european policies Flashcards
(25 cards)
What are the principles of a monetary union?
Price stability, central bank independence, fiscal discipline
What are the entry conditions of the EMU?
- inflation should be similar and with a low value -> related to competitiveness
- nominal interest rate should be similar and with a low value
- country must have belonged to the ERM for <2y without devaluing currency
- budget deficit < 3% of GDP
- public debt < 60% of GDP
What happens when a poor country joins the EMU?
- productive -> prediction of higher income -> more consumption today -> + investment -> + imports and exports
- lower interest rates -> increased debt levels -> increase in consumption -> + investment -> + imports, = exports -> CA deficit
TLDR: country doesn’t have enough competitiveness to keep up
What are the five elements of the SGP?
- excessive debt definition
- Preventative arm
- Corrective arm
- European semester
- sanctions
What is the preventative arm meant to do?
submit finance ministers to a collective discussion of one another’s fiscal policy to constraint the deficit bias and support budgetary discipline
What is the corrective arm meant to do?
adopt recommendations that are increasingly detailed and urgent to help solve an excessive deficit
What is the European semester and how does it work?
annual process where the EU coordinated and monitors countries’ economic policies
- beginning of the year: annual growth survey
- march: key challenges in economic policy
- april: member states report their measures + commission makes proposals for each member state
- june: member states discuss the recommendations and adopt them
Why were risks neglected leading up to sovereign debt crisis?
- role of the central bank was just controlling price inflation
- financial regulation and supervision was restricted at ensuring the solvability of institutions
- assumption that financial markets could be disciplined through auto-regulation
What is the motivation of the banking union?
reduce fragmentation in financial markets and break correlation of banking and sovereign risk
What are the building blocks of the banking union?
- single supervision mechanism
- single resolution mechanism
- european deposit insurance scheme
What is the goal of the SSM?
kill financial fragmentation and adopt common supervisory rules
What are the principles of the SRM?
- uniform rules for banking resolution
- funding for any cash injection to which banks contribute
- bank deposits by households and SMEs are fully protected up to 100 000€
What is the purpose o the EDIS?
provide a stronger and more uniform degree of insurance cover in the euro area, as to ensure that the level of depositor confidence in a bank would not depend on the bank’s location
The banking union wants to make European banking…
… more transparent (common rules and procedures)
… unified (same treatment of banking activities regardless of country)
… safer (intervening early and resolving efficiently)
What were the ingredients that led to a financial bubble in Europe?
- countries with CA deficits
- risky behaviors
- financial fragmentation
- correlation between sovereign risk and private risk
- connection between countries defaulting and financial institutions defaulting
What was neglected leading up to sovereign debt crisis?
- excessive credit growth and leverage
- inefficient output composition: excessive expansion of some sectors
- excessive maturity mismatch of assets and liabilities in banks’ balance sheets
What was the impact of the sovereign debt crisis on monetary policy?
- low interest environment complicate the role of monetary authority -> lower banks’ profitability
- costs of borrowing higher in distressed countries
What are the pillars of the macroeconomic imbalance procedure?
- alert mechanism report
- in depth reviews
- specific monitoring
- excessive imbalance procedure
What is the alert mechanism report?
annual report which analyses the economies of all member states and identifies those who need deeper analysis
What are in-depth reviews?
provide the analysis for the identification of the presence of macroeconomic imbalances and the degree of their severity
what is specific monitoring?
dialogue between the commission and member states that aims to help them address macroeconomic imbalances that could affect their stability
what happens under the EIP?
member states experiencing excessive imbalances may b required to submit corrective action plans to address their situation
Imbalance: definition
any trend giving rise to macroeconomic developments which are adversely affecting the proper functioning of the economy of the country or of the union as a whole
what is the mission of the european stability mechanism?
provide financial assistance to the euro area countries experiencing severe financing problems
