Monetary Union

Monetary Union An advanced stage of trading

arrangements including free trade between members, common external barriers, free movement of factors, a common currency and a common monetary policy.

The Eurozone January 1, 2014

Lesser known monetary unions

The West African Franc and the Central African Franc had been fixed to the French franc, now they are fixed to the euro.

The most famous monetary union in the world?

1780s – the newly independent 13 colonies of the USA pooled their national debt.

1863 – the National Banking Act – the US dollar become the only legal tender.

1913 – the creation of the Federal Reserve. Since then all 50 states of the USA have had one monetary policy.

The eurozone 19 EU member states in the eurozone

(Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain) introduced the euro 1 January 1999 when it was electronic only.

Greece joined 1 January 2001

Subsequently, the following seven countries also joined the eurozone

Slovenia (2007) Cyprus (2008) Malta (2008) Slovakia (2009) Estonia (2011) Latvia (2014) Lithuania (2015)

Latvia became the 18th member state of the eurozone on January 1, 2014.

Why, oh why, would anybody want to join the euro.

The former Soviet republic on the Baltic Sea recently emerged from the financial crisis to become the EU's fastest-growing economy.

Much scepticism in the country after recent bailouts for existing eurozone members.

But there is also hope that the euro will reduce dependency on Russia.

EU commissioner Olli Rehn said joining the eurozone marked "the completion of Latvia's journey back to the political and economic heart of our continent, and that is something for all of us to celebrate".

Leonora Timofeyeva, who earns the minimum wage of 200 lats (284 euros) per month tending graves in a village north of the capital Riga, said: "Everyone expects prices will go up in January."

Join the euro? Price control.

The eurozone monetary policy is governed by the ECB in Frankfurt.

It prioritises price control as a macroeconomic objective.

It removes monetary decision from politicians with short term aims and empowers European Central Bankers.

This in theory, should allow for long term price stability.

A single currency reduces exchange rate costs.

The cost of minting and maintaining an independent currency is quite high for a small country.

Being a member of the euro means your currency is free from speculative ebbs and flows.

Attract FDI?

Remember – trade is very integrated nowadays. A brewer in Latvia may export his product to other countries, but he may buy his glass from Russia, his wheat from Poland and his machinery from Germany.

It removes the damaging effect of speculation.

Disadvantages/Problems 1. The euro brought about monetary

union. And the ECB has been successful in maintaining low prices since 1999. However, it did not agree on full fiscal union.

No fiscal union? Problems

No fiscal union. What MEO do we prioritise?

Should we have tax harmonisation?

No fiscal union. One country acts wastefully/stupidly. Their borrowing costs increase. They cannot borrow money themselves. They need help from the EU and/or IMF

to meet their debt repayments. This reduces the reputation, value and

belief in the single European currency.

Debt/GDP Luxembourg 18% Finland 54% Austria 75% Ireland 125% Italy 126% Greece 161%

PIIGS Portugal – persistant low growth unable

to keep up with govt spending. Greece – low growth, overpaid public

sector and very low tax compliance. Spain – huge unemployment following

collapse of property bubble Ireland – disastrous decision to bail out

private banking losses. Italy – low growth, ageing population.

The richest US state’s average income is about twice that of the poorest.

The richest eurozone member’s average income is about four times that of the poorest.

Euro - problems Legally, economically, politically - there

is no exit mechanism. This is a huge oversight on the part of the founders and means that members which are unwilling and unable to remain members cannot be kicked out.

If the debt was pooled, the eurozone debt/GDP would actually be lower than that of the USA, so why don’t they?