Monetary Union

11 Key excerpts on "Monetary Union"

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  eBook - ePub

  International Economic Integration

  Limits and Prospects

  • Miroslav Jovanovic(Author)
  • 2006(Publication Date)
  • Routledge

    (Publisher)

  de facto EMU). This prevents any alterations in the rates of exchange as indirect methods of non-tariff protection or as a subsidy to exports. It also means that the member countries should seek recourse to the capital markets in order to find funds to cover their budget deficit. Within an EMU, it should be as easy, for example, for a Frenchman to pay a German within Europe, as it is for a Welshman to pay an Englishman within the United Kingdom (Meade, 1973, p. 162).

  A Monetary Union requires the following elements: •  convertibility (at least internal) of the participating countries’ currencies; •  centralization of monetary policy; •  a single central bank or a system of central banks that control stabilization policies; •  unified performance on the international financial markets; •  capital market integration; •  identical rates of inflation; •  harmonization of fiscal systems; •  replacement of balance-of-payments disequilibria with regional imbalances: •  similar levels of economic development or a well-endowed fund for transfers of real resources to the less developed regions; and •  continuous consultation about and coordination of economic policies among the participating countries, as well as the adjustment of wages on the union level.

  There may exist, also, a pseudo exchange rate union (Corden, 1972b). In this kind of union, member countries fix the exchange rates of their currencies and freely accept each others’ monies. However, since there is no pooling of foreign reserves and no central monetary authority, such a union is not stable. Since there is no mechanism to coordinate national policies, an individual member country may choose to absorb real resources from the union partners by running with them a balance-of-payments deficit. In addition, such a country may change the effective exchange rates of other members by creating a deficit in the union’s balance of payments with the rest of the world. A full EMU is not vulnerable to such instability. Foreign exchange rates are pooled and monetary policy is operated by a single monetary authority. In a pseudo exchange rate union, there is imperfect coordination of national monetary policies, but in a full EMU the problem is solved by policy centralization (Cobham, 1989, p. 204).

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  European Union Law

  Text and Materials

  • Damian Chalmers, Gareth Davies, Giorgio Monti(Authors)
  • 2014(Publication Date)
  • Cambridge University Press

    (Publisher)

  708 European Union Law Committee for the Study of Economic and Monetary Union, Report on Economic and Monetary Union in the European Community (Luxembourg, 1989) 22. A Monetary Union constitutes a currency area in which policies are managed jointly with a view to attaining common macroeconomic objectives. As already stated in the 1970 Werner Report, there are three necessary conditions for a Monetary Union: • the assurance of total and irreversible convertibility of currencies; • the complete liberalization of capital transactions and full integration of banking and other financial markets; and • the elimination of margins of fluctuation and the irrevocable locking of exchange rate parities. The first two of these requirements have already been met, or will be with the completion of the internal market programme. The single most important condition for a Monetary Union would, however, be fulfilled only when the decisive step was taken to lock exchange rates irrevocably. . . . 23. . . . The adoption of a single currency, while not strictly necessary for the creation of a Monetary Union, might be seen – for economic as well as psychological and political reasons – as a natural and desirable further development of the Monetary Union. A single currency would clearly demonstrate the irreversibility of the move to Monetary Union, considerably facilitate the monetary management of the Community and avoid the transactions costs of converting currencies. A single currency, provided that its stability is ensured, would also have a much greater weight relative to other major currencies than any individual Community currency. . . . 25. Economic union – in conjunction with a Monetary Union – combines the characteristics of an unrestricted common market with a set of rules which are indispensable to its proper working.

