the european monetary union (the eurozone)

The European Monetary Union(the eurozone)

www.theglobaleconomy.com


About the slides

The presentation is part of an open source project with free resources on the global economy. For more information visit:


Please modify and use the slides as you see fit. They can be used along with the complete guide to the eurozone available here:

Practical guide: PDF and interactive version

http://www.theglobaleconomy.com/

http://www.theglobaleconomy.com/practical_guides/24/40/


Contents

• Basic facts about the EMU … slides 3-7• The dollar-euro exchange rate … 8• Indicators of the member countries … 9• The economic benefits of the EMU … 10-11• The economic costs of the EMU … 12-14• When does a monetary union work well … 15-18• Should Europe have a monetary union … 19-20• The current crisis … 21-26• Integration road map … 27• Further exploration … 28


What is the EMU

• The European Monetary Union (the eurozone) is a group of 17 countries that use the same currency called the euro.

• They have the same central bank that conducts monetary policy. It manages the interest rates and the rate of inflation for the entire union.


The 17 eurozone members on a map(Kosovo and Montenegro, in light blue, use the euro but are not EMU members)


Quick facts about the eurozone

• Headquarters of the European Central Bank: Frankfurt, Germany

• The President of the European Central Bank: Mario Draghi• Members of the eurozone: 17• Members of the EU that are not in the eurozone: 10• Introduction of the euro: 1999 as “virtual currency”; 2001

physical implementation• Population of the eurozone in 2011: 334 million • Gross Domestic Product in 2011: 13.1 trillion dollars• Unemployment rate in 2010: 10.0 percent• GDP per capita in 2011: 39,267 dollars• Public debt in 2009: 64.7 percent of GDP


What the euro currency looks like


How big is the eurozone economy?

The GDP of the eurozone was about 12 trillion dollars in 2010, compared to 16 trillion dollars for the entire European Union and 14 trillion dollars for the U.S.


The euro-dollar exchange rate

The euro has appreciated against the dollar since 2001; that trend was somewhat reversed during the financial crisis.

Euro per one U.S. dollar


Economic indicators of the member countries

Click on the link below to see the following indicators for the 17 member countries, the U.S., the EU, the EMU, and world averages.

- GDP- GDP per capita- population- unemployment rate and- government debt

Economic indicators

http://www.theglobaleconomy.com/practical_guides/24/39/


The economic benefits of the EMU

Having the same money eliminates currency conversion costs and currency risks. As a results, international trade and investment increase.

Exports as percent of GDP


Economic benefits continued…

As monetary policy is handled at a central level, some countries with traditionally high inflation rates now enjoy lower inflation.

The inflation rate in Greece


Economic costs of the EMU

With the same currency and common monetary policy, the interest rates on deposits and credits become similar.

Interest rates on bank credit in Italy and the Netherlands


Having similar interest rates could be a problem

Rapidly growing countries need higher interest rates and countries that grow slowly need low interest rates. Notice how different the economic growth rates across the eurozone are .

GDP growth rates


The one-size-fit-all policy

On the chart it is clear that Germany and Spain have been affected differently by the crisis. Should the European Central Bank base its policy on what is happening in Spain or in Germany? It cannot appease both.

Unemployment rate


A one-size-fit-all policy does not fit anyone

• How can the union function then?

- Labor mobility between the countries.- Wages are flexible- Fiscal union

• We look at each separately


Labor mobility (example)

• Spaniards move to Germany. • The unemployment rate in Spain declines and

it may increase somewhat in Germany. • The unemployment rates in the two countries

become similar.• The one-size-fit-all policy is then not a

problem.


Wage flexibility (example)

• Wages in Spain drastically decline. • Then, Spanish goods and services become

more competitive and Spanish exports to Germany and other countries increase.

• That leads to lower unemployment in Spain.


Fiscal union (example)

• German taxpayers make payments to unemployed people in Spain.

• That gives a boost to the Spanish economy while the extra tax burden slows down the German economy.

• The economic conditions in Spain and Germany become similar and the one-size-fit-all policy is not a problem.


Do these conditions hold in Europe?

• Generally no.• There is limited labor mobility because of

language and cultural barriers.• Wages are not very flexible because of long-

term contracts and collective bargaining.• The member countries have decided not to

coordinate tax collections and expenditures.


Why was the EMU formed then?

• A political decision. • The euro is supposed to foster further

economic, political and fiscal integration. • Over time, that integration could create the

conditions necessary for a monetary union.


The current crisis

Imagine the following scenario:

• One of the member countries of the EMU cannot pay its international debts.

• The banks that lent money to that country take losses. • Other governments are pressured to spend money to support

the banks. • These other governments also go into fiscal trouble and may

stop paying their international debt.• And so on, more and more governments and banks become

insolvent and the EMU economy collapses.


Maastricht treaty

To avoid that scenario, the EMU member states have to comply with the fiscal requirements set out in the Maastricht treaty:

• Budget deficits no greater than 3 percent of GDP

• Government debt no greater than 60 percent of GDP


Too much government debt in Greece

Greece had high debt (much higher than the Maastricht treaty requirement) even before its entry into the eurozone. During the crisis its debt increased even more and could not be paid.

Government debt as percent of GDP


Too much bank credit in Spain

Spain had low public debt but its banks gave too many credits too fast. The credits were backed by property. When real

estate prices fell, banks were in trouble.

Bank credit to the private sector as percent of GDP


Lack of competitiveness

The two countries also lack international competitiveness, evident in the large trade deficits. They would have devalued their currencies to gain competitiveness.

Being in the eurozone, however, that option is not available. Trade balance as percent of GDP


Other problem countries

Explore the economic indicators of the other problem counties in the eurozone:

• Italy• Ireland• Portugal

You can also use this tool to compare them to other countries:

• Compare countries

http://www.theglobaleconomy.com/Italy/

http://www.theglobaleconomy.com/Ireland/

http://www.theglobaleconomy.com/Portugal/

http://www.theglobaleconomy.com/compare-countries/


Integration or collapse

• To survive, the eurozone countries have to take further integration steps in terms of fiscal, economic, and political union.

• Indeed, they are trying to do that. Here is the new proposed road map (June 2012):

Integration road map

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131201.pdf


Further exploration

Answer the following questions, based on the practical guide, individual research, and data from www.thegobaleconomy.com:

• Why does the UK stay out of the eurozone?• Will the business cycles (the economic ups and

downs) of the EMU countries become more similar over time?

• Should all East Europeans countries join the eurozone?

the european monetary union (the eurozone)

Documents

euro currency

eurozone members

eurozone economy

eurozone available

gdp gdp

dollareuro exchange

rate of inflation

emuthe european monetary