European Economic and
Monetary Union
The Eurosceptic perspective
<<Your Name>>
The EU Economy
The Development of the European
Economic System
• 1957: Treaty of Rome, aimed to create a single
European market
• 1968: Creation of a customs union for a single market
for goods
• 1986: Single European Act signed, removing barriers to
trade and creating the four economic freedoms of the
single market
• 1992: Target date for the full completion of the single
market (yet is it complete?)
• 1999: EMU launched
• 2002: Euro notes and coins issued
The Gradient of European
Economic Integration
1. The European Single Market.
2. Economic and Monetary Union.
The Progression to the Single Market
1. A country has full economic and monetary sovereignty.
Step 1. The country must lose a degree of economic
sovereignty over trade
2. The country joins a trade bloc or single market, e.g. the EU
The Process of Joining the Single
Market
All countries that join the EU have access to the single market
and input into how it is run.
Three processes must take place for a country to join the EU:
1. Stabilisation and Association Agreement
2. Application and negotiation.
3. Accession Treaty.
Countries in the EEA (Iceland, Liechtenstein and Norway) have
access to some aspects of the single market, but have no
input into how it is run.
How does the EU single market work?
Four Fundamental Economic Freedoms:
Free movement of:
1. Goods (customs union)
2. People
3. Services
4. Capital
The Benefits of the Single Market
•
•
•
•
•
Increased trade
Greater consumer choice
Jobs across Europe
Economic growth
Economies of scale
However...
• Price differences still high in Europe.
• Single market in many areas not complete.
• Successes could be down to other factors e.g.
Globalisation.
The Costs of the Single Market
• Some people have lost jobs as businesses
have moved abroad.
• There has been tension over immigration
and the free movement of people.
• Some countries have struggled to compete
with others which have benefitted more
from the single market.
The Progression to Economic and
Monetary Union
2. A country is a member of a trade bloc or single market, e.g.
The EU
Step 2. To move from being part of a single market to being part
of an EMU, further monetary powers must be transferred from
the national level to the supranational level
3. The country becomes a member of EMU
How does a country join EMU?
1. Become a member of the EU
2. Meet the Convergence Criteria
3. Hand control of national monetary policy to the
ECB
4. Abide by the Stability and Growth Pact
There are currently 17 countries in the Eurozone.
How does the European Economic and
Monetary Union work?
Introduction of EMU saw the ECB take over the
monetary powers previously held by national
central banks.
The ECB:
1. Sets a common interest rate.
2. Controls the growth of the money supply.
The Benefits of Being Part of EMU
1. End to exchange rate fluctuations and
costs.
2. Same interest rates across EMU
encourages investment.
3. Shields weaker countries from domestic
political shocks.
4. End of speculation and competitive
devaluations.
The Costs of Being Part of EMU
1. Loss of devaluation power.
2. Loss of power to control interest
rates.
It is difficult to assess the pros and
cons of being in EMU without
looking at how it works in a
particular situation.
The EMU: a good or bad thing for
Europe?
Bad
1. Moral Hazard Problem -‘implicit guarantee’.
2. Different microeconomic and macroeconomic
policies in different countries.
3. Trade imbalances – some grow at expense of
others.
Some argue that these problems led to the
current Eurozone crisis
Bad – Some Evidence
Country
Trade balance,
1998
(% of GDP)
Trade balance,
2008
(% of GDP)
Change
Germany
-1.3
6.7
+5.4
Spain
-2.9
-9.7
-6.8
Greece
-3.6
-14.6
-11.0
Ireland
-0.6
-5.2
-4.6
Portugal
-7.2
-12.0
-4.8
These statistics suggest that some countries have seen a
great increase in their trade deficit since before joining EMU
Bad – Some Evidence
Country
Competitiveness
position 2001
Competitiveness
position 2011
Change
Germany
4
5
-1
Spain
23
42
-19
Greece
43
83
-40
Ireland
22
29
-7
Portugal
31
46
-15
Source: Global Competitiveness Index compiled by the World Economic Forum
These statistics suggest that some countries have
seen a significant drop in competitiveness since the
beginning of the EMU
The Eurozone Crisis
• A number of Eurozone states were particularly
badly hit by the global economic downturn which
started in 2007.
• Resulting effects included:
– increasing levels of government debt
– unprecedented levels of unemployment
– the introduction of significant austerity measures
which led to strikes and protests.
• The crisis has led to financial bailouts for Greece,
Ireland and Portugal, with Italy, Spain and Cyprus
also falling into dangerous economic territory.
The Eurozone Crisis - Greece
•
•
•
•
•
2001: Greece joined the Eurozone
2009: budget deficit: 12.7% of GDP
2010: public debt: 142.8% of GDP
2010: tough austerity measures announced
April 2010: credit rating downgraded to just above ‘junk’
status
• May 2010: three killed in violent protests during general
strikes in Athens
• May 2010: Eurozone leaders agree to a €110 billion
bailout for Greece
• July 2011: Eurozone leaders agree to a second bailout for
Greece, amounting to an additional €109 billion
The Eurozone Crisis - Ireland
• 1999: Ireland joins the Eurozone
• July 2010: Irish banks pass ‘stress tests’
• September 2010: Ireland’s budget deficit
increases from an alarming 12% of GDP to a
terrifying 32%.
