03b_И_debate
.pdf
MANAGEMENT
Optimal Currency Zones
Highly
Flexible
Labour
Market
Flexibility
High risk currency union
Inflexible
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Divergent |
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Real Economic Convergence |
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Convergent |
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MANAGEMENT
Optimal Currency Zones
Highly |
Monetary Union |
Flexible |
Works |
Labour
Market
Flexibility
High risk currency union
Inflexible
|
Divergent |
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Real Economic Convergence |
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Convergent |
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MANAGEMENT
Is the Euro an Optimal Currency Zone?
Professor Robert Mundell
The 1999 Nobel Prize Winner
"for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas"
MANAGEMENT
Tensions in the Euro Area (1)
•Recession in Euro Area as a whole (-2% in 2009)
•Riots and protests
–Fears of deep cuts in real wages
–Rising unemployment
–Strong Euro making life very tough for exporters
–Many peripheral Euro Area countries are struggling e.g. Greece, Ireland, Italy, Portugal and Spain
–Huge divergence in competitiveness showing up in massive trade imbalances
–But no chance of nominal exchange rate adjustment
–So downward pressure on wages and jobs.
MANAGEMENT
Tensions in the Euro Area (2)
•Fiscal policy is coming under pressure:
–Bail outs for financial institutions
–But smaller EU states have little chance of doing this
–Cross-border contamination e.g. heavy investment into
CEEC’s by Austrian banks
–Downgrading of credit rating for several Euro Area countries including Spain and Greece
–Makes it more expensive for companies and the government to finance borrowing
–Think of consequences for investment and growth
What happens if one or more countries leave and devalue their way to an economic recovery?
MANAGEMENT
Microeconomic Benefits of Entry
•The Euro is important in realising some of the gains from a functioning single market
•(1) Potential Gains for consumers
–Lower prices because of increased competition/ greater price transparency (this is more likely with easily transportable goods)
–Reduction in the transactions costs of travelling within Europe (e.g. costs of currency exchange)
–Easier to live and work in different EU countries
MANAGEMENT
Microeconomic Disadvantages
(1)Changeover Costs from joining the Euro:
–Costs of changing accounting systems
–Menu Costs (vending machines, catalogues, franking machines, postage)
–Installation of new payments systems
–Customer confusion (imperfect information)
(2)Higher prices
–Potential loss of consumer welfare if suppliers increase prices when
converting from national currency to euro
(3)The vast majority of consumers will continue to buy locally – what matters more is the effectiveness of competition policy in targeting anti-competitive behaviour
MANAGEMENT
Macroeconomic Case Against Entry
(1)Entering the Euro means losing an instrument of policy adjustment
–A “one-size fits all” monetary policy may work against a country if their cycle is not convergent with Euro Zone
–Retaining the option of making an exchange rate adjustment is useful
(2)Fiscal Policy constraints
–The EU Growth and Fiscal Stability Pact
–Limits on government borrowing
–But now largely ignored – especially with the effects
of the credit crunch / fiscal bail-outs etc
MANAGEMENT
Expansion of the Euro Zone
•Slovenia joined in 2007
•Cyprus and Malta joined in January 2008
•Slovakia joined in January 2009
•Estonia joined in January 2011
•Latvia narrowly missed out on the convergence criteria and will join on January 1, 2014
•Other countries have delayed their entry
•What are the arguments for the new member states entering the single currency?
MANAGEMENT
Converging on the Euro Area
Official Policy Interest Rates
per cent
9 |
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9 |
8 |
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8 |
7 |
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7 |
6 |
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6 |
5 |
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5 |
% |
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4 |
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4 |
3 |
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3 |
2 |
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2 |
1 |
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1 |
0 |
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0 |
01 |
02 |
03 |
04 |
05 |
06 |
07 |
08 |
Slovak Republic |
Eurozone |
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Source: Reuters EcoWin