The Economic and Monetary Union

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Alternative economic policies for the Economic and Monetary Union

Alternative economic policies for the Economic and Monetary Union

The Optimal Currency Area (OCA) literature had much influence in academic debates but appears to have little impact on the design of the Economic and Monetary Union (EMU). Many authors who were attached to the OCA approach tended to conclude that the euroarea was not an optimal currency area – or at least by comparison with the USA, the euroarea had lower factor (notably labour) mobility, and lacked fiscal transfers authors (see, for example, Eichengreen, 1997) . Insofar as regard was paid to the OCA criteria, the argument was put that there would be endogeneity in the fulfilment of the criteria, that is whilst at the time of formation of the euro the criteria would not be satisfied, the experience of the single currency and the enhancing trading between countries would lead in the direction of their fulfilment (see, for example, Baldwin and Wyplosz, 2009). This is reflected in the question ‘Is EMU more justifiable ex post than ex ante?’ (Frankel and Rose, 1997, 1998). The answer given by Frankel and Rose (1997) was positive in their ex ante analysis; they argued that the EMU would be more justifiable in the ex post sense. However, more recently, Vieira and Vieira (2012) in an ex post analysis of the EMU’s first decade in existence (including the initial group of eleven countries as members of the EMU plus Greece) conclude that the hypothesis does not hold for some countries.

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Social Models under Economic and Monetary Union

Social Models under Economic and Monetary Union

imbalances exploded right at the inception of the Economic and Monetary Union (EMU) and then reversed in asymmetrical fashion during the crisis. The argument is that, in peripheral countries, there was a relatively large share of the population that was credit- constrained prior to capital liberalization and that got indebted as soon as credit became available on the back of optimistic expectations about the future. These are also the countries that had been protected until then by relatively closed capital accounts to safeguard their soft currencies. Strict regulation vis-à-vis the outside was also

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Economic and Monetary Union : Implications for Scotland

Economic and Monetary Union : Implications for Scotland

This short paper sets out background to current EU policy on Economic and Monetary Union (EMU), looking at both the management of monetary policy focusing on the Euro and the parallel system for economic policy coordination which is primarily the responsibility of member states. It describes the way in which EU countries coordinate economic policy (notably through the Economic Reform Programmes and processes such as deficit reduction procedures) and how the EU institutions will support countries in the delivery of EU policies, including the mobilisation of investment funds to support EU policy priorities. It then looks as Scotland’s experience, describes the most recent Scottish Economic Reform Programme 2016 and postulates that the close degree of alignment between Scottish and EU economic and social priorities would allow a basis for joint working if Scotland decides to pursue a more close approach to EU policies than the rest of the UK. It also notes that if Scotland pursues the independence in Europe option, Euro membership would not be an issue of substance in the early years and that the focus of EMU discussions would likely be on the need for a deficit reduction programme for Scotland.

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Information Guide: Economic and Monetary Union

Information Guide: Economic and Monetary Union

On 9 December 2011 eurozone members agreed to move towards stronger economic union under provisions set out in a Treaty on Stability, Coordination and Governance (TSCG; also known as the ‘fiscal compact’) in the Economic and Monetary Union. The Treaty was formally signed on 2 March 2012 by 25 of the 27 Member States (the UK and Czech Republic didn’t sign) and entered into force on 1 January 2013 (see Press Release PRES/12/551). Intended to safeguard the stability of the euro area, the Treaty requires national budgets to be in balance or in surplus - with signatories ensuring that that rule is incorporated into national law within a year of the Treaty entering into force (see European Council news item and Treaty text). The 20 June 2012 Communication ‘Common principles on national fiscal correction mechanisms’ (COM(2012)342) set out guidelines for implementing the automatic correction mechanism introduced by the TSCG.

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Spillover Effects of Budgetary Policies in Monetary union: The Case of West African Economic and Monetary Union

Spillover Effects of Budgetary Policies in Monetary union: The Case of West African Economic and Monetary Union

With the help of a vector model for dynamic panel vector error correction, this article examines the extent to which a country’s policy shocks spread to the economic activity of other countries in the West African Economic and Monetary Union. The results of one part, the emergence of externalities that cause asymmetric shocks and another part, the public expenditure shocks induce greater spillover effects on economic growth than public revenue shocks. Both results imply the structural heterogeneity of economies, leading to an uneven distribution of the benefits and costs of a common monetary policy. Therefore, corrective measures can be applied, through a real policy mix that can reduce the risks of instability related to budgetary externalities. Keywords: Budgetary Externality, Structural Heterogeneity, Panel Vector Error Correction Model, West African Economic and Monetary Union JEL Classifications: F14, F15, F41

