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About this book

This accessible text on economic and monetary integration provides readers with a comprehensive look at the evolution of the eurozone, from its beginnings in fixed exchange rate systems through the sovereign debt crisis. It examines why the EMU was created, what went wrong to bring about the global financial crisis, and why countries were affected so differently. Using theories drawn from economics and political science, this book provides readers with an up-to-date analysis of the recent reforms undertaken, grounded in a long-term perspective of the trajectory of European integration.

Table of Contents

1. Introduction

Abstract
In the spring of 2008 the European Union (EU) celebrated the tenth anniversary of economic and monetary union (EMU). Events in Brussels and Frankfurt marked the successful first decade of the currency. The Economic and Monetary Affairs Commissioner boasted that “the Economic and Monetary Union and the euro are a major success” (Commission 2008, p.iii), while European Central Bank President Jean-Claude Trichet lauded “the vision and determination of the Governing Council members, past and present… who have helped to build a solid foundation for the euro” (ECB 2008, p.6). This congratulatory air quickly dissipated a few months later when the worst economic crisis for the European Union countries since the Great Depression began. The crisis originated with the American subprime crisis, but quickly exposed the inherent weaknesses in the EU’s financial system. Despite the gravity of the global financial crisis, the EU’s initial policy responses were quite timid and incremental. The ensuing sovereign debt crisis forced the euro area into tighter integration while hardening the reluctance of certain non-euro area countries to press ahead with delegating greater powers to Brussels.
Michele Chang

2. History of Economic and Monetary Union

Abstract
This chapter gives an overview of the history of economic and monetary union, starting from the beginning of European exchange rate cooperation in the 1970s up until 2015. Subsequent chapters will cover the events in more detail, according to the specific issue area (monetary, financial, fiscal or economic integration) or actors (ECB, non-euro area countries, etc.). It begins with a consideration of exchange rate cooperation in Europe, starting with the Bretton Woods system, the Snake, and its successor, the European Monetary System (EMS). The success of the EMS in stabilizing exchange rate fluctuations and lowering interest rates contributed to the decision to create a single currency, the euro. During its first decade the new currency thrived, but the global financial crisis revealed its underlying weaknesses that were further exposed by the subsequent sovereign debt crisis. Therefore EMU (Economic and Monetary Union) 2.0 saw an expanded role for the ECB, the creation of a bailout fund (ESM, the European Stability Mechanism), banking union, tighter fiscal cooperation and more economic policy cooperation. The policies and institutions of EMU are further described in later chapters.
Michele Chang

3. Monetary Integration

Abstract
Monetary integration was the cornerstone of economic and monetary union under the Maastricht Treaty (hereafter referred to as EMU 1.0), but ultimately it provided an insufficient basis. This included delegation of monetary policy to an independent central bank but precluded a lender of last resort, bailing out other member states, and the funds and institutional support for crisis management. Moreover, EMU 1.0 largely retained member state competences in fiscal policy, financial supervision and economic policy. The revised monetary union (EMU 2.0) contains some of these elements, but does this make it a “genuine economic and monetary union” (Van Rompuy 2012)? This chapter traces the evolution of EMU, drawing on both the economic and political logic behind it. Issues concerning markets, governments and democracies will be considered in regard to economic ideas relating to how markets function, government incentives for pursuing specific policies, and how domestic politics, particularly in Germany, influenced monetary union’s development. The various competences accrued, and institutional developments, will also be covered.
Michele Chang

4. The European Central Bank

Abstract
The European Central Bank (ECB) opened its doors in 1998 and immediately became the second most powerful central bank in the world (after the US Federal Reserve). The ECB emerged from the post-global financial crisis era as a major actor in international affairs and a key player in EU policymaking. It has built upon its solid reputation for technocratic competence and has seen its authority expand into financial supervision and advising governments on economic reforms, arguably becoming a political actor in the process. ECB President Mario Draghi has been credited with single-handedly ending the euro area crisis in the summer of 2012 by vowing to do “whatever it takes” to save the single currency (Draghi 2012a). But with a higher profile came additional responsibilities that potentially impinge upon its primary (treaty-mandated) task of pursuing price stability.
Michele Chang

