EUP – The Euro

Pros

• High degree of price stability
• A better deal for consumers
• Lower interest rates for borrowers
• More price transparency
• Removal of transaction costs
• No exchange rate fluctuations

Cons

• Dependency
• Potential macroeconomic imbalance
• The rigidity of one-size-fits-all interest rates
• Lack of Strong Federal Government
• Abolished Independent Monetary Policies
• You share the problems of the collective countries

• Advantages:
  • Elimination of transaction costs
  • Ellimination of currency risk
  • Greater price and market transparency
  • Lower borrowing costs due to more efficient financial markets
  • Lower admin costs
• Disadvantages
  • A country gives up its independent monetary policy.
    • It gives up the possibility to change the exchange rates and the interest rates (internal & external monetary policy)
  • It depends on the integration of the countries.
    • E.g.: Germany - NL => 99% symmetric / Germany - UK => asymmetric

(One size fits all problem)

• If all the EU is facing a shock, the ECB will decide to decrease the interest rates and increase the exchange rates

One size fits all problem

• When an economic supply or demand shock is different from one region to another, or when the shocks do not move in tandem. | Example: If Germany has a positive total demand shock and France has a negative total demand shock, then these two countries are experiencing asymmetric shocks. 

The Stability and Growth Pact (SGP) is an agreement, among the 28 Member states of the European Union, to facilitate and maintain the stability of the Economic and Monetary Union (EMU).

Is it realistic?

It is not. Rules are not appropriate to the situation of recession. France & Germany don’t follow it.

The euro convergence criteria (also known as the Maastricht criteria) are the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their currency.

Maastricht Criteria: (1997 Stability and Growth Pact)

• Inflation: less than 3% GDP
• Government budget deficit: Less than 3% GDP
• Government debt: Less than 60% GDP ratio
• Long-Term Interest rates: No more than 2.0% higher than average Europe.
• Stable exchange rate: The country who just join, for two consecutive years, and should not have devalued its currency during the last two years

UK, “extra” test:

• Business cycles must converge
• Background: “One size fits all” problem
• Flexible (labour) markets
• Background: Giving up monetary policy

• Inflation: less than 3% GDP
• Government budget deficit: Less than 3% GDP
• Government debt: Less than 60% GDP ratio
• Long-Term Interest rates: No more than 2.0% higher than average Europe.
• Stable exchange rate: The country who just join, for two consecutive years, and should not have devalued its currency during the last two years

• The crisis started in 2007
• Fever chart: 
  • The top of the fever is somewhere in 2012. Something has changed.
  • It shows the EU is ill (fever = fièvre).
  • Because the investor’s confidence decreased, investors were asking for higher interest rates to compensate.