Chapter 20 Optimum Currency Areas and the European Experience
Chapter 20 ▪ Optimum Currency Areas and the European Experience
Chapter organization How the european Single Currency evolved The Euro and economic policy in the Euro Zone The Theory of Optimum Currency Areas The Future of emu Summary Copyright C 2003 Pearson Education, Inc Slide 20-2
Copyright © 2003 Pearson Education, Inc. Slide 20-2 Chapter Organization ▪ How the European Single Currency Evolved ▪ The Euro and Economic Policy in the Euro Zone ▪ The Theory of Optimum Currency Areas ▪ The Future of EMU ▪ Summary
Introduction European Union countries have progressively narrowed the fluctuations of their currencies against each other This culminated in the birth of the euro on January 1 1999 This chapter focuses on the following questions How and why did europe set up its single currency? Will the euro be good for the economies of its members? How will the euro affect countries outside of the European Monetary Union(EMU)? What lessons does the European experience carry for other potential currency blocks? Copyright C 2003 Pearson Education, Inc Slide 20-3
Copyright © 2003 Pearson Education, Inc. Slide 20-3 Introduction ▪ European Union countries have progressively narrowed the fluctuations of their currencies against each other. • This culminated in the birth of the euro on January 1, 1999. ▪ This chapter focuses on the following questions: • How and why did Europe set up its single currency? • Will the euro be good for the economies of its members? • How will the euro affect countries outside of the European Monetary Union (EMU)? • What lessons does the European experience carry for other potential currency blocks?
Introduction Figure 20-1: Members of the Euro Zone as of January 1, 2001 Sweden/ Finland Scotland Ireland Estonia Denman atvia England Bela. German Belar Luxembourg Poland France Czec Switz. Austria slovakia Ukraine Hung ry Portugal Italy Romania. Spain Yugoslavia Bulgar Greece Turke Copyright C 2003 Pearson Education, Inc Slide 20-4
Copyright © 2003 Pearson Education, Inc. Slide 20-4 Introduction Figure 20-1: Members of the Euro Zone as of January 1, 2001
How the european Single Currency evolved Table 20-1: A Brief Glossary of euronyms ECB European Central Bank ESCB European System of Central Banks EMS European monetary system EMU Economic and monetary Union ERM Exchange Rate mechanism SGP Stability and growth Pact Copyright C 2003 Pearson Education, Inc Slide 20-5
Copyright © 2003 Pearson Education, Inc. Slide 20-5 Table 20-1: A Brief Glossary of Euronyms How the European Single Currency Evolved
How the european Single Currency evolved European Currency Reform Initiatives, 1969-1978 The Werner report(1969) It set out a blueprint for the stage-by-stage realization of Economic and Monetary Union by proposing a three phase program to Eliminate intra-European exchange rate movements Centralize EU monetary policy decisions Lower remaining trade barriers within Europe Two major reasons for adopting the euro To enhance Europe's role in the world monetary system To turn the European Union into a truly unified market Copyright C 2003 Pearson Education, Inc Slide 20-6
Copyright © 2003 Pearson Education, Inc. Slide 20-6 How the European Single Currency Evolved European Currency Reform Initiatives, 1969-1978 • The Werner report (1969) – It set out a blueprint for the stage-by-stage realization of Economic and Monetary Union by proposing a threephase program to: – Eliminate intra-European exchange rate movements – Centralize EU monetary policy decisions – Lower remaining trade barriers within Europe • Two major reasons for adopting the Euro: – To enhance Europe’s role in the world monetary system – To turn the European Union into a truly unified market
How the european Single Currency evolved The European monetary System, 1979-1998 Germany, the Netherlands, Belgium, Luxemburg, France, Italy, and Britain participated in an informal joint float against the dollar known as the"snake Most exchange rates could fluctuate up or down by as much as 2.25% relative to an assigned par value The snake served as a prologue to the more comprehensive European Monetary System (EMS) Eight original participants in the EMSS exchange rate mechanism began operating a formal network of mutually pegged exchange rates in March 1979 Copyright C 2003 Pearson Education, Inc Slide 20-7
Copyright © 2003 Pearson Education, Inc. Slide 20-7 ▪ The European Monetary System, 1979-1998 • Germany, the Netherlands, Belgium, Luxemburg, France, Italy, and Britain participated in an informal joint float against the dollar known as the “snake.” – Most exchange rates could fluctuate up or down by as much as 2.25% relative to an assigned par value. – The snake served as a prologue to the more comprehensive European Monetary System (EMS). • Eight original participants in the EMS’s exchange rate mechanism began operating a formal network of mutually pegged exchange rates in March 1979. How the European Single Currency Evolved
How the european Single Currency evolved Capital controls and frequent realignments were essential ingredients in maintaining the system until the mid-1980s After the mid-1980s. these controls have been abolished as part of the Eus wider "1992 program of market unification During the currency crisis that broke out in September 1992, Britain and Italy allowed their currencies to float In August 1993 most EMS currency bands were widened to t 15% in the face of continuing speculative attacks Copyright C 2003 Pearson Education, Inc Slide 20-8
Copyright © 2003 Pearson Education, Inc. Slide 20-8 • Capital controls and frequent realignments were essential ingredients in maintaining the system until the mid-1980s. – After the mid-1980s, these controls have been abolished as part of the EU’s wider “1992” program of market unification. • During the currency crisis that broke out in September 1992, Britain and Italy allowed their currencies to float. • In August 1993 most EMS currency bands were widened to ± 15% in the face of continuing speculative attacks. How the European Single Currency Evolved
How the european Single Currency evolved German Monetary Dominance and the credibility Theory of the EMs Germany has low inflation and an independent central bank It also has the reputation for tough anti-inflation policies Credibility theory of the EMs By fixing their currencies to the dm, the other EMs countries in effect imported the German Bundesbank's credibility as an inflation fighter Inflation rates in EMS countries tended to converge around germany 's generally low inflation rate Copyright C 2003 Pearson Education, Inc Slide 20-9
Copyright © 2003 Pearson Education, Inc. Slide 20-9 ▪ German Monetary Dominance and the Credibility Theory of the EMS • Germany has low inflation and an independent central bank. – It also has the reputation for tough anti-inflation policies. • Credibility theory of the EMS – By fixing their currencies to the DM, the other EMS countries in effect imported the German Bundesbank’s credibility as an inflation fighter. – Inflation rates in EMS countries tended to converge around Germany’s generally low inflation rate. How the European Single Currency Evolved
How the european Single Currency evolved Figure 20-2: Inflation Convergence Within Six Original EMS Members 1978-2000 品E5写5238 1978198019821984198619881990199219941 19982000 Netherlands Ireland Shown are the differences between domestic inflation and German inflation for six of the ori EMS members, Belgium, Denmark, France, Ireland, Italy, and the Netherlands. As of 997 all na nflation rates were very close to the German levels. Source: CPl inflation rates from IMF Intenational Financial Statistics Copyright C 2003 Pearson Education, Inc Slide 20-10
Copyright © 2003 Pearson Education, Inc. Slide 20-10 How the European Single Currency Evolved Figure 20-2: Inflation Convergence Within Six Original EMS Members, 1978-2000
