EUROPEAN MONETARY UNION Jérôme ODDO Céline VERCHERE

Introduction The EMU: 3 stages coordinating economic policy and culminating with the adoption of the Euro 15 member states have adopted the Euro To adopt the Euro:  Copenhagen criteria  To have its currency in the ERM II for 2 years

The creation of the EMU Stage 1: 1 July 1990 to 31 December 1993 Stage 2: 1 January 1994 to 31 December 1998 Stage 3: 1 January 1999 and continuing

Why a Monetary Union? A single market with a common currency The Delors Report :  The EMU is a natural consequence of the Single Act  Exchange rate volatility is harmful to trade integration  A tightly pegged exchange rate cannot impose sufficient discipline on monetary policy  National currencies cannot and should not be preserved

Is the EMU an Optimum Currency Area (OCA)? A geographical region in which it would maximize economic efficiency to have the entire region share a single currency Labour mobility across the region Product diversification Openness with capital mobility and price and wage flexibility across the region An automatic fiscal transfer mechanism to redistribute money to areas which have been adversely affected by the first two characteristics

Numerous debates The “monetarist” view : the Maastricht criteria were the source of a painful growth slowdown The “economist” view: costs were pedagogically useful to acquire a culture of price stability The verdict on convergence remains controversial

The Stability & Growth Pact The Stability & Growth Pact is a mattering tool which the countries of the euro area acquired to coordinate their budgeting policy extreme. SGP includes two types of dispositions: - Multilateral surveillance, precautionary disposition - The procedure of deficit extreme. Policy Coordination

Why? The main reason for adopting the SGP is for correcting deficit bias. The euro offers a chance of dealing with the deficit bias through externally imposed rules is open to discussion. Euro area is a pretext to deal with correctly diagnosed problem raises good questions. The deficit is source of numerous problem, two valid reasons to limit deficits are the link between debts financing and inflation.

Reform Reforming the SGP has become a highly debated issue in Europe. The reform starts with recalling the fiscal policy framework in the euro area: the 3 % of GDP limit for public deficits, Stability programmes, The broad economic policy guidelines. The weaknesses of the existing procedures are addressed: the arbitrary nature of the criteria, the lack of economic policy co-ordination.

The Euro System The Eurosystem which comprises the European central Bank and the national central banks of the member states whose currency is the euro is the monetary authority of the euro area. Eurosystem have as for primary objective the maintenance of price stability for the common good. Acting also as a leading financial authority, Eurosystem aim to safeguard financial stability and promote financial integration.

The Monetary Policy Monetary policy is the process by which the government, central bank, or monetary authority manages the supply of money, or trading in foreign exchange markets. The monetary policy was assigned by the Maastricht treaty. The monetary policy has two pillars: the first is the monetary pillar defined as a prominent role for money, and the second include indicators to deliver a broadly-based assessment of others forces affecting inflation.

The stability & inflation target The EMI defined price stability as “a year on year increase in the Harmonised Index of Consumer Prices (HICP) for the Euro area of below 2%” To avoid deflation it is added an implicit target range of 0-2%

Transparency & Accountancy Financial markets consider that Eurosystem has established its credibility Central banking effectiveness depends on the ability of outsiders to read and anticipate central bank actions Transparency is a condition for effectiveness

Conclusion Today the Euro Area is not in a good situation, the economic logic has not always respected. Policies are focalized on the process of choosing the founding members of euro area. The time is now at the extension. The monetary strategy of the eurosystem has also been readjusted but has not seriously applicated.