5. Financial Integration and Banking Union

Abstract
The European Union has the largest banking sector in the world; at €33 trillion it is almost three and a half times as large as the euro area’s GDP, while Japan, Canada and Australia’s respective banking sectors amount to twice their GDP and the American banking system is roughly equal to its economic size (Thompson 2013). Although the number of credit institutions has fallen over the past decade (by 1500 institutions), at the end of 2011 there were still about 8000 credit institutions in the EU, nearly three quarters of which are in the euro area (European Banking Federation 2012, pp.6–7). Finance has played a major role in European economic growth, but it has also been responsible for many of the economic and political troubles that plague the EU today. The first section of this chapter looks at the evolution of financial integration in the EU, both theoretically and empirically. Financial services in the EU are traditionally divided into banking, securities markets and insurance.
Michele Chang

6. Fiscal Policy Coordination

Abstract
Monetary union originally lacked a fiscal component beyond the debt and deficit level requirements to join the euro area. This entailed little more than rules to limit the level of debt of the individual member states; neither a common budget nor a euro arealevel treasury was envisioned. Even the Stability and Growth Pact (SGP) was reformed in 2005 to make it more flexible and therefore less constraining on national policy. With the onset of the sovereign debt crisis in 2009, this was quickly reversed and numerous measures were adopted to strengthen fiscal coordination: the Six Pack, the fiscal compact (as part of the Treaty on Stability, Coordination and Governance), and the Two Pack delegate more power to the Commission to perform surveillance, make recommendations and even sanction member states in breach of fiscal rules. Nevertheless, control over fiscal policy strikes at the heart of national economic policymaking, and citizens have protested against austerity.
Michele Chang

7. Economic Policy Coordination

Abstract
European economic policy cooperation is the least developed and institutionalized part of Economic and Monetary Union. Although monetary cooperation enjoys a long history and a correspondingly high degree of delegation to a supranational institution, economic policy remains a competence of the member states. While numerous mechanisms have been developed to promote economic policy cooperation, it remains limited to national coordination of policies with few repercussions for noncompliance with agreements. Since the onset of the euro crisis, various measures have been undertaken to strengthen economic policy cooperation, but it is still marked by the widespread use of voluntary compliance. Regarding policy content, the types of policy reforms advocated by the European Union have been heavily influenced by German conceptions of competitiveness.
Michele Chang

8. The Euro Outs: A View from the Outside

Abstract
Although the Maastricht Treaty envisaged the possibility of a twospeed EU with the imposition of the convergence criteria as a prerequisite for entering monetary union, the original expectation was that such a situation would be: (1) temporary and (2) limited in regard to the number of member states that would remain on the outside. Of course, this was prior to both the 1992–93 ERM crisis that resulted in the negotiation of opt-outs for Denmark and the UK and the accession of the countries from central and eastern Europe. This chapter considers the motivations of the euro “outs”, including the impact of the global financial crisis and sovereign debt crisis. This is followed by a brief analysis of how being a euro outsider differs from EMU membership in relevant EU institutions and policies: the European Central Bank and the Single Supervisory Mechanism, the Stability and Growth Pact, the European Stability Mechanism, the Treaty on Stability, Coordination and Governance, and the Euro Plus Pact.
Michele Chang

9. EMU and the World

Abstract
Since the French government decried the “exorbitant privilege” of the US in issuing the international reserve currency and alleged its misuse of this power in the 1960s (Eichengreen 2011), the potential benefits and prospects of Europe taking over such a role have figured among the most important implications of European monetary cooperation. While it would entail both economic and political costs, the gains could be substantial. This chapter evaluates the international role of the euro. It first reviews the status of the euro as an international currency and how it fares compared to the international reserve currency, the US dollar. The chapter then considers the rise of the Chinese renminbi and how this impacts the euro. It continues with the euro’s external representation, including its exchange rate and the participation of the euro in the IMF (the G20, Bank for International Settlements and the Financial Stability Board are covered in Chapter 4). The final section considers the desirability of the ascendance of the euro.
Michele Chang

Conclusion

Abstract
Economic and Monetary Union has undergone a profound transformation since the euro’s introduction in 1999. This conclusion summarizes the key points from the previous chapters and considers possible roads forward for EMU, including a euro area breakup and more euro area integration in terms of financial, fiscal, economic and political union. The proposals from the Five Presidents’ Report (Juncker et al. 2015) will be considered, linking them to themes developed earlier regarding markets, government and democracy.
Michele Chang
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