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IPE > Lecture 10 > Flashcards

Lecture 10 Flashcards

1
Q

What is the main motivation behind the European snake (snake in the tunnel) ?

A

After the collapse of the BWsystem in 1970s, trade within the European Union inhibited. Consequently the European Union decide to cope he instability of the BWsystem by stabilizing the European XR.

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2
Q

What does EMU mean ?

A

European monetary union

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3
Q

What is the snake in the tunnel ?

A

The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies.

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4
Q

What was the goal of the snake in the tunnel ?

A

It was an attempt at creating a single currency band for the European Economic Community (EEC), essentially pegging all the EEC currencies to one another.

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5
Q

What are the features of the snake ?

A
  • 4.5% band
  • Financing facilities
  • EM Cooperation Fund
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6
Q

Explain the 4.5% band supported by the snake ?

A

In order to peg the EEC currencies to one another, the snake allowed a 4.5% band. The european currencies could have up to 9% change between their currencies.

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7
Q

When did the Snake collapse ?

A

The tunnel collapsed in 1973 when the US dollar floated freely. The snake proved unsustainable, with several currencies leaving and in some cases rejoining.

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8
Q

What were the role of the Financing Facilities and the EM Cooperation Fund ?

A

Coordinate monetary policies.

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9
Q

What happened in 1972-74 within the snake ?

A

Some currencies (british, french and italian) left the snake. This lead to a situation in 1976 in which the remaining countries were aligned on the DM.

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10
Q

What was the consequence of the Snake’s failure ?

A

The creation of the European Monetary system (EMS).

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11
Q

Under the initiative of who does the EMS appeared ?

A

It was a Franco-German cooperation.

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12
Q

What were the motivations of the EMS ?

A

The cooperation between European countries and the deeper integration via economic affairs.

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13
Q

What were the features of the EMS ?

A

A 2.25% band and the possibility of reevaluation.

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14
Q

What are the 4 phases of the EMS ?

A 
1979-81 = establishment
1981-83 = tumbling Franc
1983-87 = stabilization
1987-91 = no revaluations
(1992: creation of the Economic and Monetary Union)
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15
Q

From what did the EMU emerge ?

A

From unification plans.

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16
Q

What were the criterias to enter the EMU ?

A
  • no more than +1.5% inflation over the lowest inflation rate
  • < 3% fiscal deficit
  • < 60% debt level of GDP
    BUT no country met these criterias
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17
Q

Which institution was created in 1998 within the EMU ?

A

European Central bank

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18
Q

On which model was the ECB created ?

A

on the federal and decentralized system modelled after the German Bundesbank.

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19
Q

What illustrate the ECB ?

A

the strong independence btw the countries.

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20
Q

Is Denmark part of the EMU ?

A

No he is not because he opt-out.

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21
Q

What happened in 1992 with the EMS ?

A

There has been a crisis because of the speculation. It leads to major devaluation.

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22
Q

What happened in 1999 with the EMS ?

A

The EUR was created.

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23
Q

How much countries adopted the EUR in 1999 ? and how much are there actually ?

A 
1999 = 11 countries
Todaxy = 19 countries
24
Q 
is there :
- capital mobility
- autonomus monetary policy
- fixed XR
in the Bretton Woods system ?
A
  • capital mobility NO
  • autonomus monetary policy YES
  • fixed XR YES
25
Q 
is there :
- capital mobility
- autonomus monetary policy
- fixed XR
in the European currency snake ?
A
  • capital mobility YES
  • autonomus monetary policy YES
  • fixed XR NO
26
Q 
is there :
- capital mobility
- autonomus monetary policy
- fixed XR
in the european monetary system ?
A
  • capital mobility YES
  • autonomus monetary policy NO
  • fixed XR YES
27
Q

What are the 3 stages of the EMU ?

A 
1990-94 = reforms on the domestic level
1994-99 = convergence
1999-... = union
28
Q

What are the political explanations of the European integration ?

A
  1. credibility, given by the fixed XR
  2. interest groups, multinational and capital owners in favor of capital mobility
  3. interstate bargaining
  4. ideas/inflation attitudes
    reminder: EMS = fixed XR and capital mobility (trinity by Mundell and Flemming)
29
Q

What is the economic explanation of the European integration ?

A

The optimum currency areas

30
Q

What is an optimum currency area (OCA) ?

A

OCA is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency.

31
Q

Who developed the OCA theory ?

A

The theory of the OCA is developped by Mundell and reliees on a trade-off. The gain by reducing transaction costs, and by increasing trade is reduce by losing monetary autonomy and having less flexibility to offset shocks.

32
Q

Why do we use the OCA theory ?

A

The theory is used often to argue whether or not a certain region is ready to become a currency union, one of the final stages in economic integration.

33
Q

Which criterias influence the benefits and costs in OCA ?

A 
benefits
- degree of openness
- trade and financial flows between union members
costs
- symmetry of shocks
- labor mobility
- wage price flexibility
- cushioning mechanism
- fiscal transfers
34
Q

Is the EMU an OCA ? Why ?

A

EMU is not an OCA because the shock in supply are too much different from one country to another. –> asymmetric shocts

35
Q

Which political factors try to explain the creation of the EMU ?