• September 2010: the Irish Government
announces extreme austerity measures
• November 2010: Eurozone leaders agree to
an €85 billion bailout for Ireland
• July 2011: Ireland’s credit rating downgraded
to ‘junk’ status
The Eurozone Crisis - Portugal
• 1999: Portugal joins the Eurozone
• 2010: Portuguese debt reaches 93% of GDP
• 2010: The Portuguese Government announces
strict austerity measures in the annual budget
• Nov 2010: EU leaders deny that Portugal is in line
for a bailout
• March 2011: Opposition parties in Portuguese
parliament defeat austerity measures as too
severe
• April 2011: Portugal asks the EU for financial help
• May 2011: Eurozone leaders agree to a €78billion
bailout for Portugal
The Eurozone Crisis – Spain,
Italy and Cyprus
SPAIN
ITALY
CYPRUS
•The last of the EU’s
‘major’ economies to be
in recession.
•2010: government deficit
comparatively low at
60.1% of GDP
•2011: unemployment
rate reaches 21.0%
•August 2011: ECB
recommences purchasing
bonds from Spain and
Italy to increase flow of
money around Eurozone.
•Third largest economy in
the EU
•2010: government deficit
at 119.0% of GDP
•August 2011: Italy
deemed likely to default
on its debts; crisis talks of
Eurozone leaders
commence.
•Prime Minister Silvio
Berlusconi denies that
Italy is facing an economic
crisis.
•2008: Cyprus joins the
Euro
•July 2011: a hoard of
confiscated ammunition
explodes
•The explosion is
estimated to reduce
Cypriot GDP by 14-17% in
2011
•July 2011: The Cypriot
Government resigns amid
the economic troubles:
the country’s credit rating
is downgraded
Good – Some evidence
1. Stable interest rates and low inflation.
2. Benefits for weaker economies, greater
access to large market.
3. Euro currency stability and strength
4. Growth in trade?
Who is right?
GOOD
• The failings of EMU countries in terms of growth,
competitiveness, and deficits is down to other factors.
• Moreover the EMU can provide a good safety net and
the appropriate conditions for further economic reforms.
BAD
• The EMU is the cause of the problems of reduced
competitiveness, trade deficits, public debt and poor
growth.
• The experiment that has been EMU is in the process
of failing due to the Eurozone crisis.
The Political Angle
Perhaps the European EMU was driven by
politics:
1. Political bargaining between countries.
2. Countries think that disbanding it would
be politically embarrassing.
3. The EMU as a political symbol.
What does the public think?
In general, does the eurozone have a positive or negative effect upon
the national economy? Results from 15 eurozone countries.
Source - Flash Eurobarometer Survey 251, Sept 2008
70
60
50
Score
40
30
20
10
0
-10
-20
Malta
Ireland
Luxembourg
Cyprus
42
Belgium
Austria
31
28
Finland
23
21 21 20
Slovenia
Spain
Germany
6
3
2
0
Eurozone average
Greece
-2 -2
-4
France
-10
Italy
Netherlands
Countries, overall effect score is displayed. Mean Score (positive
effect Portugal
58
negative effect)
% of respondents
Are people happy that the Euro will replace their national currency?
Results from 8 EU, but non-Eurozone, countries.
Source - Flash Eurobarometer Survey 296, May 2010
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
11
13
11
18
12
14
27
28
35
D/K, N/A
Very Unhappy
Rather Unhappy
37
31
39
Rather Happy
Very Happy
6
10
9
Respondents
09/2005
Respondents
05/2008
Respondents
05/2010
Month/Year
“Overall the Euro has mitigated the negative effects of the current
financial and economic crisis.”
Eurobarometer: Europeans and the Economic Crisis, Feb 2009 EU27
35
29
30
26
%
25
18
20
15
10
17
10
5
0
Totally agree
Tend to agree Tend to disagree Totally disagee
DK
Optimism about the Eurozone Crisis
What do the Public Think about
the EU’s Response to the Crisis?
In spring 2011:
• 22% of EU citizens consider the European Union to be
the best organisation to take effective action against
the effects of the economic crisis, with 20% answering
that their national government would be best.
• More than 70% of EU citizens feel that the measures
proposed by the EU to tackle the Eurozone crisis
would be effective.
• 79% believe that stronger economic cooperation
between all EU member states would be an effective
way of tackling the Eurozone crisis.
• 45% of EU citizens believe the EU did not act
effectively to combat the crisis up until now.
Conclusions
• EMU was an ambitious experiment in
taking the Single Market one step further
– but is it a step too far?
• The Eurozone crisis has highlighted the
limitations of EMU across so many
economically and politically diverse
countries – could it be doomed to failure?