Download In 1998 eleven EU member-states had met the convergence criteria

Європейський монетарний
союз
Лекція 6
European Monetary Union

In 1998 eleven EU member-states had met the convergence criteria, and the
Eurozone came into existence with the official launch of the Euro on 1
January 1999.

Greece qualified in 2000 and was admitted on 1 January 2001. Physical coins
and banknotes were introduced on 1 January 2002.

Slovenia qualified in 2006 and was admitted on 1 January 2007.

Slovakia also qualified and was admitted on the 1 January 2009 bringing total
Eurozone membership to its current level of over 325 million people and
fourteen member states:

Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Netherlands, Portugal, Slovakia, Slovenia, Spain

In addition, Montenegro uses Euro as its currency. So do three European
microstates: Monaco, San Marino and Vatican (they concluded agreement
with the EU permitting them to use Euro as their currency and mint coins).
SEVERAL INTERESTING FACTS
Non-member states with formal euro agreements
Monaco
San Marino
Vatican City
Monaco, San Marino, and Vatican City also use the
euro, although they are officially neither Eurozone
members nor members of the EU.
Likewise, Montenegro and Kosovo, which used to have
the German mark as their de facto currency, also
adopted the euro without having entered into any legal
arrangements with the EU explicitly permitting them to
do so. Kosovo uses the euro instead of the Serbian dinar,
mainly for political reasons.
Adoption of Euro (as of the end of 2009)
Currency
Central
rate
Code
Official
target date
Expected
target date
British pound
GBP
—
Opt-out
Opt-out
Bulgarian lev
BGN
1.95583
—
2013
Czech koruna
CZK
—
—
2015
Danish krone
DKK
7.46038
Opt-out
Opt-out
Estonian kroon
EEK
15.6466
—
1 July 2010
or by 1 January 2011
Hungarian forint
HUF
—
—
2014
Latvian lats
LVL
0.702804
—
2013
Lithuanian litas
LTL
3.45280
—
2013
Polish złoty
PLN
—
2012
2013 or 2014
Romanian leu
RON
—
2014
2014
Swedish krona
SEK
—
—
—
As of 1 December 2002, North Korea has replaced the
U.S. dollar with the euro as its official currency for
international trading. (Its internal currency, the
won, is not convertible and thus cannot be used to
purchase foreign goods).
Cuba had announced the same in 1998 and Syria
followed North Korea in 2006
The fourteen countries of the European Union that do
not use the euro are: Denmark, Sweden, the United
Kingdom, Bulgaria, Cyprus, the Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland,
Romania and Slovakia.
Denmark and the United Kingdom obtained special
derogations in the original Maastricht Treaty of the
European Union. Both countries are not legally
required to join the Eurozone unless their governments
decide otherwise, either by parliamentary vote or
referendum.
Sweden did not, and is technically obliged to introduce
the euro at some point in the future. However, the EU
has made public that they have no intention to enforce
this with regard to Sweden.
Cyprus will adopt the euro on 1 January 2008. A
formal letter of application was submitted on 13
February 2007. The final decision was taken by the EU
finance ministers (Ecofin) on 10 July 2007 and the
conversion rate was fixed at 0.585274 CYP. On May 16,
2007 the European Commission backed by the
European Central Bank gave its green light for the
introduction in January 2008.The new currency will
only be used in the government-controlled areas of the
Republic: de facto state, the Turkish Republic of
Northern Cyprus, will keep on using the new Turkish
lira.
Since joining the EU the Czech Republic has adopted a
fiscal and monetary policy that aims to align its
macroeconomic conditions with the rest of the European
Union. Currently, the most pressing issue is the large
Czech fiscal deficit. Originally, the Czech Republic aimed
for entry into the ERM II in 2008 or 2009, but the
current government has officially dropped the 2010
target date, 2013 has been suggested as the earliest
changeover date.
Maastricht Convergence Criteria
Convergence criteria (also known as the Maastricht
criteria) are the criteria for European Union member
states to enter European Economic and Monetary Union
(EMU) and adopt the euro.
They assist to establishing conditions required by
optimal currency area theory.
The four main criteria are based on Article 121(1) of the
European Community Treaty. Those member countries
who are to adopt the euro need to meet the following
criteria:
1. Inflation rate
No more than 1.5 percentage points higher than the 3
best-performing member states of the EU (based on
inflation).
