European Economic and Monetary Union

The Eurosceptic perspective

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The EU Economy

The Development of the European Economic System

• 1957: Treaty of Rome, aimed to create a single European market

• 1968: Creation of a customs union for a single market for goods

• 1986: Single European Act signed, removing barriers to trade and creating the four economic freedoms of the single market

• 1992: Target date for the full completion of the single market (yet is it complete?)

• 1999: EMU launched• 2002: Euro notes and coins issued

The Gradient of European Economic Integration

1. The European Single Market.2. Economic and Monetary Union.

1. A country has full economic and monetary sovereignty.

Step 1. The country must lose a degree of economic sovereignty over trade

The Progression to the Single Market

2. The country joins a trade bloc or single market, e.g. the EU

The Process of Joining the Single Market

All countries that join the EU have access to the single market and input into how it is run.

Three processes must take place for a country to join the EU:

1. Stabilisation and Association Agreement2. Application and negotiation.3. Accession Treaty.

Countries in the EEA (Iceland, Liechtenstein and Norway) have access to some aspects of the single market, but have no input into how it is run.

Four Fundamental Economic Freedoms:

Free movement of:

1. Goods (customs union)

2. People

3. Services

4. Capital

How does the EU single market work?

The Benefits of the Single Market• Increased trade• Greater consumer choice • Jobs across Europe• Economic growth• Economies of scale

However...• Price differences still high in Europe.• Single market in many areas not complete.• Successes could be down to other factors e.g.

Globalisation.

The Costs of the Single Market

• Some people have lost jobs as businesses have moved abroad.

• There has been tension over immigration and the free movement of people.

• Some countries have struggled to compete with others which have benefitted more from the single market.

Step 2. To move from being part of a single market to being part of an EMU, further monetary powers must be transferred from

the national level to the supranational level

3. The country becomes a member of EMU

The Progression to Economic and Monetary Union

2. A country is a member of a trade bloc or single market, e.g. The EU

How does a country join EMU?

1. Become a member of the EU

2. Meet the Convergence Criteria

3. Hand control of national monetary policy to the ECB

4. Abide by the Stability and Growth Pact

There are currently 17 countries in the Eurozone.

How does the European Economic and Monetary Union work?

Introduction of EMU saw the ECB take over the monetary powers previously held by national central banks.

The ECB:

1. Sets a common interest rate.

2. Controls the growth of the money supply.

The Benefits of Being Part of EMU

1. End to exchange rate fluctuations and costs.

2. Same interest rates across EMU encourages investment.

3. Shields weaker countries from domestic political shocks.

4. End of speculation and competitive devaluations.

The Costs of Being Part of EMU

1. Loss of devaluation power.2. Loss of power to control interest

rates.

It is difficult to assess the pros and cons of being in EMU without looking at how it works in a particular situation.

The EMU: a good or bad thing for Europe?

1. Moral Hazard Problem -‘implicit guarantee’.2. Different microeconomic and macroeconomic

policies in different countries.3. Trade imbalances – some grow at expense of

others.

Some argue that these problems led to the current Eurozone crisis

Bad

Bad – Some Evidence

Country

Trade balance, 1998

(% of GDP)

Trade balance, 2008

(% of GDP) ChangeGermany -1.3 6.7 +5.4

Spain -2.9 -9.7 -6.8

Greece -3.6 -14.6 -11.0

Ireland -0.6 -5.2 -4.6

Portugal -7.2 -12.0 -4.8

These statistics suggest that some countries have seen a great increase in their trade deficit since before joining EMU

Bad – Some EvidenceCountry

Competitiveness position 2001

Competitiveness position 2011 Change

Germany 4 5 -1

Spain 23 42 -19

Greece 43 83 -40

Ireland 22 29 -7

Portugal 31 46 -15

Source: Global Competitiveness Index compiled by the World Economic Forum

These statistics suggest that some countries have seen a significant drop in competitiveness since the

beginning of the EMU

The Eurozone Crisis• A number of Eurozone states were particularly badly

hit by the global economic downturn which started in 2007.

• Resulting effects included: – increasing levels of government debt– unprecedented levels of unemployment– the introduction of significant austerity measures which led

to strikes and protests. • The crisis has led to financial bailouts for Greece,

Ireland and Portugal, with Italy, Spain and Cyprus also falling into dangerous economic territory.

