Topics in EU Political EconomyBy Ivan F Dumka

Presentation Outline

• Economic and Monetary Union (EMU)– EMU in Overview– Key events– The Maastricht Treaty and the Design

of EMU– EMU and the economic crisis

EMU in Overview (What is EMU?)

• Set of agreements that brought about the euro and related policies/institutions:– Stability and Growth Pact– European Central Bank (ECB)

The Eurozone

EMU in Overview (Why?)

• Economics explanations– EMU suitable if optimum currency area

(OCA)• OCA is economically integrated so no need

for ERM• Some argue that EU is not an OCA → EMU

bad move• Some take broader view of OCA → less

critical

• Political/Institutional Explanations– EMU is needed to buttress other EU

programmes

Key Events Shaping EMU

• 1970: Werner Report• 1977: MacDougall Report• 1989: Delors Report• 1992: Maastricht Treaty• 1999: creation of the Eurozone• 2009: beginning of the Eurozone

Crisis

The Maastricht Treaty and the Design of EMU

• Today’s EMU goes much further than past attempts, but…

• What’s in the name ‘EMU’?– ‘Monetary Union’– ‘Economic Union’

The ‘Monetary’ in EMU

• Highly developed:– Created a single ECB with a mandate to

pursue low inflation– Created ‘irrevocably locked exchange

rates’ and a single currency• This represents a significant transfer of

responsibility from national institutions to European ones

The ‘Economic’ in EMU• The Maastricht Convergence Criteria:

– Budget deficits no more than 3% of GDP– National debt no more than 60% of GDP– Inflation no more than 1.5% within “best

performing members”– Long term interest rates no more than 2%

within “best performing members”• This entails rules for governments but

far less coordination at European level• Less advanced than the ‘Monetary’

side of EMU, and less ambitious than past designs

So What?• These design choices in EMU limit

significantly the options to governments in reacting to the Global Financial Crisis– Currency devaluation is not possible– Fiscal policy is constrained– QE is more contentious

• These design choices have also been blamed for contributing to the Eurozone Crisis

Underlying problems• Monetary union has the ECB, but there is no

corresponding supranational institution that sets economic policies for the same area– Budgetary and fiscal policies remain in the

hands of national governments• Internal imbalances in euro area are difficult

to correct• Breaches of Stability & Growth Pact

– Visible and hidden, punitive arm of ECB not very strong

• Housing bubble and interest rates• Some of these problems were well-

understood well prior to EMU

Recent Developments• “Troika” involved in economic recovery:

– EC, ECB, and IMF• Differing perspectives on austerity and bailouts• Loose consensus that maintaining EMU is

important– No precedent / procedure for members leaving the

Euro-zone– Potential instability and loss of investor confidence

arising from abandoning the euro– How to move forward? France-German

negotiations, different perspectives on new course of integration.• “Window of opportunity” for further political union

Questions