Economic and Monetary Union (EMU)
Philipp Kirchner and Benjamin Schwanebeck
Winter Term 2016/17
Ch. 1 – The European Union
Economic and Monetary Union Kirchner/Schwanebeck
Outline and syllabus
Some important information
• Lecture part is open for everybody
• Combined with lecture on Labor Economics: 6CP
– Necessity to write 2 exams!
– Registration for exam in His course “Lectures on EMU and Labor Economics” until 10th
December
• Lecture + seminar is only available for 24 students from EBGo
– Registration for exam + seminar in His course “Economic and Monetary Union (EMU)”
until 1st November
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Economic and Monetary Union Kirchner/Schwanebeck
Outline and syllabus
Literature
Three main text books:
• Baldwin, Richard and Charles Wyplosz (2009): The Economics of European Integration, 3rd
edition, London.
• De Grauwe, Paul (2005): Economics of Monetary Unions, 6th edition, New York.
• Pelkmans, Jacques (2001): European Integration – Methods and Economic Analysis, 2nd
edition, Essex.
All papers that are used as introductory readings for the seminar papers
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Economic and Monetary Union Kirchner/Schwanebeck
Outline and syllabus
Topics
1. The European Union – History, Facts and Institutions
2. The Microeconomics of Economic Integration
1. Trade, factor markets, labor markets (migration)
3. The Macroeconomics of Monetary Integration
1. Costs and benefits of EMU, optimum currency areas
2. Monetary Policy (One size fits all?, the ECB)
3. Fiscal Policies, Stability and Growth Pact
4. Current Issues
1. Brexit, Refugee Migration in Europe, Reforms
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Economic and Monetary Union Kirchner/Schwanebeck
Outline and syllabus
Time schedule
27.10.2016: The European Union (History, Institutions, €, ECB)
03.11.2016: The Microeconomics of Economic Integration
10.11.2016: The Microeconomics of Economic Integration
17.11.2016: The Macroeconomics of Monetary Integration
24.11.2016: The Macroeconomics of Monetary Integration
01.12.2016: The Macroeconomics of Monetary Integration
08.12.2016: Current Issues
15.12.2016: Midterm exam
22.12.2016: First day of seminar
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
A preliminary and clarifying aspect on Economic and Monetary Unions
• Within this lecture our notion of EMU corresponds to: EMU of the European Union
• But: EMU is a general term for countries/states forming an economic union combined with
a monetary union
• Why?
– Integration comprises several benefits (more details in the upcoming weeks)
• Some examples of EMU’s:
– Central African Economic and Monetary Community
– West African Economic and Monetary Union
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Point of departure: the end of WW II – 1945
How can Europe avoid another war and regain economic strength?
7
Death toll The Economic setback: pre-war year
when GDP equalled that of 1945
Austria 525,000 1886
Belgium 82,750 1924
Denmark 4,250 1936
Finland 79,000 1938
France 505,750 1891
Germany 6,363,000 1908
Italy 355,500 1909
Netherlands 250,000 1912
Norway 10,250 1937
Sweden 0 GDP grew during World War II
Switzerland 0 GDP grew during World War II
UK 325,000 GDP grew during World War II
Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Development of the EMU – some milestones
January 1st, 1952
• European Coal and Steel Community (ECSC) between France and Germany, later Italy
and BeNeLux (The Six – F, D, I, BeNeLux))
January 1st, 1958
• The Treaty of Rome – foundation of the European Economic Community (EEC) by the
Six
• Main goal: elimination of intra-EEC tariffs
• Common external tariffs and deeper economic integration
January 1st, 1973
• First enlargement of the Six to Nine (Denmark, Ireland and UK join the EEC)
1985
• Schengen Agreement – Abolishment of internal border checks among F, Benelux, D
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Development of the EMU – some milestones
May, 1992
• Establishment of the European Economic Area
1993
• European Single Market and Maastricht Treaty – „Treaty on European Union“
January 1st, 1994
• Establishment of the European Monetary Institute (the ECB‘s predecessor)
January 1st, 1999
• ECB takes over responsibility for monetary policy
• Introduction of the euro as ‚book‘ money
January 1st, 2002
• Introduction of euro banknotes + coins
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
What is the EMU (EWWU)?
