Theorie und Politik der
Europäischen Integration
Theory and Politics of
European Integration
Lecture 13
The European Monetary Union (EMU)
Prof. Dr. Herbert Brücker
Theory and Politics of European Integration
The European Monetary System
Last Lecture
Optimum Currency Areas
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Is Europe an optimum currency area?
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Asymmetric shocks
Openness
Diversification
Labour mobility
Fiscal transfers
Homogenous preferences
Solidarity vs. nationalism
Will Europe become an optimum currency area?
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Effects of a currency union on trade
On trade specialisation
Labour markets
Fiscal transfers
Beyond OCA criteria: politics
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
This lecture
The European Monetary Union (EMU)
• The Maastricht Treaty
· Convergence criteria
· Interpretation
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The Eurosystem
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Objectives
Instruments
Strategy
Taylor’s rule interpretation
Does one size fits all?
Independence and accountability
The record so far
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
The European Monetary System
Theory and Politics of European Integration
The European Monetary System
The long road to Maastricht and to the euro
The EMU Timetable
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The Maastricht Treaty
•
A firm commitment to launch the single
currency by January 1999 at the latest
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A list of five criteria for admission to the
monetary union
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A precise specification of central banking
institutions
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Additional conditions mentioned (e.g. the
excessive deficit procedure)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The Maastricht convergence criteria
Inflation
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Not to exceed by more than 1.5% the average of the three
lowest rates among EU countries
Long-term interest rate
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Not to exceed by more than 2% the average interest rate in
the three lowest inflation countries
ERM membership
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At least two years in ERM without being forced to devalue
Budget deficit
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Deficit less than 3% of GDP
Public debt
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Debt less than 60% of GDP
· NB: observed on 1997 performance for decision in 1998
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Interpretation of the convergence criteria: inflation
• Straightforward fear of allowing in unrepentant inflation-prone
countries
10.00
5.00
0.00
1991
1992
France
Spain
Belgium
Greece
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
1993
1994
1995
1996
1997
1998
Italy
Germany
Portugal
average of three lowest + 1.5%
Theory and Politics of European Integration
The European Monetary System
Interpretation of convergence criteria: long-term interest rate
• A little bit too easy to bring inflation down in 1997
– artificially or not – and then let go again
• Long interest rates incorporate bond markets
expectations of long term inflation
• So criterion requires convincing markets
• Problem: self-fulfilling prophecy
• If markets believe admission to euro area, they expect
low inflation and long term interest rate is low, which
fulfils the admission criterion
• Conversely, if …
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Interpretation of convergence criteria: ERM membership
• Same logic as the long-term interest rate: need to
convince the exchange markets
• Same aspect of self-fulfilling prophecy
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Interpretation of convergence criteria: budget deficit and debt
• Historically, all big inflation episodes born out of
runaway public deficits and debts
• Hence requirement that house is put in order
before admission
• How are the ceilings chosen?
• Deficit: the German golden rule
• Debt: the 1991 EU average
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Interpretation of convergence criteria: budget deficit and debt
• Problem No.1: a few years of budgetary discipline
do not guarantee long-term discipline
• The excessive deficit procedure will look to that once in euro
area, more later
• Problem No.2: articifial ceilings
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The debt and deficit criteria in 1997
Maastricht fiscal criteria 1997
120
Public Debt (%GDP)
100
80
60
40
20
0
-3
-2
-1
0
1
Deficit (% GDP)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
2
3
4
5
Theory and Politics of European Integration
The European Monetary System
A tour of the acronyms
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N countries with N National Central Banks
(NCBs) that continue operating but with no
monetary policy function
A new central bank at the centre: the European
Central Bank (ECB)
The European System of Central Banks (ESCB):
the ECB and all EU NCBs (N=15)
The Eurosystem: the ECB and the NCBs of euro
area member countries (N=12)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The system
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
The European Monetary System
Theory and Politics of European Integration
The European Monetary System
How does the Eurosystem operates?
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Objectives
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What it is trying to achieve?
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Instruments
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What are the means available?
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Strategy
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How is the system formulating its actions?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Objectives (1)
• The Maastricht Treaty’s Art.105
“The primary objective of the ESCB shall be to maintain price
stability. Without prejudice to the objective of price stability, the
ESCB shall support the general economic policies in the Community
with a view to contributing to the achievement of the objectives of
the Community as laid down in Article 2.”
• In clear:
• Fighting inflation is the absolute priority
• Supporting growth and employment comes next
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Objectives (2)
• Making the inflation objective operational: does
the Eurosystem have a target?
• No, it has a definition of price stability:
"Price stability is defined as a year-on-year increase in the
Harmonised Index of Consumer Prices (HICP) for the euro area of
below 2%. Price stability is to be maintained over the medium
term."
“The Governing Council agreed that in the pursuit of price stability
it will aim to maintain inflation rates close to 2% over the medium
term.”
