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THE EUROPEAN MONETARY SYSTEM AND MONETARY UNION prepared by Engin GÜR
Transcript of THE EUROPEAN MONETARY SYSTEM AND MONETARY UNION prepared by Engin GÜR
The aim of the agreement creating the EMS was to foster “closer monetary cooperation leading to a zone of monetary stability in Europe’’
The Europan Monetary System
The ECU functioned as a unit of account, a means of settlement, and a reserve asset fot the members of the EMS
Europan Currency Unit(ECU)
EU currenty has 27 members (2007)
In 1992, The EC became The Europan Union(EU)
Austria (1995) Luxembourg (1952)
Belgium (1952) Malta (2004)
Bulgaria (2007) Netherlands (1952)
Cyprus (2004) Poland (2004)
Czech Republic (2004) Portugal (1986)
Denmark (1973) Romania (2007)
Estonia (2004) Slovakia (2004)
Finland (1995) Slovenia (2004)
France (1952) Spain (1986)
Germany (1952) Sweden (1995)
Greece (1981) United Kingdom (1973)
Member states of the EU
(year of entry)
is an exchange rate system which is comprised between the currencies included in European Monetary System but staying out of the Euro zone and the Euro and in which the fluctuation margin around the central rate is determined as ± 15 %.
Exchange Rate Mechanism(ERM)
The European Currency Crisis (1992)
A review of the EMS and its history provides valuable insights into the operation of a targetzone system.
Lessons from the EMS
The most important lesson the EMS illustrates is that the exchange rate stability afforded by any target-zone arrangement requires a coordination of economic policy objectives and practices.
Lessons from the EMS
The experience of the EMS demonstrates that foreign exchange market intervention not supported by a change in a nation’s monetary policy has only a limited influence on exchange rates.
Lessons from the EMS
“Black Wednesday” refers to the events on September 16, 1992.
Due to major speculations and a weakening currency, the UK’s prime minister and cabinet members tried all day to prop up the sinking pound and avoid withdrawal from the ERM.
The British government raised the base interest rate from a high 10% to 12% in order to tempt speculators to buy pounds.
During that same day, it promised to re-raise the interest rates to 15%, but investors kept selling the pounds.
Even with the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets, Britain was eventually forced to withdraw from the ERM because they were unable to keep the sterling above its agreed lower limit.
Black Wednesday and Speculative Attacks
The UK Treasury spent approximately ₤27 billion of reserves in trying to defend the pound by selling Deutsche Mark and buying pounds.
The market knew that the UK could not afford to keep interest rates high for long.
The UK was not prepared to lose all of its currency reserves to simply stay in a seriously flawed ERM.
One of the most high profile currency market investors, George Sorros, made over $1 billion in profit by betting against the pound.
Effect of Black Wednesday
the history of the ERM shows that great dilemmas may ocur between political objectives and market expectations. Such dilemmas tend to be more disruptive in a system with narrow margins of fluction than in the system with wide margins that has been adopted in Europe since mid-1993
The Exchange Rate Mechanism Is Abandoned in August 1993
Europen monetary union particularly useful. It discusses in a suitably detached manner the pros and cons of a union designed tol ast forever. It also clarifies the difference between monetary union and Exchange rate system with fixed but adjustable parities.
In particular, emphasis is placed on the requirement of jointy designed and stability-oriented monetary and fiscal policies that is an inherent characteristic of a monetary union
Although the full impact of the euro has yet to be felt its effects have already been profound.Business clearly benefits from EMU through lower cross-border currency conversion cost
Consequences of European Monetary Union
Adoption of common currency benefit the european economy in other ways as well
•It eliminates risk of currency fluctions and facilities cross border price comparisions
•Lower risk and improved price transparency encourages the folw of trade and investments among member countries and should bring about greater integration of Europe’s capital,labor,commodity markets and a more efficient allocation of resources within the region as a whole
•İncreased trade and price transparency,in turn,has intensified Europe wide competition in goods and services and spurred a wave of corporate restructurings and mergers and acquisitions
• Morever monetary union such as the one that exists among the 50 states of US where the exchange rate between states is immutably set at 1- provides the ultimate in coordination of monetary policy
To ensure the EMU’S inflation fighting success, the new central bankers must be granted true independence along with a statutory duty to devote monetary policy to keeping the price level stable
Another important issue in forming a monetary union is that of who gets the benefits of seigniorage the profit to the central bank from money creation
PERFORMANCE OF THE EURO
Following the terrorists attacks on the United States on September 11
The French referendum on the EU constitution takes place on 29 May, followed by a similar referendum in The Netherlands on 1 June.
Why French and Dutch citizens are saying NO
Optimum Curreny Area
(Robert A. Mundell)
In economics, an optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency
What is the OCA ?
The four often cited criteria for a successful currency union are;
OCA with stationary expectations
Labor mobility across the region
Openness with capital mobility and price and wage flexibility across the region
A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics
Participant countries have similar business cycles
Production diversification (Peter Kenen)
Commonality of destiny ("Solidarity")
Additional criteria suggested are:
Here Mundell tries to model how exchange rate uncertainty will interfere with the economy; this model is less often cited
OCA with international risk sharing
ELİF NUR HAMİDİ
1- Inflation rates
4. Long-term interest rates
THANK YOU ALL