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  Enclyclopedia of Public International Law

  • Ezio Biglieri, G. Prati(Authors)
  • 2014(Publication Date)
  • North Holland

    (Publisher)

  M.R. SHUSTER, The Public International Law of Money (1973). L. FOCSANEANU, Droit international public monétaire, Jurisclasseur droit international, fascicule 136 (1980). R .s. RENDELL (cd.). International Financial Law (1980). K.w. DAM, The Rules of the Game, Reform and Evolu-tion of the International Monetary System (1982). J. GOLD, Developments in the International Monetary System, the International Monetary Fund, and Inter-national Monetary Law since 1971, RdC, Vol. 174 (1982 I) 107-366. F.A. MANN, The Legal Aspect of Money (4th ed. 1982). F.A. MANN Monetary UnionS AND MONETARY ZONES Monetary Unions and monetary zones are among the arrangements by which two or more geographical entities that are not parts of a single State agree to follow a common approach to monetary policies or problems (see also Monetary Law, International). The geo-graphical entities are usually, but not necessarily. States. The arrangements are diverse, largely be-cause of differences in economic conditions and historical developments. 1. Definitions Numerous definitions of a Monetary Union have 404 Monetary UnionS AND MONETARY ZONES been formulated, usually by economists, but there is no authoritative legal definition. For the pur-pose of this article, a Monetary Union is defined as an arrangement by which the members, in order to promote an economic objective, have agreed to establish and control a common central bank that issues a common currency as the only curren-cy in circulation and that holds the pooled monet-ary reserves of members to support the currency. The definition implies, inter a l i a , that the issuing authority has a sufficient range of powers to be considered a central bank and therefore can establish a common monetary policy. The econo-mic objective of the union may or may not be made explicit in the legal instruments of the un-ion. Effective control of the bank and the curren-cy by members does not preclude some participa-tion in control by a non-member.

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  Monetary Integration in Europe

  The European Monetary Union after the Financial Crisis

  • Horst Tomann(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Part I The Functioning of the Monetary Union 21 © The Author(s) 2017 H. Tomann, Monetary Integration in Europe, Studies in Economic Transition, DOI 10.1007/978-3-319-59247-3_2 2 Theory of Optimum Currency Areas To clarify the economic rationale of a currency union we have to judge it from the point of view of markets and against the background of the market agents’ experiences with other currency systems. In the case of national currencies which are bound together in a system of fixed exchange rates, governments face the risk of balance of payments imbal- ances which may finally lead them to exchange rate adjustments. With flexible exchange rates, on the other hand, markets experience large fluc- tuations in currency prices, not only in the form of short-term volatility, which can be hedged, but more importantly in long-term variations of exchange rates which could have lasting effects on the real terms of trade. These developments are barely predictable since they result largely from the instability of expectations in financial markets. What distinguishes a currency union, compared to these currency sys- tems? The important point is that governments are required to tie their hands, that is to say money cannot be used as a policy instrument at their discretion. This implies that a currency union has features similar to the gold standard and serves as a remedy to stabilize expectations in financial markets. Consequently, a currency union can only yield its benefits in full if it is strictly targeted toward preserving the value of money. In contrast 22 to the gold standard, however, the indicator of the value of money is not a fixed price of gold, but price level stability which guarantees the pur- chasing power of money in terms of a basket of consumer goods. If preserving the value of money is the predominant objective, an ade- quate institutional design of the currency union is required.

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  European Union Law

  Volume II: Towards a European Polity?

  • Damian Chalmers, Erika Szyszczak(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  sine qua non for Monetary Union if mass unemployment is to be unavoided. For the latter can only be avoided by uncompetitive firms reducing labour costs or individuals moving from areas of labour surplus to areas of labour shortage. Yet this is also the language of 'sweatshop economics'. In social terms, its logic leads to people having to accept levels of wages and a degree of mobility and social dislocation which many would regard as unacceptable. It is doubtful whether such a scenario is socially acceptable or politically feasible. Federations deal with this problem through a system of inter-regional transfers of wealth from rich regions to poor regions, yet no comparable mechanism on such a scale exists within the Union. A rise in unemployment in some regions of the European Union is therefore highly likely as a result of economic and Monetary Union. Once again, however, this argument needs qualification. Such a development is also likely to happen from one State pegging its currency to another's. This has already happened within the context of the Exchange Rate Mechanism for a number of years. Monetary Union may, in this respect expand employment in the outer regions. For the central authority will no longer be the central bank of the base currency-in Europe's case the Deutschmark-but a European body which will be able to adopt a wider perspective and adopt a policy geared to European rather than to national interests.

