economic and monetary union (emu) - universität kassel · economic and monetary union (emu) ......

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

2



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

3



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

4



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



08.12.2016: Current Issues

15.12.2016: Midterm exam

22.12.2016: First day of seminar

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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

6



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



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

8



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

9



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

10



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

11



From a mere EU member state to an Euro area member

• The convergence criteria (Maastricht-Criteria)

12



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



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



Some Facts – GDP of the EU member states

15

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1.500,

2.000,

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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 €)



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%

16



Some Facts – Member contributions to the EU

17



Some Facts – Total expenditures by country (receiving from EU)

18



Some Facts – Operating budgetary balance (EUR, million, 2015)

19



Some Facts – Member contributions to the EU

20



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

21



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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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

23



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.”

24



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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