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EMU and the euro . . . (for dummies?) PowerPoint PPT Presentation


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The 2009 Euro Challenge | EMU and the euro . . . (for dummies?). EMU and the euro . . . (for dummies?). Presentation by Nigel Nagarajan Faculty Orientation for the 2009 Euro Challenge New York, November 25 th 2008. What are we going to cover today?. What is EMU ? - PowerPoint PPT Presentation

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EMU and the euro . . . (for dummies?)

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The 2009 Euro Challenge | EMU and the euro . . . (for dummies?)

EMU and the euro . . . (for dummies?)

Presentation by Nigel Nagarajan

Faculty Orientation for the 2009 Euro Challenge

New York, November 25th 2008


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What are we going to cover today?

  • What is EMU?

  • What are the costs and benefits of having a single currency?

  • How is economic policy made in a monetary union?


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What EMU isn’t

HELLO, MY NAME IS

Dromaius Novaehollandiae

  • Sorry to disappoint you, but . . .

. . . EMU is not a bird!


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What does EMU stand for?

  • Does EMU stand for:

  • European Monetary Union?

  • Or:

  • Economic and Monetary Union?


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EMU vs. the euro area

  • EMU is a Treaty objective shared by all 27 EU Member States

  • The euro is a reality for 16 Member States (“the euro area”)

  • What about the “E” in EMU?


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What are the three parts of EMU?

1) The euro – countries give up their own currency when they join the euro area. The ECB sets interest rates for the euro area (16)

2) The single market – all countries participate in the single market, with free movement of goods, services, capital and people (27)

3) Enhanced policy coordination – countries retain sovereignty over other economic policies but commit to coordinate more closely at the European level (27/16)


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Which countries are in the euro area?

  • Euro area:Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Spain.

  • EU Member States obliged to adopt the euro eventually:Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Sweden.

  • EU Member States with an opt out from adopting the euro: Denmark, United Kingdom.


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How does a country join the euro?

  • A Member State must fulfill the “convergence criteria” laid down by the Maastricht Treaty:

  • Low inflation

  • Low interest rates

  • Low government deficit

  • Low government debt

  • Stable exchange rate (ERM II)


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What are the benefits of the euro? And the costs?

  • CITIZENS benefit from greater price transparency, which should stimulate competition and reduce prices and from the elimination of currency exchange costs

  • For BUSINESSES it is easier to make investment decisions (no exchange rate risk)

  • The ECONOMY benefits from price stability, and lack of exchange rate risk

  • Countries that adopt the euro can no longer change their INTEREST RATE or their EXCHANGE RATE. In a monetary union, you cannot have an INDEPENDENT MONETARY POLICY.


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Massachusetts: recession

Texas: boom

The challenge of asymmetric shocks

(1) Federal fiscal system

(2) High labour mobility

Fiscal transfers: 

Taxes: 

Real world example of a single currency area

Fiscal transfers: 

Taxes: 

Euro area less good at coping with shocks?

Asymmetric shock: oil prices . Affects Texas and Massachusetts differently.


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Economic policy in EMU

Single monetary policy

set by the ECB

Fiscal and other policies

set by Member States

(but subject to common rules)


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Economic policy making - the euro area and the US

Eurogroup Finance Ministers

Monetary policy

ECB President

Jean-Claude Trichet

Federal Reserve Chairman

Ben S. Bernanke

Fiscal policy

Treasury Secretary

Henry M. Paulson

Economic policy co-ordination more difficult?


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Conclusions

  • The launch of the euro was a tremendous achievement for the EU

  • But EMU is still a work in progress (especially for the “E” part)

  • How will the euro area cope with its first recession?

  • Can you have a monetary union without a complete economic union? Without a political union?