1. International finance 120181-1165 The functioning of the euro area- current problems

2. International finance 120181-1165 Lecture outline  The functioning of the euro area- basic rules  The effects of the single monetary policy  Public finance crisis  Potential solutions and perspectives

3. International finance 120181-1165 Monetary policy  Single monetary policy  ECB- supranational institution  ESBC  Eurosystem

4. International finance 120181-1165 EBC and ESBC  Creation of the ECB  the necessity to set its rules  Different conditions than for NCB’s  The euro area- small degree of opennes  Monetary impuls transmission  The necessity to build credibility

5. International finance 120181-1165 Monetary policy strategy  2 pillars  Control of the monetary base  Other economic and financial values

6. International finance 120181-1165 Exchange rate policy  The aim- price stability  EBC and the EU Council (Ecofin)  Ecofin can unanimously set the rules of the euro area exchange rate system vs. other countries

7. International finance 120181-1165 Exchange rate policy  ERM II- ER stabilisation vs. The currencies of EU countries which are not euro area members  Euro area extension plans  Counteracting high ER volatility within the EU market

8. International finance 120181-1165 ERMII  Amsterdam summit 1997  Agreements between ECB and NCB of countries which are not euro area members  ER approaches the band limit  NCB is obliged to conduct automatic and unlimited interventions  ECB support- conditional

9. International finance 120181-1165 Fiscal policy  The Werner plan 1970  The MacDougall report 1977  Assumptions of fiscal centralisation

10. International finance 120181-1165 Fiscal policy  The Maastricht Treaty  The prohibition to finance fiscal deficits by ECB  No bail out clause  Thresholds concerning the fiscal balance and governement debt

11. International finance 120181-1165 Fiscal policy  Stability and Growth Pact 1997  The reform of the Pact 2005  Middle term surplus or balance requirement

12. International finance 120181-1165 Current problems  Single monetary policy vs. differences  The Stability and Growth Pact and the problem of public finance imbalance  Monetary integration and political integration

13. International finance 120181-1165 The effects of the single monetary policy  Different growth rates in the euro area countries  Potential Balassa-Samuelson effect  Differences in reference i% according to Taylor rule  Differences in inflationary pressures e.g.:  Labour market flexibility  Product market flexibility  The role of labour unions

14. International finance 120181-1165 The effects of the single monetary policy  The lack of national monetary aggregates  Inflation as a monetary phenomenon- analysis only on the euro area level  Monetary transmission- national level

15. International finance 120181-1165 Monetary transmission- national level  Angeloni et al. 2003  The interest rate channel  The role of banks in the transmission process

16. International finance 120181-1165 Monetary transmission- national level  Christiano et al. 2007  Comparison of ECB and FED monetary policy  The role of labour market structure in the transmission mechanism

17. International finance 120181-1165 The crisis of public finance  The crisis in several member countries (PIIGS)  Procyclical economic policy  The effects of the financial crisis

18. International finance 120181-1165 The crisis of public finance  „Transfer union”- the possibility to finance deficits of other member countries  violation of the Treaty regulations  Loans vs. transfers??  ECB support- the purchase of governement bonds

19. International finance 120181-1165 The crisis of public finance  Assessment by financial markets participants  No implicit information abot who can support whom, when and on what conditions  information discrepancies

20. International finance 120181-1165 The crisis of public finance  Propositions to create a European Monetary Fund  Euro area bonds

21. International finance 120181-1165 The case of Spain Long term nominal interest rate in Spain and in the euro area Ameco database, European Commission

22. International finance 120181-1165 The case of Spain Long term real interest rate in Spain and in the euro area Ameco database, European Commission

23. International finance 120181-1165 The effects of the interest rates decrease  Credit boom  Increasing investments  Investments raising/ not raising labour productivity  Productivity growth vs. inflation

24. International finance 120181-1165 The real exchange rate in Spain Ameco database, European Commission

25. International finance 120181-1165 Current account199920002001200220032004200520062007 -2,9-4-3,9-3,3-3,5-5,3-7,4-8,9-10,1 Goods199920002001200220032004200520062007 -5,2-6,4-5,7-5-5,1-6,4-7,6-8,5 Services199920002001200220032004200520062007 3,3 3,43,132,62,52,32,1 Eurostat

26. International finance 120181-1165 Inflationary pressures Years2001200220032004200520062007 Unit labour cost 3,23,0 2,72,82,73,1 Labour productivity 2,51,21,41,61,92,31,8 Eurostat

27. International finance 120181-1165 The crisis in Spain  The collapse of the bubble on the housing market  Increase of market interest rates  Recession as a consequence of the lack of antycyclical monetary policy?

28. International finance 120181-1165 The crisis in Spain  Antycyclical banking supervision instead od antycyclical monetary policy  Proposition to diversify the minimum reserve requirement in the euro area  Proposition to diversify capital requirements

29. International finance 120181-1165 Euro area desintegration?  Arguments contradicting this scenario:  Economic arguments- the single European market  Political arguments

30. International finance 120181-1165 Euro area desintegration?  Eichengreen 2007  Large long term economic costs of disentragtion  Large technical costs

31. International finance 120181-1165 Euro area desintegration?  Credibility of the euro area- diversified risk premia in different countries  ECB as a lender of last resort  Does the crisis change the balance of benefits and costs of the EMU creation???

32. International finance 120181-1165 Summing up  The current problems of the euro area are mainly a consequence of the finacial crisis 2007-2009 but also of the procycylical economic policy in some member countries

33. International finance 120181-1165 Summing up  Conclusions from the case study- the necessity to introduce antycyclical tools which could replace the antycyclical monetary policy

34. International finance 120181-1165 References  Auszüge aus Presseartikeln, Deutsche Bundesbank, 51-54/2010  B. Eichengreen, The breakup of the euro area, NBER Working Paper, 2007  I. Angeloni et al., Monetary transmission in the euro area: does the interest rate channel explain it all?, NBER Working Papers 2003  M. Woodford, How important is money in the conduct of monetary policy?, NBER Working Paper,2007