STEPS TO INTEGRATION FREE TRADE AREA - free movement of goods and services CUSTOMS UNION - free movement of goods and services and factors of production - common external tariff (and policies) COMMON MARKET - customs union + common policies e.g. taxation, transport, social etc. ECONOMIC INTEGRATION - common market + centralised control of monetary and fiscal policies (EMU) POLITICAL INTEGRATION EMU + other common policies e.g. democratic institutions, defence policy etc.

BARRIERS TO INTEGRATION FRAGMENTATION OF MARKET - physical frontiers - technical restrictions - differing tax regimes - non-tariff barriers - public purchasing policies FINANCIAL RESTRICTIONS - barriers on capital movements - exchange controls - exchange rate instability - lack of harmonisation of financial market - differing bank regulations SOCIAL - differing levels of development - special problems

EXCHANGE RATES Fixed - absolutely fixed - adjustable pegs - crawling pegs Floating - pure - managed Basket of Currencies - composite mix of currencies - examples

FIXED RATES Advantages - creates more certain environment for trade - reduces speculation Disadvantages - creates strains in terms of managing Balance of Payments - not in keeping with market approach - can lead to instability and damaging devaluations (and revaluations)

FLOATING RATES Advantages - automatic adjustment of Balance of Payments - freedom to choose domestic policies - consistent with free market approach Disadvantages - exchange rate instability - reduce international trade

EXCHANGE RATES (con) Factors determining exchange rates - demand for exports and imports - inflationary pressures - changes in interest rates - speculation - political factors Intervention on Foreign Markets - using reserves - borrowing abroad - raising interest rates - deflationary policy - supply-side policies - controls on imports

FIRST EMU EXPERIMENT Background Werner Report Economists v Monetarists The Snake Agreement Setting up of EMCF Breakdown of system Setting up of EMS

EUROPEAN MONETARY SYSTEM (EMS) EMS comprised three elements ECU (EUROPEAN CURRENCY UNIT) ERM (EXCHANGE RATE MECHANISM) EMCF (EUROPEAN MONETARY COOPERATION FUND) EMS WAS A PRECURSOR OF ECONOMIC AND MONETARY UNION

EUROPEAN CURRENCY UNIT (ECU) ECU was a composite currency made up of a basket of member countries USES - Used as denominator of community transactions - All currencies in ERM linked to ECU - Used in supporting currencies - Had considerable value as a private asset - Servedas basis for single European currency

EXCHANGE RATE MECHANISM (ERM) Cornerstone of EMS - Fixed exchange rate system with both adjustable and crawling pegs Problems - not all member countries participated in system - currency bands were far too wide (after ’92) - system not able to deal with currency pressures in 92 and '93 - in some respects present ERM did work effectively - had very important consequences for Ireland

EXCHANGE RATE CRISIS Causes - rigidity in system - poor response to Maastricht - doubts about monetary union - abolition of exchange controls - nature of the way the system worked - lack of willingness to support currencies Irish Experience - reasons for crisis - efforts to support currency - effects of attempted support

EUROPEAN MONETARY COOPERATION FUND (EMCF) Founded in On joining members submitted 20% of gold and foreign reserves in return for ECU's Funds were used for settling transactions - very short-term lending facilities - short-term loans - medium-term loans - functions transferred to EMI in 1994