1. Topics in EU Political Economy By Ivan F Dumka

2. 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

3. 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)

4. The Eurozone

5. 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

6. 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

7. 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’

8. 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

9. 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

10. 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

11. 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

12. 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

13. Questions