PowerPoint Presentation

Governance IssuesThere is a structural contradiction within the euro system, that is a single monetary policy without a fiscal union, such as common taxation, pension and treasury function.In the Eurozone system, the countries are required to follow similar fiscal path, but they do not have common treasury to enforce it.

Coordination Failure ExternalitiesNo Fiscal UnionBudgetary union and Political Union i.e. centralizing national Government budget.Ok the first thing is that the paper listed 2 issues : coordination failure and eurozone externalities (page 10 last paragraph) which was not highlighted here. The second thing here is that the author suggested solutions for each of the two problems, that needs to be clear in the presentation - since our classmates will need the presentation for their review for midterms.European Monetary FundMay 2010European Financial Stability Facility (EFSF) was form in 2010. This institution obtain funding from participating countries then distributes the funds to the Eurozone countries

September 2012 EFSF transformed into permanent fund, known as European Stability Mechanism (ESM), as a firewall for safeguarding and providing instant access to financial assistance programs for member of the Eurozone in financial difficulty, with a maximum lending capacity 500 billion euros.

How it works ?Countries received fund will be subject to conditional and restrictions (stick and carrot)They are divided into 3 categories.a. High risk premium b. Collective Action Clauses (CAC) c. Tough budget austerity program

this is not actually being done yet... this is the solution of the author. so it is misleading to say that this is how it works (see page 12, paragraph 2)the idea in this part was not properly explained, which is important in the paper. if you look at the paper on page 12, and 13, these 3 things enumerated are the list of problems with the European Monetary FundJoint Issue EurobondsHow it works ?Countries would be able to participate in the issuing of Eurobond up to 60% of their GDP => Blue Bonds Anything above 60% would have to be issued by national bonds market => Red Bonds Pricing features => different fees for countries participating in issuing Blue Bonds i.e. fiscally prudent countries should pay lower

By jointly issuing Eurobonds, participating countries become liable for the debt they issued together and constraining commitment that will convince market about the future of Eurozone.

Several problems that might happen Moral hazard Resistance from countries (Germany, Netherlands) that has already enjoy favorable rating of securities

This part I had to divide into two as the font was too small for our classmates to read when we are presenting.In page 15, paragraph 2, you can see the criticism explicitly stated there as well as the author's response to the criticism (paragraph 3), which we need to highlight to complete the idea of the author and tie up loose endsCoordination of Economic PoliciesECB must focus not only on system-wide aggregates but also on macroeconomic variables which is part of individual countries. An intensive coordination between ECB, financial services supervisor and European Systemic Risk Board (ESRB) to maintain economic and financial stability in the framework of system-wide aggregates and national individual. Ideally, countries should have unified economic policy (monetary and fiscal)

National governments had very little control over many of the macroeconomic variables targeted by the European Commission (e.g. house price bubbles in Spain).

4In here is where your earlier statement of "united monetary union but different fiscal policy" because this is where the author tackles this problem - see page 15 last paragraph. SummaryProblems faced by members of the Monetary UnionProblematic CountriesStable Countries

Suggested SolutionsAdvantagesDisadvantagesEuropean Monetary Fund (EMF) Stick & carrot policy (e.g. Collective Action Clauses (CAC), austerity package) Causing a high risk premium that market does not truly believe in the success of its programme Joint issue of Eurobond

Joint liable for the debt that issued Each countries is euro zone protect themselves against destabilizing liquidity crisisMake euros as a reserve currency

Moral hazard (for some countries that misbehaved)Less attractive for the countries with favorable credit ratings (e.g. Germany and Netherlands)

Coordination of Economic PoliciesEliminating uncentralized policy barriers (e.g. fiscal policy) Enhancing credibility of the Eurozone Highly intensive coordination among policy makers

It wont be easy to hand over sovereignty in the case of political union

SummaryProblem 1: CAC is not an advantage. Look at page 12 paragraph 4..."there are other features of the ESM that will undermine its capacity ....members ... will be obliged to introduced Collective Action Clauses"This is only a disadvantage for the current set-up, but the author also highlights how this can be improved.not necessarily an advantage but a description of the solutionConclusionA monetary union should be defined more than just as a single currency and one central bank, but as a heartily brotherhoodMarket sentiment could lead to sudden-stop which eventually become a risks such as liquidity and solvency risks.During recession, countries which is part of monetary union will loose their capacity to apply counter-cyclical budgetary policies. This risks creating a loss of confidence of investors which eventually push countries into bad equilibria.During the period of the sovereign-debt crisis, policy makers have taken important steps. However, to some extent, a number of features of the design of the policy (financial assistance) have more sensitive measures that tend to put countries into bad equilibrium rather into good equilibrium.