  ii. The Route to Monetary Union

  The TEU sets out a phased approach to economic and Monetary Union. In this it follows the structure of the earlier Delors Report which suggested a three stage approach to economic and Monetary Union.48 The first stage finished on 31 December 1993. By that date each Member State had to ensure free movement of capital unless granted a derogation by the Council.49 Member States also were required to adopt multiannual programmes intended to ensure the lasting convergence necessary for the achievement of economic and Monetary Union. These had to have regard to price stability and sound public finances. These reports also had to enable the Council to make an assessment on the progress made with regard to economic and Monetary Union and the progress on implementation of the internal market.50

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  International Financial Integration

  Competing Ideas and Policies in the Post-Bretton Woods Era

  • A. Endres(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  One group of dissenters of whom Harvard economist Martin Feldstein (1988) is representative, doubted the value of constraints limiting sov- ereignty over monetary policies. He had always been sceptical of inter- national economic policy coordination per se (Feldstein 1998b). The standard case for Monetary Union was equivalent to claiming that the benefits of coordination outweighed the costs. The risks and disadvan- tages of policy coordination, indeed perfect harmonization as far as mone- tary policy goes, were downplayed in this standard case. One major limitation concerned the prospects that nations could join a Monetary Union in order to avoid making necessary changes in monetary policy. Monetary Unions can therefore insulate bad policies. For instance, pres- sure would be brought to bear on the proposed ECB to reduce the empha- sis on price stability. And the proposed union ‘arrangements could also affect the broader prospects of economic policy, including protectionist trade policies toward non-EMU countries and the policies that affect structural unemployment within the EMU area’ (Feldstein 1997, p.32). Currency Consolidation and Currency Unions 187 Feldstein assessed the net economic effects of the EMU in particular, as negative. National political and social interests in retaining a high degree of autonomy over countercyclical monetary and fiscal policies and exchange rates would be too strong and render the union infeas- ible (p.35). In terms of purely economic factors, firstly the structure of the European economy was significantly heterogeneous. Differences in trading patterns and the structure of GDP between countries meant that external shocks affecting Germany for instance, will be different from those affecting Portugal. Secondly, the EMU was constituted by econ- omies with vastly different degrees of wage and price flexibility.

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  Rethinking the Union of Europe Post-Crisis

  Has Integration Gone Too Far?

  • Giandomenico Majone(Author)
  • 2014(Publication Date)
  • Cambridge University Press

    (Publisher)

  Since these lines were written the number of member states has almost doubled, the range of EU competences has greatly expanded, and socioeconomic diversity has increased exponentially. In spite of all these changes, the boldest experiment in total harmonization was launched on 1 January 1999, when the final stage of Monetary Union entered into force with the irrevocable fixing of the exchange rates of the currencies of eleven (soon to become twelve, and eventually eighteen and more) member states, and the pre-emption of national action in the monetary area. What is most striking about this rather paradoxical return to total harmonization is the contradiction between the centralization of mon- etary policy and the mutation of the fairly homogeneous EU-15 into a highly heterogeneous bloc of twenty-eight states – a contradiction which, as noted above, tends to reduce the benefits of a common monetary policy. What two American experts, Eichengreen and Frieden, argued in 1995 is even truer today: Given the risks and uncertainties that pervade the process [of monetary integration] there would have to be a clear margin of benefits over costs for economic considerations, narrowly defined, to provide a justification emu and the paradox of policy harmonization 39 for such a radical departure in policy. The absence of such a margin implies that the momentum for Monetary Union must therefore derive from other, primarily political, factors. (Eichengreen and Frieden 1995: 274) Unfortunately, the political benefits of Monetary Union are even more doubtful than the economic ones. This is particularly true in the case of Germany. German leaders worked hard to convince their voters that the sacrifice of their beloved D-Mark was justified by the prospect of a decisive advance towards political union. In reality, the introduction of the common currency has hardly increased the credibility of the com- mitment of Germany’s partners to political union.

