Chapter 10: The Euro Flashcards
Currency (Monetary) Union
A group of states or nations who replace their national monies with a single, common currency
Eurozone
A currency union in Europe
Euro
The currency of the eurozone
European Union (EU)
The EU is a mainly economic, but increasingly political, union of countries that is in the process of extending across–and some might argue beyond–the geographical boundaries of Europe
Maastricht Treaty
The treaty led to the creation of the euro, and created what was commonly referred to as the pillar structure of the European Union. The treaty established the three pillars of the European Union—the European Community (EC) pillar, the Common Foreign and Security Policy (CFSP) pillar, and the Justice and Home Affairs (JHA) pillar.
Maastricht Treaty Convergence Criteria for Joining the EU
- Exchange Rate: Two consecutive years in ERM band with no devaluation
- Inflation Rate: No more than 1.5% above the level in the three member states with the lowest inflation in the previous year
- Long-term Nominal Interest Rate: No more than 2% above the level in the three member states with the lowest inflation in the previous year
- Government Deficit: No more than 3% of GDP in previous financial year
- Government Debt: No more than 60% of GDP in previous financial year
Optimum Currency Area (OCA)
The monetary union that results if countries make a decision that best serves their self-interest when they form a currency union
Inflation Bias
The tendency of government control of the economy to lead to a higher than optimal level of inflation
Traditional theories suggest that inflationary bias will exist when monetary and fiscal policy is discretionary rather than rule based. Others have suggested that the inflationary bias exists even when policy makers do not have the goal of a lower than natural rate of employment, and their policies are based on rules.
Marshall Plan
In 1947-1951, the USA gave a shitload of money to Europe in what is the most generous and successful reconstruction ever undertaken in history.
We poured billions of dollars worth of aid into the war-torn regions of Western Europe to rebuild economic infrastructure
It required that the funds be allocated and administered by a European High Authority, composed of representatives of all European countries. This encouraged collective action to solve common problems.
Treaty of Rome
The TEEC proposed the progressive reduction of customs duties and the establishment of a customs union. It proposed to create a common market of goods, workers, services and capital within the EEC’s member states. It also proposed the creation of common transport and agriculture policies and a European social fund. It also established the European Commission.
Exchange Rate Mechanism (ERM)
A fixed exchange rate regime based on bands of ±2.5%
Economic and Monetary Union (EMU)
The monetary union would propose a currency for the entire EU. Countries would transition from their pegged rates within the ERM into an irrevocable peg with the euro at an appointed date.
ERM Crisis
A crisis in which several ERM countries suffered exchange rate crises and their pegs broke
British pound, Italian lira, Portugese escudo, and Spanish peseta all broke their pegs
European Central Bank (ECB)
Central bank for the Eurozone
Stability and Growth Pact (SGP)
Its shortcomings
An agreement, among the 27 Member states of the European Union, to facilitate and maintain the stability of the Economic and Monetary Union (EMU).
Shortcomings:
- Surveillance failed because member states concealed the truth about their fiscal problems
- Punishment was weak
- Deficit limits rule out the use of active stabilization policy, but they also shut down the “automatic stabilizer” functions of fiscal policy
- Once countries joined the euro, the incentive to maintain the pact disappeared
