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Mr. Massimo M Beber Senior Tutor College Lecturer in Economics. Sidney Sussex College Cambridge CB2 3HU [email protected] Arts, Humanities and Social Sciences Summer School 2013 One Market, One Money? The Economics and Politics of European Monetary Union

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Mr. Massimo M Beber

Senior Tutor

College Lecturer in Economics

Sidney Sussex College

Cambridge CB2 3HU

[email protected]

Arts, Humanities and Social Sciences Summer School 2013

One Market, One Money?

The Economics and Politics of European Monetary Union


Europe a phase chronology
Europe – A Phase Chronology

  • 1945-51: “hegemon-led integration” (Marshall Plan, OEEC-OECD, EPU)

  • 1951-1973: “Golden Age regionalism” (ECSC to EEC – customs union, single market in agricuture and coal/steel, first MU blueprint – Werner and MacDougall Reports)

  • 1973-1984 “devil take the hindmost”

  • 1985-1999: “one market, one money”

  • 2008-?? “Make (banking & fiscal union) or Break”

Landmarks on the road to emu
Landmarks on the Road to EMU


Source: The Kok Report (2004)


Source: High Level Group (2004): Figure 1

Exchange rate and relative prices
Exchange Rate and Relative Prices

The real exchange rate compares our prices with prices abroad: “purchasing power parity” favours equilibrium in our foreign trade

If world prices are stable

But the home economy experiences inflation

A fall in the exchange rate can act as a safety valve or “parachute” by restoring the price competitiveness of our goods

Exchange Rate, Relative Returns, and Volatility

If total expected returns are quickly equalised by arbitrage...


…expected depreciation will generate an immediate change in today’s interest rate and/or exchange rate: expected depreciation causes either an immediate monetary contraction or immediate depreciation





Monetary and Macroeconomic Sovereignty


Stable Real Exchange Rate

C’’, C


Free Mobility of Capital

A: the Gold Standard as an “anchor” to the price level

B: the Bretton Woods compromise

C: the German model, Mrs Thatcher’s monetarist experiment

C’, C’’: the Keynesians’ Last Hurrah between autarchy and stagflation

D: back to the anchor: EMU, currency boards, dollarisation...

Emu costs and benefits
EMU: Costs and Benefits







Costs and Benefits of monetary union



Trade Integration

Income disparities and eu widening
Income Disparities and EU Widening

Source: Commission of the European Union (2003) Second Progress Report on Economic and Social Cohesion. Communication from the Commission, Brussels, Commission of the European Union: COMM (2003) 34 Final): Maps



Delors II

Delors I

The single capital market at work lending to the private sector
The Single Capital Market at Work(lending to the private sector)

Source: Lane (2012) “The European Sovereign Debt Crisis”, p. 52.

The single capital market at work external borrowing
The Single Capital Market at Work(external borrowing)

Source: Lane (2012) “The European Sovereign Debt Crisis”, p. 53.

The single capital market frozen
The Single Capital Market Frozen

while Germany is running a big trade surplus with the rest of the eurozone which Germany's private sector is no longer willing to finance, transfers of one sort or another are inevitable. But no-one should be under any illusions about how difficult this is for politicians to explain to their electorates, even if they understand themselves. In the public's eyes and in the minds of many politicians, a trade surplus just shows that their country is more competitive. What could be wrong with that?

Simon Tilford, July 2012

The lender of last resort llr
The Lender of Last Resort (LLR)

  • Liquidity: money back today

  • Solvency: money back in full

  • The fire-sale problem

  • “to lend freely on good security at a time of crisis” (Walter Bagehot, Lombard Street)

Eurozone sovereign debt crisis greece
Eurozone Sovereign Debt Crisis: Greece

  • Focus on ECB’s liquidity management 2007-9

  • October 2009 – Greek general election

  • Budget revises deficit from 6 to 12.7% of GDP

  • Earlier years’ budgets (and thus debt) also revised up

  • Rising cost of servicing debt forces first Greek bailout in May 2010

Eurozone s sovereign debt crisis continued
Eurozone’s Sovereign Debt Crisis:continued

  • Ireland (November 2010)

  • Portugal (April 2011)

  • Greece again (March 2012)

  • Spain, Cyprus (June 2012)

European financial stability facility
European Financial Stability Facility

  • Established in 2010 to avoid another “Greece I” bailout (Euro 110bn hard to cobble together)

  • Hopes that it would merely deter bank runs by its existence

  • Yet needed for Ireland and Portugal within months

  • Euro 440bn not enough

The trouble with consolidation
The trouble with consolidation

  • The “denominator effect” of low growth, low inflation limit the “natural” fall in debt-to-GDP ratios

  • “Adjustment fatigue” leads to protests

  • “Financial repression” within the single market is increasingly difficult – residents cannot be forced to buy government bonds

  • Persistent, significant risk praemia raise the cost of servicing existing debt in the Eurozone’s periphery

The banking union proposal
The Banking Union Proposal

  • A true banking union removes all national differences in the policy and regulatory environments in which banks operate

  • Crisis Prevention

    • Regulation

    • Supervision

  • Crisis management: LLR

  • Crisis resolution: bailing in/out

Adjustment iii migration really
Adjustment III: Migration – really?

“either poor countries will become richer, or poor people will move to rich countries. Actually, these two developments can be seen equivalent. Development is about people: either poor people have ways to become richer where they are now, or they can become rich by moving somewhere else. “ (Milanovic 2012)

Fiscal transfers not really yet
Fiscal transfers? Not really (yet?)

we frown upon the transmission of family-acquired wealth to offsprings if two different individuals belong to the same nation [but] we take it as normal that there is a transmission of collectively acquired wealth over generations within the same nation, and if two individuals belong to two different nations, we do not even think, much less question, such acquired differences in wealth, income and global social position. (Milanovic 2012)

Can the eu face the truth

European policy-makers have been reluctant to accept that the eurozone's decentralised nature makes it an inherently unstable currency union that forces its constituent states and 'their' banks into a pernicious and deadly embrace.

On the face of it, all that changed at the June 29 summit, when member-states agreed to consider establishing a banking union. Among the features of such a union would be: a shared supervisory authority; a collective deposit protection scheme for the currency union; and a common resolution framework for dealing with weak banks.

... The idea of a banking union is sometimes spoken of as an easier route to 'mutualisation' (or federalisation) than issuing common debt – partly, the reasoning goes, because citizens do not understand what a banking union entails.

Philip Whyte, July 2012