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Information Guide: Economic and Monetary Union

Information Guide: Economic and Monetary Union

On 9 December 2011 eurozone members agreed to move towards stronger economic union under provisions set out in a Treaty on Stability, Coordination and Governance (TSCG; also known as the ‘fiscal compact’) in the Economic and Monetary Union. The Treaty was formally signed on 2 March 2012 by 25 of the 27 Member States (the UK and Czech Republic didn’t sign) and entered into force on 1 January 2013 (see Press Release PRES/12/551). Intended to safeguard the stability of the euro area, the Treaty requires national budgets to be in balance or in surplus - with signatories ensuring that that rule is incorporated into national law within a year of the Treaty entering into force (see European Council news item and Treaty text). The 20 June 2012 Communication ‘Common principles on national fiscal correction mechanisms’ (COM(2012)342) set out guidelines for implementing the automatic correction mechanism introduced by the TSCG.

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The Design Faults of the Economic and Monetary Union

The Design Faults of the Economic and Monetary Union

The convergence criteria required convergence of inflation rates at the time of admission into the EMU, with a country’s inflation rate (in March 1998) being within 1.5 per cent of the average of the rate in the three countries with the lowest inflation. This was a reasonable requirement given that a common inflation rate after union would be a requirement for its sustainability, though as indicated in Table 1 a common inflation rate was not achieved. The inflation rate requirement was for a moment in time, and as Table 1 indicates inflation rate divergences had re-appeared by 2001. It is well-known that the constituent members of EMU had previously experienced different inflation patterns (for example, compare Germany and Italy). But there was little concern as to whether there was a similarity in inflationary conditions. Thus, whether there was any tendency for one country to inflate faster than another or whether inflationary expectations were similar were ignored despite the marked differences in inflation experience in the preceding decades. There was also no regard paid to differences in the inflationary barrier between countries, that is differences in the unemployment rate which may be consistent with constant inflation. The creation of the single currency may have generated some conditions, which would be conducive to less divergence in inflation experience (e.g. trade between countries in a common currency placing pressure on prices). But crucially there was no criteria on inflationary conditions being similar. In that we would include any underlying tendencies on the rate of inflation, the wage and price determination mechanisms, the responsiveness of domestic prices to foreign price changes and the effects of fluctuations in demand and economic activity on wage and price inflation.

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The problematic nature of the Economic and Monetary Union

The problematic nature of the Economic and Monetary Union

An EMU-level fiscal policy should be used for stabilisation purposes for the euroarea as a whole. A progressive tax system applied across the euroarea would serve to operate as an automatic stabiliser. Further, an EMU-level fiscal policy would also cushion a region (or country) against economic shocks which hit the region (or country). An income tax system, which is proportional or progressive (or even mildly regressive) will involve more tax revenue (per capita) being raised in higher income regions than would be raised in lower income regions. The degree to which fiscal transfers between countries are involved would depend on the progressivity of the tax system and the structure of public expenditure undertaken from the EMU-level budget. These fiscal transfers would serve to re-distribute spending power, and could go somewhere to easing current account imbalances. An EMU- level fiscal policy must involve the ability of EMU to levy taxes in its own right to help underpin borrowing by EMU. The relationship between EMU as a fiscal authority and the ECB as the central bank would be comparable to that between a national government and its central bank in terms of the support which the central bank can provide to fiscal policy and the ability of government to borrow.

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Genuine Economic and Monetary Union Will Be Federal or It Will Not Be

Genuine Economic and Monetary Union Will Be Federal or It Will Not Be

The T-Dem team do not explain, at least to my satisfaction, why they believe a new parliamentary assembly is required to make the Eurozone more democratic. They do not analyse in detail the current role of the European Parliament in scrutinising and shaping the economic and monetary affairs of the Union as a whole or of the Eurozone in particular. Like many outside the Brussels bubble, Mr Piketty and company underes- timate the importance of the regular dialogue that takes place between the presidents of the ECB, the Eurogroup and the Eurogroup working group with the Parliament’s Eco- nomic and Monetary Affairs Committee (ECON). The fact that national parliaments are already involved in the European semester – and could be more so if they wished - is also conveniently overlooked. And no reference is made to the seminal role of the Eu- ropean Parliament in the large volume of legislation, enacted quickly and effectively, in the raft of measures taken in the wake of the great crash. The legislative and budgetary procedures proposed by T-Dem for the putative Assembly are in some respects a re- treat from the level of parliamentary accountability one finds already installed by the Treaty of Lisbon. The decision-making procedures advocated in T-Dem would be likely to end in stalemate: the President of the Eurogroup is reduced to making a final plea to the Assembly to take a decision; nothing is said about what would happen were the As- sembly to remain deaf to such pleadings. 10

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Can prosperity return to the Economic and Monetary Union?

