Germany
Devaluation of FRF and revaluation of DEM (fixed exchange rate)



D’G
Cheaper French exports in Germany and more expensive German exports in
France
Rising demand for French goods and declining demand for German goods
Return to initial equilibria prevailing before asymmetric shock
5
Asymmetric shock – absence of exchange rate
SF
P
EF
ED
DF
Q
France



Primary effects (internal devaluation): drop in demand  lower
production and higher unemployment  pressure on wages 
cheaper production  output expansion (supply curve moves to
south-east)
Secondary effects: lower wages  lower household expenditure 
contraction in output (demand curve moves to south-west)
Danger of self-strengthening spiral of deflation and contraction
6
Asymmetric shock – secondary adjustment
S’F
P
SF
E’F
EF
D’F
DF
Q
France



Devaluation increases prices of imports (including investment
goods), higher production costs  supply curve moves to left (new
equilibrium EF’ removes part of positive effects of devaluation)
Devaluation is accompanied by monetary tightening in order not to
undo price pillow too fast
Pass-through of devaluation is faster the more open the economy is
7
Asymmetric shock – vs. symmetric shock
P
SF
EF
France



SG
EG
D’F

P
DG
DF
D’G
Q
Q
Germany
Symmetric shock hits all members of monetary union
Danger of competitive devaluation (solving French problems at
expense of Germany)
Danger of retaliating competitive devaluations, which destabilise
mutual trade and push up inflation only
Difficult distinction between symmetric and asymmetric shocks in
practice
8
Asymmetric shock – other practical considerations

Dubious circumstances for using the exchange rate
as policy response




Devaluation may weaken pressure for necessary
restructuring (sleeping on the exchange rate pillow)
Creation of tensions in other trading sectors (green rates in
CAP)
Permanent vs. transitory asymmetric shocks
Outdated model of fixed but adjustable exchange
rates


Movements of floating exchange rate need not be linked to
the occurrence of asymmetric shocks
Overshooting in exchange rate changes
9
Competitiveness – purchasing power parity



Phillips curve postulates trade-off between
inflation and unemployment (or growth rate)
Different countries may have different
preferences about inflation-unemployment
mix (lower unemployment at cost of a higher
inflation and vice versa)
At different inflation rates, exchange rate
helps restore price competitiveness


Static PPP: PI = EI/G x PG
Dynamic PPP: πI = eI/G x πG
10
Competitiveness – equilibrium devaluation
πI
Italian PC
German PC
eI/G
πG
uI



uG
Existence of national currencies: devaluation of lira against mark
restores price competitiveness of Italian exporters
Absence of national currencies: national inflations must be equal
(eI/G = 0  πI = πG)
Resulting inflation-unemployment mix need not be optimal in any
country (too high unemployment in Italy and too high inflation in
Germany)
11
Competitiveness – monetarist view



Market agents adjust prices and wages
according to expected inflation  monetary
policy inefficiency in medium run (impossible
to suppress unemployment below natural
level)
Only unexpected inflation (caused by
unexpected devaluation) may have
stimulating effects  temporary effect due to
adaptation of inflation expectations
Phillips curve in medium run is vertical (no
inflation-unemployment menus are available)
12
Competitiveness – vertical PC
German PC
(long-run)
Italian PC
(long-run)
πI πG
uIn



uGn
Creation of monetary union does not involve long-run costs (natural
unemployment rate is not related to inflation)
Higher-inflation country receives one-off bonus from importing low
inflation (loss of exchange rate tool should not be seen as cost of
monetary union)
Problems can arise during adjustment to new equilibrium (termination of
formal or informal indexation schemes)
13
Competitiveness – Barro-Gordon model




Central bank announces its preferences about inflationunemployment trade-off through its decisions
Market agents do not adjust behaviour to declared
objectives if they are judged non-credible (suspicion of
cheating)
By entering monetary union, non-credible bank can no
longer cheat about monetary policy, and inflation
expectations are based on reputation of more credible
central bank of monetary union
Effect of borrowed credibility (recommendation to
establish ECB on lines of Bundesbank)
14
Competitiveness – representation of BG model
C
πC
πB
πA
Market judgement about CB
indifference curves regarding
inflation-unemployment mix
Short-run Phillips curve
Indifference curve of credible CB
B
A
uN



