Download emu (pp slides) - Southern Methodist University

History of European
integration
•
•
•
•
•
•
•
1950 - European Payments Union
1951 - European Coal and Steel Community
1957 - Treaty of Rome
1970s & 1980s - Expansion of EU
1986 - Single European Act
1992 - Maastricht Treaty
1999 - EMU
Two dimensions
• Political
-Council of Ministers as
decision making body
-European law
-European Parliament
(directly elected since
1979)
• Economic
-Eliminate internal
customs duties and
quotas
-Common external trade
policy
-Creation of single
market
GDP growth 1990-2000
8
6
4
Percent
2
0
-2
90
91
92
93
94
95
96
Euro area
97
US
98
99
00
01
Unemployment 1990-2000
14
12
10
Percent
8
6
4
2
0
90
91
92
93
94
95
96
Euro area
97
US
98
99
00
01
No New Economy in Europe
Productivity growth 1990-2000
4
3
Percent 2
1
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Euro area
US
EMU: What happened?
• January 1, 1999 (Stage IIIA)
– Formal launch of euro
– ECB takes over monetary policy
• January 1, 2002 (Stage IIIB)
– Introduction of euro notes & coins
EMU
• Profound change in international monetary
relations
– Between the countries of Europe
– Between Europe and the rest of the world
• Model for what we will see in the 21st
century?
Why does it matter for Europe?
•
•
•
•
Fundamental change in monetary policy
ECB independent
Mandate for price stability
Significance of currency as symbol of
sovereignty
• Move towards “super state”
The euro
The €1 coin
The €5 note (front)
The €5 note (rear)
The €10 note (front)
The €10 note (rear)
The €50 note (front)
The €50 note (rear)
The €100 note (front)
The €100 note (rear)
The €200 note (front)
The €200 note (rear)
The €500 note (front)
Institutions
Council of Ministers
European Commission
European Central Bank
European Parliament
Policy making institutions
6 Executive
Board Members
of the ECB
Governing
Council
of the ECB
Monetary
policy
for
euro area
12 National
Central Bank
Governors
Strategy & accountability
• Twin pillars of ECB monetary policy strategy
– Broad based assessment of outlook for price
stability
– Reference value for money growth
• Quantitative definition of price stability
– 2% inflation or less
Three facets of EMU
• Creation of European “super state”
• Deepening and strengthening the single
market
• Monetary stability through new institutions
Why does it matter for the US?
• Europe is our most important trading
partner
• Europe is the most important source of
investment in the US
• The euro as a competitor with the dollar
Destination of US exports
EU
28%
Rest of the
world
40%
Japan
8%
Mexico
8%
Canada
16%
Source of US imports
EU
27%
Rest of the
world
37%
Canada
15%
Japan
13%
Mexico
8%
Source of US FDI
Rest of the
world
15%
Japan
16%
Mexico
0%
Canada
9%
EU
60%
Destination of US FDI
Rest of the
world
39%
Japan
4%
Mexico
3%
EU
43%
Canada
11%
The euro as a competitor with
the dollar
• US dollar dominant in international
transactions
– size and global reach of US
– stability of purchasing power
• Benefit to US: seigniorage revenue
• Challenge from high-denomination euro
notes?
A model for the future?
• National central banks an expensive luxury?
• The debate over dollarization
• Monetary union as an alternative?
Dollar-euro exchange rate
$ per €
Launch
of
EMU
1.30
1.20
1.10
1.00
0.90
0.80
Jan-97
$ per ECU
prior to 1999
Jan-98
Jan-99
Jan-00
Jan-01
EU expansion
Other
EU
Euro
area
Candidate
countries
Candidate countries not shown: Malta and Cyprus
The demographic timebomb
5
4
Workers 3
per
retiree 2
1
0
1990
2000
2010
2020
2030
US
EU15
EU28
2040
2050
Will the euro displace the dollar?
• Dollar currently the primary
international currency
• Euro has potential to match and even
displace the dollar
• But...
Will the euro displace the dollar?
• Difficult to dislodge established currency
• Thirty years for dollar to displace sterling
• Would it matter?