Class 9: the economic and monetary union

Historical development of EMU

the idea started in the 70s, where the first idea was to lock the different existing currencies together. In 1992 during the Maastricht treaty, everyone except denmark agrees to create EMU. The euro is introduced in 1999-2002

Economic policy vs monetary policy

economic policy is acknowledged as a common concern but MS are in the lead, but have to avoid excessive deficits. The commossion monitors the economic policy of MS via the european semester. Monetary policy on the other hand, is integrated and the main objective is prive stability. ECB authorizes the issue of euros. To connect the two worlds, there exists convergence criteria, which are criteria that member states need to meet in order to join the union such as prive stability, sustainable government finances, exchange rate stability and interest rate stability.

Debt mutualization

when governments takes on each other’s debt. This is not the (officially) the case in the EU, as all countries have their individual national debt.

Introducing the ECB (TFEU Art 282-284):

the primary objective is price stability (inflation at 2%). There is a governing council (ExecBoard + €-NCB governors) which formulates policy and who determines the interst rate + money supply. There is also an executive board (EUCO-appointed President + VP + 4) which implements & executes policy

Eurosystem

ESCB (eurosystem) = ECB + national central bank of euro area state

To get inflation down

put interest rate up

Euro crisis:

before the introduction of the EURO, countries could borrow money at veru different interest rates due to their creditworthiness. Due to the introduction of euro, where governments committed to controlling inflation as a criteria, the interest rates of the countries became lower and more similar, which for a number of years ment that all governments got to enjoy low intererst rates. However, during the banking crisis, the financial market starts wondering if the greek and italians are actually as creditworthy as the germans, which means that some countries started facing higher interest rates again. Greece reaches out the the EU, and rescue packages came into being (so deep discussions about whether or not to do this, as it goes against the treaty framework that national debts are only national debts)

European semester

after the eurozone crisis, it was determined that the commission needs to oversee the national budgets (basically not too much deficit spending). So some degree of fiscal surveillance which has been operationalized because of the crisis of the eurozone

EU budget percentage

ca 2,2% of total government expenditure in the union. So in reality, the EU budget is really small. For example, Germany has national expenditures that are larger than all of EU combined.

NextgenerationEU

the pandemic triggered a major economic shock and the initial macroeconomic response was to keep everything afloat by injecting liquidity into the economy. The ECB did that by buying debt, but also said that they couldn’t sustain that approach forever (as more money in the economy would mean that inflation would increase). So the structural response needed to be fiscal. This is where nextgenerationEU comes into the picture, as a fiscal stimulus package with debt repayment obligations stretching to 2058.

Does inflation hurt wealthy or poor countries the most?

High inflation hurts wealthy countries the most, as they have the most savings (where the purchasing power of these savings will be les safter high inflation.) this also means that poorer countries wih high debt levels can benefit from high inflation, as the purchasing power of the debt has decreased.