πA is non-credible inflation: agents do not believe that CB is honest
about this inflation and do not adjust accordingly (CB is expected to use
short-run PC to achieve preferred point B (market adjusts to expected
inflation πB)
πC is credible inflation: agents believe that CB is honest about this
higher inflation (no cheating because PC cannot be used to attain
higher indifference curve)
Inflation πA can be achieved by entering monetary union with credible
central bank
15
Monetary autonomy – Impossible Trinity

Impossible Trinity means that no monetary
arrangement can reconcile simultaneously



Fixed exchange rates
Autonomous monetary policy (in setting interest
rates)
Free capital movements

Uncovered interest rate parity

Practical examples
iFRF  iDEM  EFRF / DEM


Intrinsic instability of fixed but adjustable
exchange rates (single currency solves the
dilemma)
Currency mismatches in foreign borrowing
16
Post-war monetary order




Bretton-Woods arrangement as reaction to
unprecedented inter-war instability (deep economic
recession, protective practices, competitive
devaluations)
Pivotal role of US dollar (guarantor of store of value
through link to gold, 1 oz = 35 $)
Regime of fixed but adjustable exchange rates
(fluctuations ± 1%)
International Monetary Fund as overseer of world
monetary order


Extends loans to countries with temporary balance-ofpayments problems
Monitors exchange rate realignments
17
European Payment Union (1950-1958)

System for multilateral settlement of bilateral trade
transactions
A
B
C
D



A
X
-100
+50
+30
B
+100
X
-20
-20
C D EPU
-50 -30 +20
20 20 -60
X -30 0
30 X +40
No direct debtor-creditor relationship among EPU members
(only debtor-creditor positions vis-à-vis EPU)
Makes for easier removal of bilateral trade restrictions
EPU wound up after making member currencies
convertible
18
Rome Treaty




No explicit attention paid to potential creation of
monetary union or fixed exchange rate arrangement
Laid down some important prerequisites for eventual
monetary union (full convertibility of currencies, abolition
of capital controls, coordination of economic policies)
No acute problem at time of well functioning of BrettonWoods system
Rising tensions in the end of 1960s brought forward
debate about benefits of stable currency (strong
perception of advantages of single currency)



Devaluation of British pound in 1967(UK is not EEC member yet)
Devaluation of French frank in 1967 (instability for CAP)
Growing tensions of US dollar leading to the collapse of B-W
system
19
Werner Report (1971)


Ambitious plan proposing a three-stage move to monetary union
starting in 1980 (irrevocably fixed exchange rates, eventual
introduction of single currency)
Clash of two approaches




WR agenda shelved under pressure of acute economic problems




Monetarist school: narrowing exchange rates fluctuations first that would
promote deeper economic convergence (France, Belgium, Italy)
Economist school: first economic coordination and convergence of
economic performance and only then planning of monetary union
(Germany, Netherlands)
Compromise – convergence period of a fixed length
Oil shock (1971) made visible different approaches to policy priorities
Collapse of Bretton-Woods system (1973)
Conspicuous divergence in inflations and unemployment rates
European Monetary Cooperation Fund (EMCF) established in 1973

Extension of short-term credits with the aim to stabilize balance of
payments
20
Snake in the tunnel

Tunnel: European currencies fluctuate vis-à-vis US dollar in a range
of ± 2¼ % around dollar central parities  mutual fluctuations of up
to 9 %
●
DEM/USD
FRF/USD
●
+2¼
-2¼
●
●

dollar parity
Snake: European currencies fluctuate in a range of ± 2¼% around
mutual bilateral central parities  mutual fluctuations of up to 4½%
FRF/DEM
+2¼
bilateral parity
-2¼
21
Historical moments of monetary snake













24/4/72: Founding members Belgium, France, Italy, Luxemburg,
Netherlands, West Germany
1/5/72: Denmark, United Kingdom enter
23/5/72: Norway associates
23/6/72: United Kingdom exits
27/6/72: Denmark exits
10/10/72: Denmark returns
13/2/73: Italy exits
19/3/73: Sweden associates
19/3/73: Collapse of Bretton-Woods system
3/4/73: Creation of European Monetary Cooperation Fund
19/1/74: France exits
10/7/74: France returns
15/3/76: France exits
Source: Gros & Thygesen: European Monetary Integration.
22
European Monetary System (EMS)