2. Government finance:
a) Annual government deficit:
The ratio of the annual government deficit to gross
domestic product (GDP) must not exceed 3% at the end
of the preceding fiscal year. If not, it is at least required
to reach a level close to 3%. Only exceptional and
temporary excesses would be granted for exceptional
cases.
b) Government debt:
The ratio of gross government debt to GDP must not
exceed 60% at the end of the preceding fiscal year.
Even if the target cannot be achieved due to the specific
conditions, the ratio must have sufficiently diminished
and must be approaching the reference value at a
satisfactory pace.
3. Exchange rate: Applicant countries should have joined
the exchange-rate mechanism (ERM II) under the
European Monetary System (EMS) for 2 consecutive
years and should not have devaluated its currency during
the period.
4. Long-term interest rates: The nominal long-term nterest
rate must not be more than 2 percentage points higher
than the 3 best-performing member states (based on
inflation).
European Exchange Rate Mechanism
The ERM is based on the concept of fixed currency
exchange rate margins, but with exchange rates
variable within those margins. Before the introduction
of the euro, exchange rates were based on the ECU, the
European unit of account, whose value was determined
as a weighted average of the participating currencies.
A grid (known as the Parity Grid) of bilateral rates was
calculated on the basis of these central rates expressed
in ECUs, and currency fluctuations had to be contained
within a margin of 2.25% on either side of the bilateral
rates
In 1999, ERM II replaced the original ERM. The Greek
and Danish currencies were part of the system, but as
Greece joined the euro in 2001, the Danish krone was
left as the only participant member. Currencies in ERM
II are allowed to float within a range of ±15% with
respect to a central rate against the euro.
As of 1 May 2004, the ten National Central Banks
(NCBs) of the new member countries became party to
the ERM II Central Bank Agreement. The national
currencies themselves will become part of the ERM II
at different dates, as mutually agreed.
The Estonian kroon, Lithuanian litas, and Slovenian
tolar were included in the ERM II on 28 June 2004; the
Cypriot pound, the Latvian lats and the Maltese lira on
2 May 2005; the Slovak koruna on 28 November 2005.
The currencies of the three largest countries which
joined the European Union on 1 May 2004 (the
Polish zloty, the Czech koruna, and the Hungarian
forint) are expected to follow eventually.
Plans for Bulgaria are to apply for ERM II
membership in 2007 and to commit to its rules
regardless of the European Commission decision, while
Romania plans to join ERM in 2010-2012
Country
Reference value
Inflation rate (HICP)
annual government deficit to GDP
gross government debt to GDP
ERM II membership
max 3.2%
max. 3%
max. 60%
2%
0.04%
55.9%
Bosnia and Herzegovina
1.5%
0.35%
34%
Bulgaria
0.3%
-3.2%
14.1%
Croatia
1%
2.2%
40.8%
Czech Republic
-0.6%
-1.4%
28.1%
Denmark
0.6%
-3.9%
30%
since 1 January 1999
3.6%
Estonia
-2.1%
-0.4%
3.4%
since 28 June 2004
7.23%
Hungary
4.2%
4.8%
76.9%
Iceland
9.7%
-5.19%
103%
Latvia
-1.2%
-1.1%
19.5%
since 2 May 2005
13.51%
Lithuania
1%
-3.2%
15.6%
since 28 June 2004
14.5%
Macedonia
3.2%
0.6%
39.5%
Montenegro
1.7%
Norway
1.2%
-17.27%
53%
Poland
3.8%
-2.5%
44.5%
6.1%
Romania
4.3%
-2.9%
13.6%
9.13%
Serbia
7.3%
0.48%
37%
Sweden
1.8%
-2.7%
35.5%
Switzerland
-0.8%
Turkey
5.08%
-1.3%
38.8%
United Kingdom
1.1%
7.1%
55.5%
Albania
min. 2 years
Long-term interest
rate
max 6.5%
7.08%
4.5%
7.45%
38%
3.25%
2.25%
3.34%
Monetary and Fiscal Background of EMU
Possible scenarios of monetary union design
a) MONETARY ARRANGEMENT
- minimalist monetary arrangement in which the
member states agree to operate a fixed exchange rate
system - in fact an exchange rate union
- maximalist monetary arrangement where the member
states decide to get rid of the separate national currencies
in favour of one union currency, the supply of which is
controlled from the centre, the union money supply
authority would also control interest and exchange rates a currency union.
b) FISCAL ARRANGEMENT
- minimalist fiscal arrangement would leave the raising
of taxes and the spending of them in national hands.
However tax structures and rates would be harmonised,
as a necessary condition for the elimination of
competitive distortions in connection with the common
market aspect of the arrangement. Nevertheless some
control over national budget deficits and debt levels
would have to be imposed