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  The European Monetary System And European Monetary Union

  • Michele Fratianni, Jurgen Von Hagen(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Greater economic integration and competition among national fiscal policies therefore tend to induce governments to adopt stable fiscal policies compatible with stable monetary policy in the union. 21 Harmonization of Tax Systems Recent literature has pointed to the potential damage national inconsistencies of tax systems can cause in an economic union. 22 Taxes on goods, services, and factors of production distort relative prices, triggering inefficient flows of goods, services, capital, and labor and producing regional trade imbalances. The EC governments have agreed to reduce differences in value-added tax rates, taxes on capital income, and the like as an important element of the unified internal market. Monetary integration reinforces the importance of this element in that exchange rates can no longer be used to rectify after-tax relative price and interest rate differentials and the resulting regional imbalances. One can go further: the harmonization of tax systems is itself a precondition of monetary unification as long as the union retains individual national currencies tied together through fixed exchange rates maintained by foreign exchange market intervention. Persistent trade imbalances resulting from inconsistent tax laws would undermine the sustainability of the union. A significant degree of harmonization is therefore indispensable in an EMU. 8.5 Institutional Requirements for a Low-Inflation EMU The Monetary Union can improve the average quality of monetary policy only if its institutional design facilitates credible precommitment to low-inflation policies. Three important requirements must be fulfilled: institutional independence, personal independence, and professional competence. First, the monetary authority must be fully independent from political pressure. Bade and Parkin (1987), among others, have

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  The Economics of UK-EU Relations

  From the Treaty of Rome to the Vote for Brexit

  • Nauro F. Campos, Fabrizio Coricelli, Nauro F. Campos, Fabrizio Coricelli(Authors)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  However, the European Bank will have the major constraints deriving from the complexity of the governance framework of the Monetary Union (Gerba and Macchiarelli 2016): again 1 central bank and n Treasuries. In the jargon of game theory, the problem with this set-up is that the Member States’ fiscal authorities will be better off if the ECB intervenes, obviating the need for fiscal intervention. Likewise, the ECB will be better off if the governments agree to use their fiscal stimulus, thus alleviating the pressure on the ECB itself (see Onorante 2007; Alcidi and Giovannini 2013). Once again, this gives rise to coordination failures. 3.1 Theory Behind Economic Integration From a theoretical standpoint, the “economics” of European integration can be understood under two broad headings. The first is the optimal control approach or the political economy of strict fiscal rules (see Fuest and Peichl 2012; De Grauwe 2016a), discussed earlier. This approach tends to identify in the moral-hazard implicit in pooling the exchange rate and monetary policy competencies as the main problem within a currency union. A second popular set of tools is the Optimum Currency Area (OCA) first developed in the 1960s (Mundell 1961; McKinnon 1963), and centered on the idea of trade openness, the flexibility of (labor and product) markets, and business cycle’s symmetry. The UK’s attitude towards the EU has historically put much emphasis on the former. The main research question driving the scholarship on OCA has to do with the costs and benefits of sharing a currency (Alesina and Barro 2002). The main cost is the loss of monetary policy and exchange rate 94 C. Macchiarelli autonomy, the latter being particularly relevant in the presence of asymmetric shocks. Benefits are mostly in terms of reduction of trans- action costs and exchange rate uncertainty, and of increasing price transparency, trade, and competition. Other recent work calls the attention to the role of credibility shocks.