EMS launched in March 1979
All EC members took part, but not in all
components (integration à la carte)
Major components of EMS




European Currency Unit (ECU)
Exchange Rate Mechanism (ERM) – voluntary
membership
European Monetary Cooperation Fund (system of
credit facilities to defend fixed exchange rates)
Divergence indicators
23
European Currency Unit – ECU


Basket currency composed of given quantities of all EC currencies
(not only those participating in ERM)
Weights derived from economic strength of member countries
(share in intra-EC trade, share in GDP)





Non-cash (scriptual) currency (no physical ECU banknotes and
coins)
Initial value set at 1 ECU = 1 USD
Functions of ECU (official ECU)





Regular updates at 5 year intervals
Maastricht Treaty locked the composition of ECU
Unit for defining central rates in parity grid
Accounting unit for EC budget
Means of payment in official transactions (EC authorities, member states,
international organisations)
Political symbol (harbinger of possible monetary union)
Private ECU

Financial market instruments denominated in ECU that tracked composition of
ECU currency basket (deposits and loans, international bonds, foreign exchange
contracts)
24
ECU – construction
Currency
BEF
DEM
DKK
ESP
FRF
GBP
GRD
IEP
ITL
NLG
PTE
Initial $ rate Weight (%)
39.392
8.71
1.910
32.68
7.292
2.71
162.382
4.24
6.407
20.79
0.786
11.17
293.878
0.49
0.792
1.08
2105.409
7.21
2.153
10.21
196.197
0.71
Quantity
3.4310
0.6242
0.1976
6.8850
1.3320
0.0878
1.4400
0.0086
151.8000
0.2198
1.3930
USD
USD
USD
USD
 nBEF 
 nDEM 
   nPTE 
ECU
BEF
DEM
PTE
25
ERM – parity grid

ERM as pegged but adjustable exchange rate
system





Each ERM currency has its central parity vis-à-vis ECU
Bilateral parities organised into matrix called parity grid
Central parity as centre of fluctuation band with width ±
2¼% (Italy ± 6%)
European nature (system functioning without any
link to dollar or gold) – joint float vis-à-vis dollar
Formal symmetry (absence of dominant currency)
versus factual asymmetry (different pressures on
debtor and creditor central banks during
interventions)
26
ERM – illustration of parity grid
1 BEF =
B
BEF
P
1
S
DEM
FRF
ITL
1 DEM =
1 FRF =
100 ITL =
16,03677
6,91233
3,62881
15,68000
6,75855
3,41761
15,33117
6,60819
3,21870
0,44084
0,23143
0,43103
0,21796
0,42144
0,20527
B
0,06523
P
0,06378
S
0,06236
B
0,15133
2,37281
P
0,14796
2,32002
S
0,14467
2,26841
B
0,31068
4,87153
2,09978
P
0,29260
4,58800
1,97757
S
0,27557
4,32097
1,86248
1
0,53692
1
0,50567
0,47624
1
B … buying point, S … selling point, P … parity
27
ERM – operational features

Symmetric support


Unlimited support



System of credit facilities urges central bank with strong currency
to provide sufficient amounts of liquidity to central bank with weak
currency
Fixed deadlines for repayment of borrowed funds
Collective realignments


Central banks of both weak and strong currencies must take part
in interventions
Changes in parities based on agreement of all ERM members
(protection against competitive devaluations)
Divergence indicators


Early warning indicators of exchange rate pressures with
presumption to act (interest rate changes, budgetary measures,
initiation of realignment, etc.)
Set at 75% distance of ± 2¼*×(1-w) % from central parity (w is
the weight of a given currency in ECU)
28
EMS stages – turbulent start (1979-1985)


Unstable international environment (following
second oil shock)  diverging inflations and policy
responses
ERM acted primarily as prevention against unilateral
competitive devaluations



Frequent realignments (9 during 1st stage)
Large number of countries involved
Systemic problems



Political tensions when big currencies were to be realigned
(political cost of devaluation, opposition of business people
against revaluation)
High predictability of realignments  waves of speculative
activity
Realignments caused by external events (weak dollar 
capital flows to Germany  pressure on mark 
compulsory interventions)
29
EMS stages – German mark anchor (1986-1991)