- in a maximalist fiscal arrangement the whole system of
taxing and spending would be centralised and, in
conjunction with this, there would be a centralised
system of borrowing and a federal budget deficit (or
surplus).
The process of monetary integration - “road map” in
1992 in Maastricht Treaty
There were at least four possible scenarios
Minimal monetary + minimal fiscal arrangement
Maximal monetary + minimal fiscal arrangement
Minimal monetary + maximal fiscal arrangement
Maximal monetary + maximal fiscal arrangement
Maastricht model of EMU selected a maximalist
monetary arrangement, together with a minimalist fiscal
arrangement
Monetary arrangement = full centralization of monetary
policies represented by European Central Bank
(established 1998) and the System of European Central
Banks
Fiscal arrangement = fiscal coordination, regulated by
Stability and Growth Pact (adopted 1997 in Amsterdam,
reformed in 2005)
EUROPEAN CENTRAL BANK
The ECB was established by EU in 1998 and is located
in Frankfurt, the largest financial centre in the
Eurozone
European system of central banks (ESCB) = the ECB
plus all the national Central Banks (NCBs) of the EMU
member states
ECB and ESCB is responsible for monetary policy
covering the 13 member countries of the Eurozone
The primary objective of the ECB and the ESCB is "to
maintain price stability" within the Eurozone, in other
words to keep inflation low. The present target is to
keep inflation below, but close to, 2%.
Second to this objective, the key tasks of the ECB and
ESCB are to define and implement the monetary policy
for the eurozone, support the economic policies of
the member states, conduct foreign exchange operations
(and take care of the foreign reserves of the ESCB) and
promote smooth operation of the banking payment
system
The ECB has the exclusive right
to authorize emission of banknotes
to set interest rates for the Eurozone
National Central Banks can issue euro coins but the
amount must be authorized by the ECB beforehand
The ECB has independence from any European or
national institution and also holds financial
independence by means of a separate budget drawn
from national central banks (NCB).
Governance of ESCB
President of ECB
first President of the Bank was Wim Duisenberg, the
former president of De Nederlandsche Bank, who was
succeeded in November 2003 by Jean-Claude Trichet,
former head of Banque de France.
Governing Council
Executive Board
General Council
Governing Council
the supreme decision making body of the ECB
composed of the members of the executive board and
the governors of the NCBs
responsible
for taking decisions on monetary policy, interest
rates and the reserves of the ESCB
in other matters, such as authorization the issue of
banknotes
in advising other institutions on draft legislation
Governing Council meets at least ten times a year and
can only be attended by members and the Council
President and Commission President
In voting each member has one vote (the Council and
Commission presidents do not vote) and decisions are
taken by a simple majority
The Executive Board is responsible for the
implementation of monetary policy defined by the
Governing Council and the day-to-day running of the
bank. In this it issues decisions to NCBs and may also
exercise powers delegated to it by the Governing
Council
comprised of the President of ECB, a vice president and
four other members. They are all appointed by common
accord of the eurozone governments for a nonrenewable eight year term. By an understanding arrived
at in 2005, four of these six seats are currently reserved
for the Eurozone's four big central banks of France,
Germany, Italy and Spain.
General Council
body dealing with transitional issues of euro adoption,
for example fixing the exchange rates of currencies
being replaced by the euro, (continuing the tasks of the
former European Monetary Institute, predecessor of
ECB)
It exists until all states adopt the euro, at which point it
would be dissolved. It is composed of the President and
vice president of ECB together with the governors of all
the NCBs of the EU.
STABILITY AND GROWTH PACT
the Stability and Growth Pact (SGP) is an agreement by
European Union member states related to their conduct
of fiscal policy
monetary policy centralization – ECB responsibility
fiscal coordination by SGP – Commission and Council
of Ministers responsibility
SGP consists of fiscal monitoring, and sanctions against
offending members
the pact was adopted in 1997, so that fiscal discipline
would be maintained and enforced in the EMU
Member states adopting the euro have to meet the