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  Economic and Monetary Union in Europe

  • Geoffrey Denton(Author)
  • 2022(Publication Date)
  • Routledge

    (Publisher)

  2 Economic Management in a Monetary Union

  Steven Robson

  At the Hague Summit in 1969, the Six agreed to create an economic and Monetary Union. The subsequent Werner Report became the blueprint for EMU, but was never embodied in a Council Resolution and therefore remains a background document. There are two EMU resolutions. The first of March 1971, followed the Werner Report in many respects. It stated that the aim was to turn the Community into an area “in which persons, goods, services and capital move freely and without distortions of competition, but without thereby giving rise to structural or regional imbalances, and under conditions enabling business to expand their activities on a Community scale’. At the same time the Community woul form a ‘separate monetary entity’ in the international monetary system.

  The principal features of EMU as described in the resolution are: complete and irreversible convertibility of currencies, elimination of margins of fluctuation and irrevocably fixed exchange rates; a Community organisation of Central Banks; transfer to the Community level of ‘the requisite decisions on economic policy’ and the power and responsibility ‘necessary for the cohesion of the union and the effectiveness of Community action’ in the fields of:

  1. internal monetary and credit policies;
  2. monetary policy with the rest of the world;
  3. policies relating to the capital market and to movements of capital to and from the rest of the world;
  4. budgetary and fiscal policies (in particular the variation in ‘the essential elements’ of public budgets and the size, the use and the methods of financing of the budget balance);
  5. the regional and structural measures necessary to the balanced development of the Community.

  The first stage in the process of forming the union was to last three years, finishing at the end of 1973, but the resolution was rather vague about its contents. It merely stated that these ‘should include’ a strengthening of the consultation procedures, particularly prior consultations, and the introduction of a system whereby the Council would lay down the broad outlines of economic policy at the Community level and also quantitative guidelines for the ‘essential elements’ of national budgets. Similar provisions were made for consultation and guidelines on monetary and credit policies.

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  Economic and Monetary Union Macroeconomic Policies

  Current Practices and Alternatives

  • P. Arestis, Kenneth A. Loparo, Malcolm Sawyer(Authors)
  • 2013(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  4 Monetary Policy in the Economic and Monetary Union 4.1  Introduction

  Our main focus of attention in this and the next chapter is on the EMU macroeconomic policy frameworks. We discuss monetary policy as implemented by the ECB in this chapter, and this is followed in chapter 5 by a discussion of the fiscal policy aspects of the Economic and Monetary Union (EMU). In this chapter we set out the specific elements of the monetary policy of the EMU, and consider the strengths and weaknesses of this policy as applied within the EMU.

  We examine in this chapter the institutional framework of monetary policy along with the strengths and weaknesses of the theoretical and empirical aspects of this policy. We begin by discussing monetary policy itself in section 4.2, and this is followed in section 4.3 by a discussion of inflation problems. In section 4.4 we discuss problems with economic activity; this is followed in section 4.5 by a discussion of the potential future of monetary policy developments. Finally in s ection 4.6 we offer a number of concluding remarks.

  4.2  Monetary policy

  With the formation of the EMU, monetary policy has been removed from national authorities and from political authorities and placed with the ECB – that is, the ECB is not only supranational but also ‘independent’ of political (or other) authorities. The ECB and the national central banks are linked into the European System of Central Banks (ESCB) with a division of responsibility between them. The ECB has the responsibility for setting interest rates in pursuit of the inflation objective and the national central banks responsibility for regulatory matters.

  The ECB is set up to be independent of the European Union (EU) Council and Parliament and also of its member governments. There is, thus, a complete separation between the monetary authorities, in the form of the ECB, and the fiscal authorities, in the shape of the national governments comprising the EMU. It follows that there can be little coordination of monetary and fiscal policy. Indeed, any attempt at coordination would be extremely difficult to implement. For apart from the separation of the monetary and fiscal authorities, there is also the constitutional requirement that national governments (and hence the fiscal authorities) should not exert any influence on the ECB (and hence the monetary authorities). Any strict interpretation of that edict would rule out any attempt at coordination of monetary and fiscal policies. Nor is it desirable to co-ordinate fiscal and monetary policy in the view of the ECB:

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