Can prosperity return to the Economic and Monetary Union?

The term ‘structural reforms’ is left undefined in the Treaty, and more generally the call is for flexible de-regulated labour market (and also product markets). There seems though little doubt that the intentions are for measures to reduce regulation of the labour market, reduce employment protection measures and rights against dismissal, to increase so-called labour market flexibility (which makes the labour market more like a competitive auction market in which wages can be readily changed and employment is on a short-term basis). The ways in which the Troika have operated Greece as the example: ‘To restore competitiveness and grow th, we will accelerate implementation of far reaching structural reforms in the labor, product, and service markets. Indeed to give a strong upfront impetus to unit labor cost reductions, and protect employment, we have already reformed the collective bargaining framework and reduced the minimum wage as a prior action for this program. And to reduce market rigidities, boost productivity, and increase long-term growth potential we are implementing reforms in product and service markets and improvements in the business environment.’ ‘Place more emphasis on securing reductions in unit labor costs and improvements in competitiveness, through a combination of upfront nominal wage cuts and structural labor market reforms. In unison with the elimination of rigidities in product and service markets, these are expected to lower costs and facilitate the reallocation of resources towards the tradable sectors, stronger growth, and higher employment.’ (Greece: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of

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The “T-Dem” for Democratizing the Europe’s Economic and Monetary Union – A Critical Appraisal

The “T-Dem” for Democratizing the Europe’s Economic and Monetary Union – A Critical Appraisal

More fundamentally, the creation of a new assembly involving the large majority of the EU’s Member States (19 out of 27) raises the question of the overall philosophy of Eu- rope’s political system. Would it be possible to re-conceive such parliamentarism in terms of upper and lower houses? In the envisioned constellation, legislative competences would be fragmented across four institutions instead of three, even five considering the Eurogroup as an additional, new institution emanating from the Council. The EU would also be equipped with no less than 5 chambers: the EP, the Council (described by the Lis- bon treaty as a legislative organ), the Committee of Regions, the Economic and Social Committee, and the new Assembly of the Euro area. Implementing the T-Dem’s proposal would undeniably make the overall institutional architecture of the EU more complex and this is bound to have political costs in terms of accountability, expenditures, and intelligi- bility of the system – and thus legitimation. It will also contribute to further institutionalise the differentiated mode of integration, but this time at the parliamentary level. The Euro- zone is not the only example of differentiated integration and therefore is not the sole ar- ea where a subgroup of states is involved (Schengen, EU citizenship, enhanced coopera- tions etc.). It could thus open the way to parliamentarism à la carte . 21

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Financial Intermediation and Economic Growth: Bank Credit Maturity and Its Determinants

Financial Intermediation and Economic Growth: Bank Credit Maturity and Its Determinants

The decision to enter a monetary union can bring important economic benefits as well as costs for the member countries. Starting with Mundell (1961), the literature has identified the restricted ability of member countries to react to negative economic shocks as the main cost of monetary unions. In a monetary union, monetary and exchange rate policies are decided at the union level and may not always be in line with the current needs of each member country. This is particularly problematic if the member countries have dissimilar business cycles and if wage rigidity and restricted labor mobility hamper macroeconomic adjustment. On the benefits side, monetary unions eliminate exchange rate uncertainty and the currency conversions costs among the member states, which may spur international trade and investment. An important benefit that has dominated the recent literature is the credibility argument. Monetary unions create the potential for some countries to “import monetary credibility” from other member countries with reputation for prudent monetary policy, e.g., Germany in the Euro-zone (Herrendorf 1997). Time wise this is a more efficient way to improve credibility than earning it through the alternative time consuming way of building a track record (Blinder 2000).