Maastricht convergence criteria, and the SGP ensures
that they continue to observe them
The actual criteria that member states must respect:
- annual budget deficit no higher than 3% of GDP
(this includes the sum of all public budgets, including
municipalities, regions, etc)
- national debt lower than 60% of GDP or
approaching that value.
Excessive deficit procedure
First step – establishing excessive deficit
If the Commission identifies excessive budget deficit of
some Member State of the EMU (exceeding 3% of
GDP), it prepares the report and recommendation for
the Council of Ministers. The Council then decides by
qualified majority of all Member States of the EU
(including the states not participating in EMU and the
Member State of EMU that is evaluated by the report),
whether the budget deficit, considering all
circumstances, can be classified as an excessive one.
The Member States could take into account all aspects
of an economic situation of a country considered, e.g. the
GDP growth trends.
If the real GDP decreased in a given period at least by
2%, the budgetary deficit is considered exceptional and
no sanctions are proposed.
If there is a growth of the real GDP or its decline not
exceeding some critical value (recently 0.75%), it is
expected that the Council of Ministers will declare the
budget deficit as the excessive one and initiate a
penalization procedure.
Second step - decision about sanctions
After the budget deficit of a particular country is
declared by the Council as the excessive one and if the
country in question does not take credible steps of
restoring feasible situation (deficit not exceeding 3% of
GDP), the Council decides again, this time about
sanctions.
In this round only members of the EMU participate in
voting, without the country in question. In this case the
voting quota is a majority of two thirds of the weighted
votes of the EMU members, excluding the votes of
representative of the Member State concerned.
Sanctions:
They first take the form of a non-interest-bearing
deposit with the Commission (fixed component equal to
0.2% of GDP and a variable one linked to the size of the
deficit). Annual amount of the deposit might not exceed
0.5% of GDP.
If the excessive deficit is not corrected after two years,
the deposit is as converted into a fine. The Council may
decide to abrogate some or all of the sanctions,
depending on the progress made. The fines imposed are
not reimbursable. Interest on the deposit and the yield
from fines is distributed among Member States without
an excessive deficit, in proportion to their share in the
total GNP of eligible Member States.
The stability and growth pact does not work
the Council of Ministers failed to apply sanctions
against France, Italy and Germany, despite punitive
proceedings being started when dealing with Portugal
(2002) and Greece (2005)
The pact has proved not to be enforceable against big
countries such as France and Germany, which,
ironically, was the biggest promoter of it when it was
created. These countries have run "excessive" deficits
under the pact definition for some years.
Government finances
Past breach
periods
for deficit
Country
annual government deficit to GDP
Reference value
gross government debt to GDP
min. -3%
max. 60%
Austria
-1.9%
62.4%
1995-1997
Germany
-1.7%
68.9%
1994; 1996; 2003-2006
France
-3.0%
66.9%
Italy
-1.9%
104%
Luxembourg
-1.8%
7.9%
Netherlands
-1.2%
51.2%
Belgium
-0.3%
90%
Spain
+0.9%
40.0%
Portugal
-2.2%
63.5%
Finland
+2.8%
39.7%
Ireland
+0.1%
27.2%
Greece
-2.6%
91.0%
Slovenia
-1.9%
29.9%
Sweden
+2.2%
47.6%
-4%
44.1%
Denmark
+3.9%
30.0%
Cyprus
-2.1%
Malta
Deadline for
compliance
for deficit
Past breach
periods
for debt
Deadline for
compliance
for debt
2003-
?
2007
2003-
?
2003-2007
2005
2003-
?
2003-
2007
2003-
?
2004-2005
2005
2003-
?
2002; 2005-2006
2002; 2008
2005-
?
2003-2006
2006
2003-
?
2006
2007
65%
2004-2006
2006
2004-
?
-2.6%
65.9%
2004-2006
2006
2004-
?
Estonia
+1.4%
3.6%
Latvia
-1.0%
11.3%
Lithuania
-0.6%
18.9%
-2%
44%
2004-
2007
Hungary
-4.9%
59.9%
2004-
2008
Czech Republic
-3.2%
31.5%
2004-
2008
Slovakia
-3.1%
34.3%
2004-
2007
Romania
-2.5%
20.3%
Bulgaria
+3.1%
29.9%
Eurozone
-2.4%
70.5%
2003-
NA
EU27
-2.3%
63.2%
2003-
NA
United Kingdom
Poland
The reasons that larger countries have not been
punished include their influence and large number of
votes on the Council of Ministers, which must approve
sanctions
In March 2005, the EU Council relaxed the rules to
respond to these criticisms and to make the pact more
enforceable
Fiscal coordination remains to be the weakest part of
the EMU project