Monetary leadership of Germany




Illusion of approaching quasi monetary union





EMS members tended to coordinate interest rate changes with those of
Germany (effect of borrowed credibility)
Period of converging inflations and higher financial discipline
No say of other countries in formulating German monetary policy
In 1987-1992 no realignments took place (except for techical ones)
Apart from Greece all EC currencies became ERM members
All currencies within narrow fluctuation band ± 2¼ %
Other currencies pegged to ECU (Sweden, Finland)
Plans to form EMU once again at top of agenda




June 1988: Hanover European Council (EMU project launched)
April 1989: Delors Report (plan to reach monetary union in 3 stages)
December 1990: Intergovernmental conferences about EMU and
political union
December 1991: Agreement reached about Maastricht Treaty
30
Plan to reach EMU in three stages

Stage 1: from July 1990 to December 1993




Stage 2: from January 1994 to December 1998




Full liberalization of capital movements
Closer coordination of monetary policies
Fostering economic convergence
Establishment of European Monetary Institute responsible for
technical preparations for single currency
Countries are fulfilling Maastricht convergence criteria (opt-out for
UK and Denmark)
Granting independence to national central banks
Stage 3: from 1st January 1999 onwards




Irrevocably fixed exchange rates among participating countries
ECB conducts single monetary policy
ERM replaced by the successor regime ERM-II
Stability and Growth Pact takes effect
31
EMS stages – currency crisis in 1992-1993




Reunification of Germany sparked inflation pressures,
high German rates criticised by other countries
Less than perfect convergence accompanied by
suspension of realignments  perception of
misaligned currencies (Italy, United Kingdom, Spain)
Battered credibility of EMU (failed referendum about
MT in Denmark, uncertainty about outcome in France)
Consequences of crisis



British pound and Italian lira forced to withdraw from ERM at
high costs
Heavy speculation against currencies of Spain, Portugal,
Denmark, Ireland, France
August 1993: ERM fluctuation bands widened from ± 2¼ % to
± 15 % (wide bands not very different from floating)
32
EMS stages – heading towards euro (1994-1998)

Crisis in 1992-1993 strengthened arguments of
Impossible Trinity


Promotion of exchange rate stability within wide bands





Choice among corner solutions: free floating versus single
currency
Lower risk of exchange rate speculation due to higher exchange
rate uncertainty within wide bands
Attacked currency moved back into narrow corridors
Italy returned into ERM in 1997, UK and Sweden stayed
permanently outside
Austria and Finland entered ERM in 1995 after becoming
members of EU
Orderly transition to Stage 3 in spite of turbulences on
global financial markets


1998: crisis in South-East Asia, Russian rouble crisis
Those interested in EMU membership focused on fulfilling
nominal convergence criteria  remarkable improvement in
public finances
33
Three phases of Stage 3

Madrid Summit (December 1995)



Phase 1 (1999-2001): circulation of euro in non-cash
form



National currencies became non-decimal representations of euro
Principle „no compulsion – no prohibition“
Phase 2 (Jan-June 2002): dual circulation




Beginning of Stage 3: 1 January 1999 at latest
ECU renamed euro
Introduction of euro in physical form in coins and banknotes
National currencies are withdrawing from circulation
Logistically successfully managed changeover process
Phase 3

Euro is the only legal tender in Eurozone countries
34
Actual versus perceived inflation
Chart B1.
Euro area : inflation perceptions
(Consumer Survey Balances )
65
5,0
4,5
55
4,0
45
3,5
35
3,0
25
2,5
2,0
15
1,5
5
1,0
-5
0,5
-15
janv-95 janv-96 janv-97 janv-98 janv-99 janv-00 janv-01 janv-02 janv-03 janv-04
0,0
Source: Commission services
Source: European Commission
35
Explanation of perceived inflation







Consumers attach a higher importance to price developments of
goods and services that they buy more frequently (out-of-the-pocket
expenditures)
Consumers are more influenced by upward price movements than
by downward changes
Consumers pay high attention to exceptional price increases
despite a low weight of respective goods and services in consumer
basket
Prices in national currencies that ceased to exist remained reference
units for comparisons with euro prices that were exposed to
accumulated year-to-year inflation
Problem of granulated currency (ITL, GRD): dismissive attitude
toward national coins without purchasing power was transferred to
euro coins with some purchasing power
Public failed to differentiate between different reasons for higher
inflation
Accusation for price increases were amplified by media coverage
(preference for bad news)
36
Maastricht convergence criteria