• Leaves room for interpretation:
• Where below 2%
• What is the medium term?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Instruments (1)
• Remember the channels of monetary policy
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•
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Longer run interest rates
Credit
Asset prices
Exchange rate
• These are all beyond central bank control
• Instead it can control the very short term interest
rate: European Over Night Index Average (EONIA)
• EONIA affects the channels through market
expectations
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Instruments (2)
• The Eurosystem controls EONIA by establishing a
ceiling, a floor and steering the market in-between
• The floor: the rate at which the Eurosystem
accepts deposits (the deposit facility)
• The ceiling: the rate at which the Eurosystem
stands ready to lend to banks (the marginal
lending facility)
• In-between: weekly auctions (main refinancing
facility)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
EONIA & Co.
7
6
5
4
3
2
1
EONIA
Deposit facility
Marginal lending facility
Main refinancing
0
Jan.99 Jul.99 Jan.00 Jul.00 Jan.01 Jul.01 Jan.02 Jul.02 Jan.03 Jul.03
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The two-pillar strategy
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•
The monthly Eurosystem’s interest rate
decisions (every month) rests on two pillars:
Economic analysis
· Broad review of economic conditions
– Growth, employment, exchange rates, abroad
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Monetary analysis
· Evolution of monetary aggregates (M3, etc.)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Comparison with other strategies
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The US Fed
· Legally required to achieve both price stability and a
high level of employment
· Does not articulate an explicit strategy
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Inflation-targeting central banks (Czech
Republic, Poland, Sweden, UK, etc.)
· Announce a target (e.g. 2.5% in the UK), a margin
(e.g. ±1%) and a horizon (2-3 years)
· Compare inflation forecast and target, and act
accordingly
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Taylor rule interpretation
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Taylor rule
i = i* + a( - *) + b (y - y*)
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Take:  = 2%
i = 4%
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(2% real, 2% target inflation)
Choose a and b
a = 2.0, b = 0.8
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Compare with actual EONIA
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
A Taylor rule example (1)
Inflation
3.5
3
2.5
2
1.5
1
0.5
0
Q1-1999
Q1-2000
Q1-2001
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Q1-2002
Q1-2003
Theory and Politics of European Integration
The European Monetary System
A Taylor rule example (2)
Output gap
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
Q1-1999
Q1-2000
Q1-2001
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Q1-2002
Q1-2003
Theory and Politics of European Integration
The European Monetary System
A Taylor rule example (3)
8
7
6
5
4
3
2
1
0
Q1-1999
Q1-2000
Q1-2001
EONIA
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Q1-2002
Taylor rule
Q1-2003
Theory and Politics of European Integration
The European Monetary System
Does one size fits all?
• With one monetary policy, particular national
conditions cannot be attended to
• This is another version of the asymmetric shock
concern of the OCA theory: the cost must be
borne
• Monetary policy may also affect differently
different countries.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Independence and accountability
• Current conventional wisdom is that central banks
ought to be independent
• Governments tend not to resist to the “printing press”
temptation
• The Bundesbank has set an example
• But misbehaving governments are eventually
punished by voters
• What about central banks? Independence removes
them from such pressure
• A democratic deficit?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
Redressing the democratic deficit
• In return for their independence, central banks
must be held accountable
• To the public
• To elected representatives
• Examples
• The Bank of England is given an inflation target by the
Chancellor. It is free to decide how to meet the target, but must
explain its failures (the “letter”).
• The US Fed must explain its policy to the Congress, which can
vote to reduce the Fed’s independence.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
The Eurosystem weak accountability
• The Eurosystem must report to the EU Parliament
• The Eurosystem’s President must appear before
the EU Parliament when requested, and does so
every quarter
• But the EU Parliament cannot change the
Eurosystem’s independence and has limited public
visibility
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The record so far
A difficult period
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•
•
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An oil shock in 2000
A worldwide slowdown
September 11
The stock market crash in 2002
Afghanistan, Iraq
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
The European Monetary System
Theory and Politics of European Integration
The European Monetary System
The euro: too weak first, then too strong?
The euro/dollar exchange rate
1.2
1.1
1
0.9
0.8
Jan.99 Jul.99 Jan.00 Jul.00 Jan.01 Jul.01 Jan.02 Jul.02 Jan.03 Jul.03
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
The European Monetary System
But no seriously asymmetric shocks (1)
Inflation
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1991 1993 1995 1997 1999 2001 2003
Average
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Min
Max
Theory and Politics of European Integration
The European Monetary System
But no seriously asymmetric shocks (2)
GDP growth
20.0
15.0
10.0
5.0
0.0
-5.0
1991 1993 1995 1997 1999 2001 2003
Average
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker
Min
Max
Theory and Politics of European Integration
The European Monetary System
NEXT LECTURE
•
•
Fiscal Policy and the Stability Pact
Reading: Baldwin/Wyplosz (2006, Ch. 18)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker

long-term interest rate