KOM: Chapter 21

What were the 2 main motives for adopting the euro?

1. US became self-interested, so Europeans wanted to unite to better defend their own interests

2. To truly make the EU a unified market. Even though it was established in 1957, it had significant barriers, and significant exchange rate swings was effectively one of them

Why did the UK leave the EU?

They felt there was too much net migration taking their jobs and local services (not backed by evidence) and that EU regulations were too burdensome.

What was the end result of the UK and the EU’s brexit negotations?

1. Northern Ireland and Ireland would still have no barriers, but a checks would occur to goods coming in from Britain

2. The UK could have tariff and quota-free trade with the EU for important manufacturing components but not financial services (major British export) and this could change if regulations differed too much in the future

European Monetary System (EMS)

A formal network of mutually pegged exchange rates begun in March 1979, with intervention arrangements to keep the exchange rates of participating currencies within specified fluctuation margins

What were two safety valves that kept countries in EMS?

1. Having bands that currencies could fluctuate around

2. Having strong economies lend their currency to weaker economies to keep rates fixed

3. (Not a safety valve, but some also had capital controls to stop speculative attacks)

Credibility theory of the EMS

View that the political costs of violating an international exchange rate agreement may be useful in restraining governments from depreciating their currencies to gain the short-term advantage of an economic boom at the long-term cost of higher inflation

Economic and monetary union (EMU)

Goal of a European Union in which national currencies would be replaced by a single EU currency managed by a sole central bank operating on behalf on all EU members

Maastricht Treaty

Agreement to establish a single European currency and a European Central Bank

What are some reasons EU countries went along with the goal of a single shared currency instead of stay with the EMS?

1. Greater integration helps meld Europe into a single market, which was the goal.

2. To stop the asymmetry of the EMS system, where policy would focus on Germany’s condition

3. Free movement of capital meant that there was little benefit of fixed exchange rates but a lot of costs (speculative attacks). It’s best to have one currency

4. Symbolic goal to stop wars in Europe

left on 21.2

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