the functioning of the euro area- current problems
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The functioning of the euro area- current problems. Lecture outline. The functioning of the euro area- basic rules The effects of the single monetary policy Public finance crisis Potential solutions and perspectives. Monetary policy. Single monetary policy - PowerPoint PPT PresentationTRANSCRIPT
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International finance 120181-1165
The functioning of the euro area- current problems
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International finance 120181-1165
Lecture outline
The functioning of the euro area- basic rules
The effects of the single monetary policy
Public finance crisis
Potential solutions and perspectives
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International finance 120181-1165
Monetary policy
Single monetary policy
ECB- supranational institution
ESBC
Eurosystem
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International finance 120181-1165
EBC and ESBC
Creation of the ECB the necessity to
set its rules
Different conditions than for NCB’s The euro area- small degree of opennes
Monetary impuls transmission
The necessity to build credibility
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International finance 120181-1165
Monetary policy strategy
2 pillars
Control of the monetary base
Other economic and financial values
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International finance 120181-1165
Exchange rate policy
The aim- price stability
EBC and the EU Council (Ecofin)
Ecofin can unanimously set the rules of
the euro area exchange rate system vs.
other countries
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International finance 120181-1165
Exchange rate policy
ERM II- ER stabilisation vs. The currencies of
EU countries which are not euro area members
Euro area extension plans
Counteracting high ER volatility within the EU
market
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International finance 120181-1165
ERMII
Amsterdam summit 1997
Agreements between ECB and NCB of countries which
are not euro area members
ER approaches the band limit NCB is obliged to
conduct automatic and unlimited interventions
ECB support- conditional
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International finance 120181-1165
Fiscal policy
The Werner plan 1970
The MacDougall report 1977
Assumptions of fiscal centralisation
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International finance 120181-1165
Fiscal policy
The Maastricht Treaty
The prohibition to finance fiscal deficits by
ECB
No bail out clause
Thresholds concerning the fiscal balance
and governement debt
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International finance 120181-1165
Fiscal policy
Stability and Growth Pact 1997
The reform of the Pact 2005
Middle term surplus or balance
requirement
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International finance 120181-1165
Current problems
Single monetary policy vs. differences
The Stability and Growth Pact and the
problem of public finance imbalance
Monetary integration and political
integration
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International finance 120181-1165
The effects of the single monetary policy
Different growth rates in the euro area countries
Potential Balassa-Samuelson effect
Differences in reference i% according to Taylor
rule
Differences in inflationary pressures e.g.: Labour market flexibility
Product market flexibility
The role of labour unions
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International finance 120181-1165
The effects of the single monetary policy
The lack of national monetary aggregates Inflation as a monetary phenomenon- analysis
only on the euro area level
Monetary transmission- national level
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International finance 120181-1165
Monetary transmission- national level
Angeloni et al. 2003
The interest rate channel
The role of banks in the transmission
process
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International finance 120181-1165
Monetary transmission- national level
Christiano et al. 2007
Comparison of ECB and FED monetary
policy
The role of labour market structure in the
transmission mechanism
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International finance 120181-1165
The crisis of public finance
The crisis in several member
countries (PIIGS) Procyclical economic policy
The effects of the financial crisis
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International finance 120181-1165
The crisis of public finance
„Transfer union”- the possibility to finance
deficits of other member countries
violation of the Treaty regulations
Loans vs. transfers??
ECB support- the purchase of
governement bonds
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International finance 120181-1165
The crisis of public finance
Assessment by financial markets
participants
No implicit information abot who can
support whom, when and on what
conditions information discrepancies
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International finance 120181-1165
The crisis of public finance
Propositions to create a European
Monetary Fund
Euro area bonds
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International finance 120181-1165
The case of SpainLong term nominal interest rate in Spain and in the euro area
Ameco database, European Commission
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International finance 120181-1165
The case of SpainLong term real interest rate in Spain and in the euro area
Ameco database, European Commission
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International finance 120181-1165
The effects of the interest rates decrease
Credit boom
Increasing investments
Investments raising/ not raising labour
productivity
Productivity growth vs. inflation
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International finance 120181-1165
The real exchange rate in Spain
Ameco database, European Commission
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International finance 120181-1165
Current account 1999 2000 2001 2002 2003 2004 2005 2006 2007
-2,9 -4 -3,9 -3,3 -3,5 -5,3 -7,4 -8,9 -10,1
Goods 1999 2000 2001 2002 2003 2004 2005 2006 2007
-5,2 -6,4 -5,7 -5 -5,1 -6,4 -7,6 -8,5 -8,5
Services 1999 2000 2001 2002 2003 2004 2005 2006 2007
3,3 3,3 3,4 3,1 3 2,6 2,5 2,3 2,1
Eurostat
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International finance 120181-1165
Inflationary pressures
Years 2001 2002 2003 2004 2005 2006 2007
Unit labour cost 3,2 3,0 3,0 2,7 2,8 2,7 3,1
Labour productivity 2,5 1,2 1,4 1,6 1,9 2,3 1,8
Eurostat
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International finance 120181-1165
The crisis in Spain
The collapse of the bubble on the housing
market
Increase of market interest rates
Recession as a consequence of the lack
of antycyclical monetary policy?
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International finance 120181-1165
The crisis in Spain
Antycyclical banking supervision instead
od antycyclical monetary policy
Proposition to diversify the minimum
reserve requirement in the euro area
Proposition to diversify capital
requirements
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International finance 120181-1165
Euro area desintegration?
Arguments contradicting this scenario: Economic arguments- the single European market
Political arguments
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International finance 120181-1165
Euro area desintegration?
Eichengreen 2007
Large long term economic costs of
disentragtion
Large technical costs
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International finance 120181-1165
Euro area desintegration?
Credibility of the euro area- diversified
risk premia in different countries
ECB as a lender of last resort
Does the crisis change the balance of
benefits and costs of the EMU creation???
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Summing up
The current problems of the euro area are
mainly a consequence of the finacial crisis
2007-2009 but also of the procycylical
economic policy in some member
countries
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International finance 120181-1165
Summing up
Conclusions from the case study- the
necessity to introduce antycyclical tools
which could replace the antycyclical
monetary policy
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International finance 120181-1165
References
Auszüge aus Presseartikeln, Deutsche Bundesbank,
51-54/2010
B. Eichengreen, The breakup of the euro area, NBER
Working Paper, 2007
I. Angeloni et al., Monetary transmission in the euro
area: does the interest rate channel explain it all?,
NBER Working Papers 2003
M. Woodford, How important is money in the conduct
of monetary policy?, NBER Working Paper,2007