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Integration (Day 5)

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17 views41 pages

Integration (Day 5)

Uploaded by

cliffton malcolm tshuma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ECONOMIC UNION

CFS
Economic Union
(example: EU)
 The final stage of economic and political integration
 Non-tariff barriers are eliminated along with tariff
barriers creating an even more fully integrated
market
 Member nations also agree to four “freedoms” of
movement:
 Goods
 Services
 People
 Capital
Economic Union (cont.)
 Four freedoms represent significant limitations on
national sovereignty but have significant effects on
economic activity
 Free Movement of Goods:
 Goes beyond the elimination of tariff barriers
 Requires a variety of governmental health, safety and other
standards and regulations to be “harmonized” so that a
product that can be sold somewhere in the economic union
can be sold everywhere in it
 Free Movement of Services:
 The service sector includes many industries such as
banking and finance traditionally subject to heavy
regulation that varies considerably among nations
Economic Union (cont.)
 Free Movement of People:
 Requires a unified immigration policy since a person free
to enter and work in one member of the economic union
would be able to live and work anywhere in the area
 Free Movement of Capital:
 Individual nations give up their ability to regulate
investment inflows and outflows
 Many nations have traditionally imposed capital controls
to encourage domestic investment, promote financial
stability or reduce foreign exchange variations
 These controls are not eliminated in an economic union
but must be “harmonized” so that national regulations are
similar enough to not become a barrier to economic
activity
The European Monetary Union
(EMU)
The road to EMU
 EMU is the latest step on the road towards greater
integration in Europe.

 Monetary union in the European Community (EC)


was proposed as long ago as 1970 in the Werner
Report, which envisaged it being in place by 1980.
The road to EMU
 However, two key developments in the
international sphere derailed this first attempt:

1. The breakdown of the Bretton Woods system of


fixed exchange rates in August 1971, and
2. The 1973 oil crisis.
The road to EMU
 The first attempt by the EC to deal with the
exchange rate turbulence that followed both of
these events, the so-called “snake,” rapidly
collapsed to an arrangement involving only a few
of the Member States.

Upper limit

Lower limit
The road to EMU
 The second attempt, the European Monetary
System* (EMS), created in 1979, proved more
durable, although it too was accompanied by a
number of major and minor crises.
 * Main elements: Exchange Rate Mechanism +
ECU
"Britain and Europe"

 “..... let me make clear, from the outset, that


monetary union is fundamentally a political rather
than an economic issue. It necessarily involves the
deliberate pooling of national sovereignty over
important aspects of public policy, in the interest not
just of collective economic advantage, but of a
perceived wider political harmony within Europe.”

Governor of the Bank of England, 2000


The road to EMU
 The Treaty did three things to further monetary
integration in Europe.

1. It set out a timetable for the establishment of


monetary union.
2. It laid down the criteria by which the fitness of
countries to join in monetary union would be
determined.
The road to EMU
3. It established the institutional framework for the
conduct of monetary policy under EMU.
The three stages of monetary union

Stage One: July 1, 1990.


 The complete elimination of capital controls
among the Member States and increased
cooperation between their central banks.
The three stages
Stage Two: January 1, 1994.
 The real beginning of the transition to EMU with the
establishment of the European Monetary Institute
(EMI).
 EMI = precursor of the European Central Bank, charged
with co-ordinating monetary policy and preparation for
the single currency.
The three stages

Stage Three: January 1, 1999.


 Eleven countries fixed their exchange rates.
 The national currencies of the eleven were replaced by the
euro.
 The ECB took over responsibility for monetary policy in
the euro area.
The three stages
Stage Three A:
 The initial period of monetary union during which the
notes and coins of each of the participating states continue
to circulate as non-decimal representations of the euro.
The three stages
Stage Three B:
 Begins with the introduction of euro notes and coins and
the withdrawal of national currencies on January 1, 2002.
 By July 1, 2002 the old national currencies ceased to have
legal tender status.
The convergence criteria
 Essentially all of the EU members satisfied the bulk
of the criteria for participation in EMU.

 However, Denmark and the United Kingdom did not


participate in the first round, having negotiated
“derogations”, even though they satisfied most of the
criteria.
The convergence criteria
 Likewise Sweden did not participate.

 The only country that wished to participate but


failed to meet the convergence tests was Greece
(joined in 2001)

 New member states need to meet euro acquis and


Slovenia, Malta, Cyprus and Slovakia have now
joined the EMU, too.
Monetary policy under EMU

 EMU fundamentally changes the way in which


monetary policy is conducted in the participating
states.
 Responsibility for monetary policy shifted from
national central banks to the ECB on January 1,
1999.
Click on this logo to take
you to a brochure which
explains the operations
of the ECB.

(C) The ECB


THE EURO AND THE UK
The Chancellor’s 5 Economic
Tests
 1. Are business cycles and economic structures
compatible so that we and others could live
comfortably with euro interest rates on a permanent
basis?

 2. If problems emerge is there sufficient flexibility to


deal with them?
The 5 tests
 3. Would joining EMU create better conditions for
firms making long-term decisions to invest in
Britain?

 4. What impact would entry into EMU have on the


competitive position of the UK's financial services
industry, particularly the City's wholesale markets?
The 5 tests
 5. In summary, will joining EMU promote higher
growth, stability and a lasting increase in jobs?
Employment and growth

 The fundamental test is how Britain's membership of


a successful single currency would affect prospects
for British employment.

 The assessment concludes that membership of EMU


has the potential to enhance both growth and
employment prospects.
BUSINESS AND THE
EURO
Euro Impact

The euro means big changes for business both within


these countries and throughout Europe:

 Cheaper transaction costs – countries in the euro


zone do not have to change currencies when doing
business with each other.
Impact

 Exchange rate certainty – sharing a single currency means


countries in the euro zone are no longer affected by
currency fluctuations when trading with each other.
Impact

 Transparent price differences – it is more obvious if


different euro zone countries charge different prices for
the same goods and services.
Strategic issues

Increased cross-border competition:


 Businesses who want to export into the euro zone may be
at a disadvantage against competitors within the zone who
share the same currency as the importer.
Strategic issues
Cross-border mergers and other joint ventures:
 Increased competition might make mergers within the
euro zone more likely, and
 sharing the single currency may also make them easier.
Strategic issues

Distribution and purchasing:


 May become simpler and cheaper inside the euro zone,
because businesses there will not have to worry about
exchange rate risk when trading with each other.
Strategic issues

Raising finance:
 Firms may have more choice since bond and equity
markets may be more attractive in euros.
Strategic issues
Pricing:
 Companies may have to decide whether to set new pricing
points.
 The same price is unlikely to be as ‘attractive’ in euros as
in the old national currencies
Pricing points

 499DM = €255.30
 Lower price - €249.99?
 Higher price - €259.99?

 FrF999 = €152.30
Practical issues
 Firms based in, or who deal with the eurozone need to
make practical changes.
Readings
 The UK and the Euro

 EMU INFORMATION HM Treasury

 Euro case study: Siemens

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