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"Macroeconomic effects of international regional economic integration: global practice and challenges for Ukraine"

"Macroeconomic effects of international regional economic integration: global practice and challenges for Ukraine"

The performed research of macroeconomic effects of formation and operation of different types of integration groups has shown increase of economic growth rates and approximation of coun- tries’ economic development manifested in price stabilization and decrease of the unemployment rate. In all analyzed integration associations, in addition to the general increase of GDP growth rate from the moment of their formation, their essential approxi- mation relative to the average level is traced. The effect of "pulling up" of economic development of the less developed member countries of the group due to attraction of external fi- nancing sources from the more developed countries is manifested. Furthermore, this effect is manifested in a longer period in less integrated forms of association and in a shorter perspective sub- ject to closer extents of international coordination and cooperation. Thus, in NAFTA free trade area countries the effect of the greatest approximation of macroeconomic indicators, especially unemployment rate, was manifested almost 15 years after formation of the association, in MERCOSUR common market coun-tries — in 11 years, and in Eurasian Union — in 4 years after en-largement.

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Forgotten lessons for the Eurozone  Egmont European Policy Brief No  43, May 2016

Forgotten lessons for the Eurozone Egmont European Policy Brief No 43, May 2016

(4) The relevance of ‘national’ interests. An important lesson, however, may be drawn in the comparison between the nineteenth century and the late twentieth and early twenty-first centuries: this is the changing role of the nation state and of national governments. The early period was actually the heyday of nation-state nationalism, but this had considerably diminished by the last quarter of the twentieth century. The drive towards EMU was possible only because the EU’s member states were willing to surrender certain aspects of sovereignty to the supranational institutions. The EMU became, therefore, a much more deeply integrated union than was possible, at least across different countries in the earlier period. In fact, it was only possible in a federation such as the United States or Canada because there was a willingness to create a new overarching entity. Although the EU is not yet a federation, it is developing into something quite similar. This has been borne out by the progress made in devising institutional responses to the crisis and the willingness to use it as a means of deepening integration even further.

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BEPA monthly brief, Issue 70, December 2013/January 2014

BEPA monthly brief, Issue 70, December 2013/January 2014

2014 must be a year of delivery and implementation. This message is clear in the European Commission’s work programme for this year. Growth and jobs, as part of its top priorities, will drive the Commission’s analysis of the reforms required at national level: efforts to repair public finances, continue structural economic reforms, and improve growth- enhancing investment. These efforts will be accompanied by initiatives proposed at European level to support economic recovery and job creation, as well as to tackle the social consequences of the crisis. The challenges remaining are formidable. Unemployment rates, particularly among young people, are at levels that are economically and socially intolerable. Small businesses – the lifeblood of the European economy – are still struggling to find the needed finance to grow and create jobs. And while important progress has been made, Europe is still falling short of its ambitions for the single market, particularly in key areas such as the digital economy, energy and services. EU action is also needed and will focus on safeguarding values and promoting citizens’ rights: from consumer protection to labour rights, from equality to respect

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Monetary Development and Transmission in the Eurosystem

Monetary Development and Transmission in the Eurosystem

Money is at the very core of the economy as its most fundamental element. If the financial markets are compared with the heart money is the liquidity that supplies all economic or- gans, firms and households. Its supply also has to be tightly regulated to achieve optimal conditions - like the right blood pressure and circulation - to maintain the body and many more analogies can be found within ‘ bionics of economics ’ . Too much money in the system leads to inflation, too less makes prices fall: and both always impact the business cycle and economic growth: deciding about many millions of job that are created or not in the EMU. Finding the best trade-off or equilibrium is the purpose and objective of many monetary policies (MPs), and every decision, and every lack of a decision, as well as the legal struc- ture of the entire monetary system (MS) always has tremendous effects on new money’s monetary transmission into all branches of the economy. This imperative makes MP, mone- tary developments, and monetary transmission very important for policy makers, the econ- omy and all of its producing and consuming actors, and every other stakeholder who is af- fected by it world-wide. The MS and its MP structure the financial and business sector and have a more powerful and renewing impact on the economy than is usually believed today. Since the formal introduction of the Euro in 1999, and its launch as daily legal tender in 2002, the European Economic and Monetary Union (EMU) and the European Union (EU) both have benefited much from related economic, monetary, financial, and political mech- anisms of integration, standardization and centralization. Billions of costs (up to €75bn p.a. , estimate base on ECB data) are saved every year that now indirectly contribute to a higher output potential (ca. 0.2-0.4% of GDP growth, p.a., estimate based on ECB data).

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