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Is it easier to join EU or EMU? Why ? Are the Criteria Good ?

Is it easier to join EU or EMU? Why ? Are the Criteria Good ?. Today’s Agenda. EU enlargement Benefits and costs for new members Benefits and costs for old members EMU enlargement Benefits and costs for new members When should they join?

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Is it easier to join EU or EMU? Why ? Are the Criteria Good ?

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  1. Is iteasier to join EU or EMU? Why? Are the CriteriaGood?

  2. Today’s Agenda • EU enlargement • Benefits and costs for new members • Benefits and costs for oldmembers • EMU enlargement • Benefits and costs for new members • Whenshouldthey join? • Benefits and costs for oldmembers • Euro crisis and the future of EU

  3. EU Enlargement • Severalenlargementsover the history of EEC/EC/EU • The ones in 2004 and 2007 differentfromprevious • GDP/capitamuchlower in the new countries • Largenumber of countries at once

  4. Benefits for New Members • Credibility, attractiveness • EU membershipsignalspolitical and economicstability • Moreforeigninvestments • technologydiffusion • Subsidiesfrom EU budget • Betteropportunities for trade • Technicalbarriersremoved (freetradeagreementalreadybeforemembership, though) • Competition and scaleeffects

  5. Costs for New Members • Transitionalcosts • Conforming to EU rules • Currencyappreciation • Demand for domesticcurrencyincreases • Decreasedexports • Increasedinflation • Pricelevelwellbelow EU15 • Productivity (and wage) increases in exportsector • Wageincreasedemands in otherindustries as well (”Baumol’sdisease) • ”Dependence” fromforeigninvestments • Deep recessionin 2008-2009 wheninvestmentsstopped

  6. Benefits for Old Members • New markets, more trade • More labor (to compensate the now retiring baby boomers) • Uniting Europe • Political stability • More political power globally?

  7. Costs for Old Members • Potential unemployment • Migration, firm relocation • Pay more, receive less from the budget • Reduced decision-making power • As more countries join, the weight of any one country in the DM process is diminished • Institutional and administrative issues • Voting schemes, official languages, etc.

  8. What has happened since 2004? • Economicgrowth in the new memberswasstronguntillate 2008; sincethen big problems • Migrationhasnotbeen a hugeproblem • Moremigrationfrom outside EU • Somecountriesapplyrestrictions • Someproblemswith Romania and Bulgaria

  9. Next Enlargements? • Croatia, Turkey and Icelandofficiallycandidatecountries • Turkey’smembershipdebated a lot • Macedoniasubmitted an application • Othersyet to come (Bosnia, Serbia, Kosovo, etc.) • Similarissuesapply to the forthcomingenlargements as withthe previousones • ”enlargementfatigue”

  10. EMU Enlargement • All new EU membersarerequired to join EMU at somepoint • Only UK, Denmark(and Sweden) have the option to stay out • The question is then, whencanthe EU countriesjoin EMU, and whenshouldtheydoit

  11. Cost and Benefits of EMU Enlargement • The costs and benefits of EMU membershipareessentially the same as discussed in sessions 1 and 2 • largerunionmorelikelyto experienceasymmetricshocks • The weight of one country in ECB’sdecisionsgrowssmaller • New votingrule of ECB council • In addition, the transition to EMU cancreateproblems for the new members!

  12. Catching Up • The EU12 are in a catching-upphase • Productivity and pricelevelbehind EU15 • Increasedtradeincreasesproductivity and prices in the exportsector • Wageincreases in allsectors inflation • Real currencyappreciationdue to inflation • Trouble for exportindustries • Moreforeigninvestments nominalcurrencyappreciation • Trouble for exportindustries, increasedimports • Leads to troublewith the Maastricht criteria!

  13. Convergence Criteria Once More • Public debt <60% of GDP • Budgetdeficit <3% of GDP • Long terminterestrates • Inflation • Membership in ERM II • Compatibility of national legislation to that of EMU treaties Based on previousanalysis, weshouldexpecttroublehere

  14. Convergence Criteria in 2014(figures from 2013) Source: Convergence Report 2014 (European Central Bank)

  15. Criticism and Discussion on Criteria • CEECsdon’tunderstandwhytheyhave to fulfillall the criteriaeventhoughmostcurrentmembersdidn’t • Discussionif new criteriashouldbeadded • E.g. health of financialsector • However, difficult to changecriteria (requiresunanimity)

  16. Future Developments • Slovakia joined in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015 • Others at an undetermineddatelater • Financial crisis and euro crisis made matters more complicated • The financialcrisismade EMU membershipmoreattractive to Sweden and Denmark, but the currentdebtcrisishas made themwaryagain

  17. Current Euro crisis – a threat to the future of EMU?

  18. Foundation for the crisis is laidwith the inception of EMU • Advent of EMU broughtdowninflationlevels in the south to historicallows Recordlowinterestrates and access to capital Increasedborrowing, investments and consumption • Alsogovernmentsborrowed money increasing the debtratioalreadyyearsbefore the financialcrisis and the recession

  19. Private and publicdebt

  20. Wageincreasesaboveproductivityincreases

  21. Loss of competitivenessleads to currentaccountdeficits (devaluation of currency is notpossible)

  22. When the financialcrisishit… • Banks were in troublefirst, whichmeantthatborrowersweresoon in trouble • Real estatebublecausedbyborrowing and investmentsburst • Financial crisislead to a recession, whichtogetherwithsupportingbanksforced the governments to createlargedeficits in a situationwhen the debtratiowasalreadyhigh (except Spain) • Credibility of governmentswaslost and interestrates on bondsincreased (also the ”default” of Greeceincreaseddoubts for others) • The revelationthatGreecehadfalcifiedstatisticsunderminedcredibilityevenfurther

  23. Whathasbeendone? • The EMU countrieshavelent money to the countries in trouble (without a guarantee to getany money back) • The money comeswithconditions, though • ECB hasboughtgovernmentbonds • Both of theseactswereforbidden (”no bailout” clause of the Treaty) to make sure thatgovernmentswouldbehaveresponsibly and that the credibility of the wholeunionwouldnotbe at stakeifone country is in trouble

  24. Whatnext? • No oneknows • EMU is unique in the history of economics, and so is the currentcrisis • There is no mention of how to leave the EMU in the Treaty (the membership was assumed irrevocable) • The disintegration of EMU wouldlead to greatlosses an instability for allmembers, soeven the oneswithsoundfinanceshave an incentive to help the others

  25. Final Group Work • In yourgroup, drawa new mindmap to organizeyourthoughts on economicintegration, the EU and the EMU • Again, youdon’thave to restrictyourselves to onlyeconomicaspects

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