Creation of monetary union perceived as
“coronation” of convergence process towards
price stability
Binding deadlines for start of Eurozone, not
later than 1 January 1999 even with smaller
group of countries
Limited inspiration by OCA principles when
qualification criteria were formulated; stress
on operability and intelligibility
37
Convergence criteria – inflation



Maximum admissible limit: average of three lowest
inflations in EU countries plus 1.5 percentage points
Indicator: Twelve month average HICP (Harmonised
Index of Consumer Prices)
Motivation




Substantial inflation differentials make single monetary policy
difficult to operate
Erosion of price competitiveness without recourse to
realignments
“Value of price stability” adhered to by all Eurozone members
(guarantee for Germany)
Objections



Why inflation in countries outside Eurozone?
Who are outliers (countries with extremely low inflation)?
Too restrictive for catching-up countries (Balassa-Samuelson
effect)?
38
Convergence criteria – long-term interest rates



Maximum admissible limit: average of interest rates in
three EU countries with lowest inflation plus 2
percentage points
Indicator: Average monthly yield on 10-year government
bonds
Motivation



Sustainability test of low inflation and healthy public finances in
longer term
Avoiding large instability in pricing debt securities when they are
converted from national currency to euro
Objections

Elimination of exchange rate risk in monetary union triggers
convergence of bond yields (consequence of uncovered interest
rate parity)
E / E  i F  i H

Caveat: elimination of exchange rate risk does not eliminate
credit risk
39
Convergence of long-term interest rates
Ten-year bond yields (in percent, annual data)
20
18
16
14
12
10
8
6
4
BE
DE
EL
ES
FR
IR
IT
NL
AT
PT
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
2
FN
Source: Eurostat.
40
Convergence criteria – exchange rate


Content: Membership for at least two years in ERM II, keeping
exchange rate within normal bands without severe tensions and
devaluation of central parity
Motivation



Objections




Test of appropriateness of central parity before it is irrevocably fixed (ERM II as a
training field)
Preventing competitive devaluations prior to fixing (conversion rate should be
close to market exchange rate)
Outdated concept of a normal band (former narrow bands ±2¼ % were abolished
during 1992-93 crisis)
ERM II as a compulsory waiting room
Exchange rate stability assessed from the perspective of more criteria
Properties of ERM II




Central rates are defined bilaterally in terms of euro
Fluctuation margins ±15 %, narrower margins can be negotiated with ECB or set
unilaterally
Automatic interventions on the margin provided they do not jeopardize price
stability in Euro Area
Exchange rate regimes incompatible with ERM II membership: free or managed
float, unilateral euroization, exchange rate pegged to other currencies than euro
41
Convergence criteria – fiscal stance

Government deficit




Deficit-to-GDP ratio shall not exceed the reference
value of 3%, unless
The ratio is steadily declining and approaching the
reference value
Exceeding the reference value is modest, exceptional
and temporary
Government debt



Debt-to-GDP ratio shall not exceed the reference
value of 60%, unless
The ratio is declining and approaching the reference
value in satisfactory way
Exceptions vital for Belgium, Italy and Greece
42
Links between debt and deficit
Dt  Bt  Bt 1
(size of deficit ≈ change in debt)
Dt Bt Bt 1
Bt 1 Yt 1
dt 
 
 bt 

Yt Yt
Yt
Yt 1 Yt
1
 bt  bt 1 
1  gt
dt … ratio of deficit to GDP
bt … ratio of debt to GDP
gt … growth rate of nominal GDP
3% deficit and 60% debt are roughly consistent with 5% nominal GDP
growth (approx. 2% inflation and 3% real GDP growth)
43
Theory of optimum currency areas (OCA)


OCA is theoretical basis of whether countries should
form monetary union = one authority responsible for
conduct of monetary policy
The author of OCA theory is Robert Mundell (Nobel prize
winner in 1999)


Other contributors: Peter Kenen, Ronald McKinnon, Jacob
Frenkel
OCA criteria (ability to adjust smoothly to asymmetric
shocks):



