1 / 34

The functioning of the euro area- current problems

The functioning of the euro area- current problems. Lecture outline. The functioning of the euro area- basic rules The effects of the single monetary policy Public finance crisis Potential solutions and perspectives. Monetary policy. Single monetary policy

jui
Download Presentation

The functioning of the euro area- current problems

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The functioning of the euro area- current problems International finance 120181-1165

  2. Lecture outline • The functioning of the euro area- basic rules • The effects of the single monetary policy • Public finance crisis • Potential solutions and perspectives International finance 120181-1165

  3. Monetary policy • Single monetary policy • ECB- supranational institution • ESBC • Eurosystem International finance 120181-1165

  4. EBC and ESBC • Creation of the ECB  the necessity to set its rules • Different conditions than for NCB’s • The euro area- small degree of opennes • Monetary impuls transmission • The necessity to build credibility International finance 120181-1165

  5. Monetary policy strategy • 2 pillars • Control of the monetary base • Other economic and financial values International finance 120181-1165

  6. Exchange rate policy • The aim- price stability • EBC and the EU Council (Ecofin) • Ecofin can unanimously set the rules of the euro area exchange rate system vs. other countries International finance 120181-1165

  7. Exchange rate policy • ERM II- ER stabilisation vs. The currencies of EU countries which are not euro area members • Euro area extension plans • Counteracting high ER volatility within the EU market International finance 120181-1165

  8. ERMII • Amsterdam summit 1997 • Agreements between ECB and NCB of countries which are not euro area members • ER approaches the band limit  NCB is obliged to conduct automatic and unlimited interventions • ECB support- conditional International finance 120181-1165

  9. Fiscal policy • The Werner plan 1970 • The MacDougall report 1977 • Assumptions of fiscal centralisation International finance 120181-1165

  10. Fiscal policy • The Maastricht Treaty • The prohibition to finance fiscal deficits by ECB • No bail out clause • Thresholds concerning the fiscal balance and governement debt International finance 120181-1165

  11. Fiscal policy • Stability and Growth Pact 1997 • The reform of the Pact 2005 • Middle term surplus or balance requirement International finance 120181-1165

  12. Current problems • Single monetary policy vs. differences • The Stability and Growth Pact and the problem of public finance imbalance • Monetary integration and political integration International finance 120181-1165

  13. The effects of the single monetary policy • Different growth rates in the euro area countries • Potential Balassa-Samuelson effect • Differences in reference i% according to Taylor rule • Differences in inflationary pressures e.g.: • Labour market flexibility • Product market flexibility • The role of labour unions International finance 120181-1165

  14. The effects of the single monetary policy • The lack of national monetary aggregates • Inflation as a monetary phenomenon- analysis only on the euro area level • Monetary transmission- national level International finance 120181-1165

  15. Monetary transmission- national level • Angeloni et al. 2003 • The interest rate channel • The role of banks in the transmission process International finance 120181-1165

  16. Monetary transmission- national level • Christiano et al. 2007 • Comparison of ECB and FED monetary policy • The role of labour market structure in the transmission mechanism International finance 120181-1165

  17. The crisis of public finance • The crisis in several member countries (PIIGS) • Procyclical economic policy • The effects of the financial crisis International finance 120181-1165

  18. The crisis of public finance • „Transfer union”- the possibility to finance deficits of other member countries  violation of the Treaty regulations • Loans vs. transfers?? • ECB support- the purchase of governement bonds International finance 120181-1165

  19. Assessment by financial markets participants No implicit information abot who can support whom, when and on what conditions  information discrepancies The crisis of public finance International finance 120181-1165

  20. The crisis of public finance • Propositions to create a European Monetary Fund • Euro area bonds International finance 120181-1165

  21. The case of Spain Long term nominal interest rate in Spain and in the euro area Ameco database, European Commission International finance 120181-1165

  22. The case of Spain Long term real interest rate in Spain and in the euro area Ameco database, European Commission International finance 120181-1165

  23. The effects of the interest rates decrease • Credit boom • Increasing investments • Investments raising/ not raising labour productivity • Productivity growth vs. inflation International finance 120181-1165

  24. The real exchange rate in Spain Ameco database, European Commission International finance 120181-1165

  25. Eurostat International finance 120181-1165

  26. Inflationary pressures Eurostat International finance 120181-1165

  27. The crisis in Spain • The collapse of the bubble on the housing market • Increase of market interest rates • Recession as a consequence of the lack of antycyclical monetary policy? International finance 120181-1165

  28. The crisis in Spain • Antycyclical banking supervision instead od antycyclical monetary policy • Proposition to diversify the minimum reserve requirement in the euro area • Proposition to diversify capital requirements International finance 120181-1165

  29. Euro area desintegration? • Arguments contradicting this scenario: • Economic arguments- the single European market • Political arguments International finance 120181-1165

  30. Euro area desintegration? • Eichengreen 2007 • Large long term economic costs of disentragtion • Large technical costs International finance 120181-1165

  31. Euro area desintegration? • Credibility of the euro area- diversified risk premia in different countries • ECB as a lender of last resort • Does the crisis change the balance of benefits and costs of the EMU creation??? International finance 120181-1165

  32. Summing up • The current problems of the euro area are mainly a consequence of the finacial crisis 2007-2009 but also of the procycylical economic policy in some member countries International finance 120181-1165

  33. Summing up • Conclusions from the case study- the necessity to introduce antycyclical tools which could replace the antycyclical monetary policy International finance 120181-1165

  34. References • Auszüge aus Presseartikeln, Deutsche Bundesbank, 51-54/2010 • B. Eichengreen, The breakup of the euro area, NBER Working Paper, 2007 • I. Angeloni et al., Monetary transmission in the euro area: does the interest rate channel explain it all?, NBER Working Papers 2003 • M. Woodford, How important is money in the conduct of monetary policy?, NBER Working Paper,2007 International finance 120181-1165

More Related