A
  1. bargaining
  2. interests
  3. credibility
  4. economic beliefs
36
Q

How can bargaining explain the creation of the EMU ?

A

There was an issue linkage in the process of EMu. The German unification meant that Germany would become extremely powerful. Integrating the country in the EMU was therefore a way to tame its position in Europe.

37
Q

How can interests explain the creation of the EMU ?

A

Exporters demanded stability with fixed XR (population bears the costs), the countries that export a lot to the German market therefore pushed for integration as the transaction costs would be reduced.

38
Q

How can credibility explain the creation of the EMU ?

A

IV: creation of EMU
DV: inflation convergence
This is a rationalist argument. During the Snake Dm served as the anchor currency. Even if countries did not have a lot of exports to the German market they would borrow credbility from the Bundesbank. As seen earlier, fixed XR was a commitment device. (Bodea and transition countries)

39
Q

How can economic beliefs explain the creation of the EMU ?

A

The period in which the EMU emerged is one preceded by a rise of neoliberalism. The EMU appears as the consequence and not the cause of low inflation.

40
Q

What is the other “real” reason ?

A

According to Frieden, the EMU is a result of societal interests. To him, fixed XR are driven by trading and not monetary interets. The real secotr, the production sector is mostly concerned about imports/exports to Germany. He classified countries in 3 groups:
- hard peg (North)
- moderate peg (core)
- soft peg (south)
And he found out that the North wanted credibility while the south wanted to increase exports to Germany.

41
Q

What is the alternative explanation of the EMU creation ?

A

According to Mc namara, the integration process is a result of the Neoliberal consensus. Elements of this consensus are a perception of expansionary monetary policy as being counterproductive. The reasons for this consensus are the failure of Keynesianism leading to a new alternative policy paradigm : monetarism.

42
Q

What is the main difference between the credibility and ideas argument ?

A

Credibility the EMU is the cause of the inflation convergence
Ideas: the inflation convergence is the origin of the EMU creation

43
Q

What supports the Brussels- Frankfurt consensus ?

A

Developed by De Grauwe, this consensus believes that Eurozone institutions are sufficient to run the EMU, that no further political integration is necessary.

44
Q

What are the motivations behind the Brussels- Frankfurt consensus ?

A
  • as the labor market becomes more flexible > asymmetric shocks should be absorbed more easily
  • national fiscal policy within the limits of the stability and growth pact are sufficient for macroeconomic stabilization
  • monetary policy stabilizes prices, therefore there is no need for a system-weide budgetary policy to stabilize the business cycle
  • price stability leads through financial stability through efficient financieal markets
45
Q

What are the theoretical foundations of the Brussels- Frankfurt consensus ?

A

The theoretical claims is that there is no fine tuning of the economy possible as the CB only cares about stability. The economic cycles are due to technology shocks and CB cannot do much about it.

46
Q

What is the tendance of the BoP within the EU ?

A

There are increasing intra-european imbalances:

  • Germany runs a surplus
  • Spain runs a deficit
47
Q

What are the roots of imbalances ?

A
  1. fiscal slack = wrong allocation of ressources
  2. competitiveness
  3. savings and capital flows
48
Q

Comment the “fiscal slack” as a root for imbalances

A

Looking at the public debt in % of the GDP, we observe that there is no significant pre-crisis expansion of public debt in crisis countries.
However there is a significant pre-crisis expansion of private debt in crisis countries.
Thus we could say that there is a transformation of private debt crisis into public debt crisis.
Consequently there is little evidence for systematic fiscal slack.

49
Q

What are the obstacles to a crisis resolution ?

A
  1. absence of a lender of last resort
  2. costs of internal adjusment
  3. politics of international bailouts (sauvetage financier)
50
Q

Explain the obstacle posed by the absence of a lender of last resort in the 2008 Banking crisis

A

During this crisis UK had its own currency, and Spain was subject to a common policy. The Bank of England was able to adjust internally (and follow an expansionary monetary policy) but it was not the case of Spain. In fact the European central bank did not want to act as a lender of last restort and proposes the expansionary fiscal contractions. It imposes fiscal austerity and cut fiscal spending.

51
Q

What is an expansionary monetary policy ?

A

Expansionary monetary policy is when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand. It boosts growth as measured by gross domestic product. It lowers the value of the currency, thereby decreasing the exchange rate. It is the opposite of contractionary monetary policy.

52
Q

What is expansionary fiscal contractions

A

Expansionary fiscal contractions states that fiscal austerity has no costs. According to this theory, the mechanism is that fiscal cuts increase confidence, which boosts private investments, which then offsets cuts.

53
Q

What are the consquences of the expansionary fiscal contractions in reality ?

A

The internal adjustements are much slower and more painful process that devaluation.

54
Q

What do we observe concerning the general attitude towards bailouts ?

A

Northern countries’ population are generally against bailouts. Thus their governement would introduce hard conditions on the crisis countries because they could not sell their economic policies to their electorate.

55
Q

To what are related the negative attitudes towards bailout ?

A

The determinants of these attitudes are unrelated to economic interests. Indeed the key determinant are social disposition. If you are nationalist you will not support but if you are cosmopolitanist you will.

IPE (14 decks)

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