Flexible labour markets (avoids painful drop in real wages in
reaction to asymmetric shocks)
Structural similarity (makes occurrence of asymmetric shocks
less likely)
Trade openness (diminishes efficiency of exchange rate
adjustment)
44
Endogenous OCA

Endogenity principle



Elimination of exchange rate risk boosts mutual trade



Creation and maintenance of monetary union among countries which do
not form OCA accelerates integration processes and contributes to
achieving OCA faster
Countries may form a monetary union even though they do not form
optimum currency area
Exchange rate stability improves efficiency of investment decisions
Costly hedging with financial instruments (lack of long-term contracts)
Absence of exchange rate risk leads to deeper integration



Price transparency enhances competition in product markets
(complications due to price regulation, different tax system, consumer
preferences)
Easier capital mobility contributes to easier overcoming of asymmetric
shocks
Asymmetric shocks are made more symmetric (through more diversified
ownership of assets)
45
Surveillance over macro-economic imbalances

Preventive arm




Corrective arm




Alert mechanism: a set of early warning indicators with thresholds
arranged in the scoreboard whose aim is to detect MS with
potential harmful imbalances
In-depth review: detailed analyses focused on MS economies in
which alert mechanism detected potential harmful imbalances
Possible actions: 1. No problem, 2. Imbalances exist but are not
severe, 3. Severe imbalances  MS is placed in Excessive
Imbalance Procedure
Applied to Eurozone members only
MS prepares Corrective Action Plan (fine 0.1 % GDP if the plan is
found insufficient)
Surveillance of Plan‘s commitments (interest-bearing deposit 0.1
% GDP if found insufficient, eventually converted into fine)
Reverse qualified majority voting
46
Self-fulfilling prophecy

Vicious circle of debt trap



High debt (generated by public or private sector)  concerns of bondholders are
reflected in higher risk premiums  strains in financial markets urge for fiscal
consolidation  higher taxes and expenditure cuts undermine growth prospects
 further concerns of investors about ability to repay the debt  further
escalation of risk premiums
All consolidation efforts are consumed by excessive interest rates  high
incentive to declare bankruptcy despite extreme social costs
Adjustment programme




External official assistance gets rid of dependence on extremely costly borrowing
from financial markets
Conditionalities attached to the financial assistance should encourage reforms 
putting the government debt on sustainable path which is prerequisite to restoring
the market confidence
Painful therapy but there is no other user-friendly medicine
Key role of debt sustainability analysis
𝑖𝑡 − 𝑔𝑡
∆𝑏𝑡 =
𝑏
− 𝑝𝑏𝑡 + 𝑘𝑡
1 + 𝑔𝑡 𝑡−1
b ….. debt-to-GDP ratio
i .…. average interest rate paid on government debt
g ….. growth rate of nominal GDP
pb … primary budget balance (actual balance net of
interest payments)
k ….. stock-flow adjustment (impact of exchange rate
changes, debt relief, privatization revenues, etc.)
47
European stability mechanism

Principle of functioning
Country
Bonds
ESM
MS

budgets
Capital market
Funds
Basic facts




ESM was inaugurated in October 2012 as an international
institution owned by Eurozone members
Subscribed capital 700 bn EUR = paid capital (80) + callable
capital (620)
Net lending capacity 500 bn EUR (sufficient for obtaining highest
rating for ESM bonds)
Instruments: government loans, interventions on primary and
secondary markets for government bonds, direct recapitalization
of banks, fiscal backstop in Single Resolution Mechanism
48
Multi-speed Europe

Eurozone members



EU members and Eurozone non-members with permanent
exception (opt-out)



ERM-II members: Denmark
ERM-II non-members: United Kingdom
EU members and Eurozone non-members with temporary
exception (derogation)



Founders: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Netherlands, Luxembourg, Portugal, Spain
Enlargements: Greece (2001), Slovenia (2007), Cyprus and Malta
(2008), Slovakia (2009), Estonia (2011), Latvia (2014), Lithuania (2015)
ERM-II members: none
ERM-II non-members: Sweden (euro rejected in referendum), Czech
Republic, Hungary, Poland, Bulgaria, Rumania, Croatia
European countries outside EU using euro as national
currency


National euro coins: Andorra, Monaco, San Marino, Vatican City
Others: Kosovo, Monte Negro
49