Download Economic and Monetary Union

Economic and Monetary Union
Convergence across European Union
• One of the main goals of the new member states
is finding an optimum mix of policies that would
ensure high growth rates and the alignment to the
general standards imposed by the European
Union.
• The next important step is to join the Monetary
and Economic Union and finally adopting euro.
• This embodies a series of targets that must be
accomplished in order to ensure a smooth
transition
towards
achieving
sustainable
convergence.
Convergence across European Union
• The nominal convergence criteria a state should
fulfill before adopting euro are detailed by the
Treaty of Maastricht.
• The main objective stipulated by the Treaty of
Maastricht: ” Promoting a sustainable economic
and social progress, throughout an area without
internal borders, through economic and social
cohesion and by establishing a Economic and
Monetary Union that has as final stage the
adoption of the common currency, namely the
Euro.
The Maastricht Treaty – Principles
The transition towards
a monetary union is
gradual for each
country
Not all member states
have to become
members of the
European Union at the
same time
Adopting the euro
• Establishing a fixed date for the accession to the
euro zone, is determined exclusive by the states
and their capacity of fulfilling the accession
criteria.
• The degree of fulfillment of these criteria may be
evaluated from the economic perspective and of
the structural similarities that exists between that
economies and the European Union.
• In addition to all these issues is particularly
important to assess the ability of absorption of
different types of shocks by these economies.
Adopting the euro
• The new changes of the economic and political
framework of the euro zone, but also of the
mechanisms of intervention of the supranational
institutions on different markets may generate the
introduction of new criteria for the states
involved.
• The current situation from the euro zone was
strongly influenced by the financial crisis impact
and also by the sovereign debt crisis from the
European markets.
Euro challenges – the formal framework of adopting
the common currency established by the Maastricht
Treaty
• Inflation rate must be within 1.5 percentage points
of the average rate of the three states with the
lowest inflation.
• The long term interest rate must be within 2
percentage points of the average rate of the three
states with the lowest inflation rates.
• The public debt must be either already below 60%
of GDP or heading towards this level.
• A budget deficit less than 3% of GDP.
• The national currency must not be devalued for
two years.
Adopting the euro
• The reduced performances of the CEE countries during the
recent crises were considered a warning sign for the need of
reconfiguration of the economic growth models of these
economies. Becker et all (2010) identifies as generator
elements for this context the extremely high degree of
financial integration as well as the high dependence of net
capital flows.
• The impact of the recent financial crisis was warning sign
of the need to reconsider the criteria of entering euro zone.
Darvas (2010) propose as a manner of solving these
vicissitudes a recalculation of these indicators according to
the recent developments across euro zone and extending the
period for the evaluation of the degree of fulfillment of
these criteria by the states.
Real convergence criteria
• This set of criteria’s was introduced for CEEC countries as
additional preconditions for EMU participation.
• The concept of real convergence is
characterized by
complexity and it’s related to the process of reducing the gap
between the aspirant’s countries and EU.
• Real convergence criteria considered:
 degree of openness (expressed as (Imports + Exports/GDP);
 share of bilateral trade with EU countries in total foreign
trade;
 economy structures (expressed by the share that important
sectors have in consolidation of GDP mainly agriculture,
service and industry);
 GDP/capita
Nominal and real convergence
• Establishing a correlation between real and
nominal criteria is considered to be one of the
most important landmarks of the euro issue.
• Reason: the actions related to these two types of
convergence target two different aspects
• Real convergence: complex phenomenon related to the
process of reducing the gap between economies;
• Nominal
convergence:
convergence
implies
the
harmonization of some basic macroeconomic indicators like
inflation rate, long-term interest rate, exchange rate, budget
deficit and public debt.
Institutional structure of EMU
• Is formed by the European Central Bank and
the central banks of the member states that
togheter constitute what we call the European
System of Central Banks.
• The Euro-system is formed by European
Central Bank and the central banks of the
states that already adopted euro.
• Main objectives of European System of
Central Banks:
• Maintaining price stability;
• Defining monetary policy;
• Assuring the stability of the financial system.