Economic and Monetary Union of the European Union
• A step in the integration of EU economies
Agreement on merging the economic and monetary arrangements across all member
states of the EU (milestone: Maastricht Treaty)
Coordination of economic and fiscal policies, a common monetary policy and a
common currency
• Formally, all 28 EU countries are part of the EMU
• Some have taken integration a step further: adoption of the euro
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some important aspects of the EMU
• European Single Market within the EU
– Free movement of goods, capital, services and people
– Common trade policy, labor and capital market integration
• European Union Customs Union
– No customs duties at internal borders between member states, common customs duties on
imports from outside EU, common rules of origin
• Common policies (commercial, competition)
• Euro area
Group of currently 19 EU countries using a single currency
Long-run objective: Merging all 28 EU countries to the euro area EMU completed
• A single currency
Monetary policy conducted by a single authority
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
From a mere EU member state to an Euro area member
• The convergence criteria (Maastricht-Criteria)
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Member countries
European Union Member States (EU-28)
• Belgium, Germany, Ireland, Greece,
Spain, France, Italy, Cyprus, Luxembourg,
Malta, The Netherlands, Austria, Portugal,
Slovenia, Slovakia, Finland, Estonia,
Latvia, Lithuania, Bulgaria, Czech
Republic, Hungary, Poland, Romania,
Sweden, Croatia, Denmark, United
Kingdom
Euro area Member States (EU-19)
• Belgium, Germany, Ireland, Greece,
Spain, France, Italy, Cyprus, Luxembourg,
Malta, The Netherlands, Austria, Portugal,
Slovenia, Slovakia, Finland, Estonia,
Latvia, Lithuania
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Source: http://ec.europa.eu/economy_finance/euro/adoption/euro_area/index_en.htm
Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some Facts – Citizens of the EU
14
82
,16
66
,66
65
,34
60
,67
46
,44
37
,97
19
,76
16
,98
11
,29
10
,79
10
,55
10
,34
9,8
5
9,8
3
8,7
7,1
5
5,7
1
5,4
9
5,4
3
4,6
6
4,1
9
2,8
9
2,0
6
1,9
7
1,3
2
0,8
5
0,5
8
0,4
3
0
10
20
30
40
50
60
70
80
90
Cit
izen
s in
mil
lion
Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some Facts – GDP of the EU member states
15
0,
500,
1.000,
1.500,
2.000,
2.500,
3.000,
3.500,
GD
P, in
bil
lio
n €
• The big 5 (GER, UK, F, IT, SP) account for roughly 71% (10 trillion €) of EU-28 GDP
• The rest accounts for roughly 28% (4 trillion €)
Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some Facts – The Budget of the EU
EU budget in 2015: 146 billion €
Equals 1% of GDP of EU-28 (Budget of all 28 member states: 6400 billion € )
Corresponds to 283€ per EU citizen (2013)
• 94% of the EU budget is used for citizens, regions, businesses and projects
– Smart and inclusive growth: 44.9% (underdeveloped regions, firms, sections of society)
– Sustainable growth: 41.6% (farming, foods, sustainable use of land and forest)
– Global Europe: 5.8% (development assistance and humanitarian aid outside EU)
– Special instruments: 0.4%
• Administration: 5.9%
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some Facts – Member contributions to the EU
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some Facts – Total expenditures by country (receiving from EU)
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some Facts – Operating budgetary balance (EUR, million, 2015)
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some Facts – Member contributions to the EU
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
Some important institutions of the EU – the Big-5
The Council of the European Union – EU’s main decision making body
– Members: Government ministers of each EU country
The European Council – Defines the general political direction and priorities political agenda
– Members: Heads of states or governments of EU countries, European Commission president, …
The European Commission – Responsible for proposals for new European legislations, sets EU spending priorities,
– Members: 28 Commissioners
The European Parliament – Directly elected EU body with legislative, supervisory and budgetary responsibilities
– Members: 751 MEPs
The EU Court – Ensures that EU law is interpreted and applied the same way in every country
– Members: 1 judge from each country
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
The European Central Bank (ECB) and the Eurosystem
• The European Central Bank and the national central banks of the
countries whose currency is the euro together constitute the
Eurosystem, the central banking system of the euro area
• Responsible for conducting monetary policy for the euro area (since January 1st, 1999)
• Eurosystem: comprises the ECB and the national central banks of the Member States
whose currency is the euro
• ESCB: European System of Central Banks consists of the ECB and the national central
banks of all EU member states, irresponsible of being part of the euro area or not
The Eurosystem and the ESCB will coexist as long as states with and without the euro
coexist within the EU
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
The European Central Bank (ECB) and the Eurosystem
Independence (Article 7):
• “… neither the ECB, nor a national central bank, nor any member of their decision-making
bodies shall seek or take instructions from Community institutions or bodies, from any
government of a Member State or from any other body.“
The Governing Council (Article 10):
• “… comprises the members of the Executive Board of the ECB and the governors of the
national central banks.”
“Each member of the Governing Council shall have one vote”
• They decide about the guidelines and principles of the policy of the ECB
• The Governing Council passes a resolution with simple majority
From 2015: Rotation of voting rights in the Governing Council
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
The Executive Board (Article 11):
• “… the Executive Board shall comprise the President, the Vice-President and four other
members“
President: Mario Draghi
Vice-President: Vítor Constâncio
Benoît Cœuré, Sabine Lautenschläger, Yves Mersch, Peter Praet,
“Their term of office shall be eight years and shall not be renewable”
“The Executive Board shall be responsible for the current business of the ECB.”
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Economic and Monetary Union Kirchner/Schwanebeck
1. The European Union
The benefits of the EURO
Security of purchasing power
Removal of transaction costs
Price transparency
Elimination of exchange rate risks
Financial integration
Results in economies of scale, larger variety of financial products at lower costs
Enhances the transmission of monetary impulses
Contributes to safeguarding of financial stability and smooth operation of payment
systems
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