The Eurozone Crisis - Greece• 2001: Greece joined the Eurozone• 2009: budget deficit: 12.7% of GDP• 2010: public debt: 142.8% of GDP• 2010: tough austerity measures announced • April 2010: credit rating downgraded to just above ‘junk’

status• May 2010: three killed in violent protests during general

strikes in Athens• May 2010: Eurozone leaders agree to a €110 billion bailout

for Greece• July 2011: Eurozone leaders agree to a second bailout for

Greece, amounting to an additional €109 billion

The Eurozone Crisis - Ireland• 1999: Ireland joins the Eurozone• July 2010: Irish banks pass ‘stress tests’• September 2010: Ireland’s budget deficit increases

from an alarming 12% of GDP to a terrifying 32%. • September 2010: the Irish Government announces

extreme austerity measures• November 2010: Eurozone leaders agree to an €85

billion bailout for Ireland• July 2011: Ireland’s credit rating downgraded to

‘junk’ status

The Eurozone Crisis - Portugal• 1999: Portugal joins the Eurozone• 2010: Portuguese debt reaches 93% of GDP• 2010: The Portuguese Government announces strict

austerity measures in the annual budget• Nov 2010: EU leaders deny that Portugal is in line for a

bailout• March 2011: Opposition parties in Portuguese

parliament defeat austerity measures as too severe• April 2011: Portugal asks the EU for financial help• May 2011: Eurozone leaders agree to a €78billion

bailout for Portugal

The Eurozone Crisis – Spain, Italy and Cyprus

SPAIN ITALY CYPRUS•The last of the EU’s ‘major’ economies to be in recession.•2010: government deficit comparatively low at 60.1% of GDP•2011: unemployment rate reaches 21.0%•August 2011: ECB recommences purchasing bonds from Spain and Italy to increase flow of money around Eurozone.

•Third largest economy in the EU•2010: government deficit at 119.0% of GDP•August 2011: Italy deemed likely to default on its debts; crisis talks of Eurozone leaders commence.•Prime Minister Silvio Berlusconi denies that Italy is facing an economic crisis.

•2008: Cyprus joins the Euro•July 2011: a hoard of confiscated ammunition explodes•The explosion is estimated to reduce Cypriot GDP by 14-17% in 2011•July 2011: The Cypriot Government resigns amid the economic troubles: the country’s credit rating is downgraded

Good – Some evidence

1. Stable interest rates and low inflation.

2. Benefits for weaker economies, greater access to large market.

3. Euro currency stability and strength

4. Growth in trade?

Who is right?

• The failings of EMU countries in terms of growth, competitiveness, and deficits is down to other factors.

• Moreover the EMU can provide a good safety net and the appropriate conditions for further economic reforms.

BAD• The EMU is the cause of the problems of reduced

competitiveness, trade deficits, public debt and poor growth.

• The experiment that has been EMU is in the process of failing due to the Eurozone crisis.

GOOD

The Political Angle

Perhaps the European EMU was driven by politics:

1. Political bargaining between countries.2. Countries think that disbanding it would

be politically embarrassing.3. The EMU as a political symbol.

What does the public think?

Series1

-20

-10

0

10

20

30

40

50

60

70

58

42

3128

23 21 21 20

63 2 0

-2 -2 -4

-10

In general, does the eurozone have a positive or negative effect upon the national economy? Results from 15 eurozone countries.

Source - Flash Eurobarometer Survey 251, Sept 2008

MaltaIrelandLuxembourgCyprusBelgiumAustriaFinlandSloveniaSpainGermanyEurozone averageGreeceFranceItalyNetherlandsPortugalCountries, overall effect score is displayed. Mean Score (positive effect -

negative effect)

Sc

ore

Respondents 09/2005

Respondents 05/2008

Respondents 05/2010

0%10%20%30%40%50%60%70%80%90%

100%

6 10 9

3137 39

3527 28

18 12 14

11 13 11

Are people happy that the Euro will replace their national currency? Results from 8 EU, but non-Eurozone, countries.

Source - Flash Eurobarometer Survey 296, May 2010

D/K, N/A

Very Unhappy

Rather Unhappy

Rather Happy

Very Happy

Month/Year

% o

f re

spo

nd

ents

Totally agree Tend to agree Tend to disagree Totally disagee DK0

5

10

15

20

25

30

35

10

2926

18 17

“Overall the Euro has mitigated the negative effects of the current financial and economic crisis.”

Eurobarometer: Europeans and the Economic Crisis, Feb 2009 EU27

%

Optimism about the Eurozone Crisis

What do the Public Think about the EU’s Response to the Crisis?

In spring 2011:• 22% of EU citizens consider the European Union to be the

best organisation to take effective action against the effects of the economic crisis, with 20% answering that their national government would be best.

• More than 70% of EU citizens feel that the measures proposed by the EU to tackle the Eurozone crisis would be effective.

• 79% believe that stronger economic cooperation between all EU member states would be an effective way of tackling the Eurozone crisis.

• 45% of EU citizens believe the EU did not act effectively to combat the crisis up until now.

Conclusions• EMU was an ambitious experiment in

taking the Single Market one step further – but is it a step too far?

• The Eurozone crisis has highlighted the limitations of EMU across so many economically and politically diverse countries – could it be doomed to failure?