The European Union and the EURO

European Union 1. What does it mean: - Free Movement of People - Free Movement of Goods - Mutual Recognition of National Standards but also - Different Cultures - Different Languages - National Governments - National Laws

2. Objectives - Economic - Social - Political 3. Who Participates?

EU Member Countries Old Members Austria € Belgium € Denmark Finland € France € Germany € Greece € Ireland € Italy € Luxembourg € Netherlands € Portugal € Spain € Sweden UK until 2019? -New Members Cyprus € Czech Republic Estonia € Hungary Latvia Lithuania Malta € Poland Slovak Republic € Slovenia € Rumania Bulgaria Croatia -In Negotiations Turkey € Countries that adopted the EURO

EC Institutions European Commission Council of Ministries European Parliament European Court of Justice

Euro Crisis?

EMU 1.What is EMU? 2. How Does it Work? Acronym for Economic and Monetary Union 2. How Does it Work? All national currencies of member states convert into the EURO at an irrevocably fixed rate. The EURO floats freely against other main currencies (yen, $). National banknotes ceased to be legal on 1 July 2002. 3. What is the role of the ECB? The Governing Council of the European Central Bank (ECB) consists of six executive board members responsible for current business and the 11 ministers of the National Central banks. The ECB is responsible for the money supply in Euroland.

4. Does the EMU lead to a loss of sovereignty of its member states? A nation’s currency symbolizes national autonomy. Monetary policy is a powerful economic instrument, that has an impact on inflation, interest rates, governmental debt, short term unemployment, and economic cycle 5. What are potential benefits of the EMU? Lower cost of managing cash for companies operating across national borders within Euroland Elimination of currency risk in Euroland Lower cost of hedging currency risk between EURO and non-EURO currencies Bigger markets. Customers will more readily purchase across national boundaries, unimpeded by the complexities of different currencies

6. What happens if the economic cycles in different EMU member states are out of synch? The exchange rate weapon is ruled out. There is no redistribution effect of federal taxes (For example: If one part of the U.S. moves into recession, its tax payments (linked to income and sales) will fall and federal benefit payments will rise). Adjustments in the EMU will have to take place through: - Relocation of workers - Relocation of businesses - Change of wages - Transfer payments between EMU member states

Greek Crisis 1. Timeline of the Crisis Greece joins currency union in 2001 Low interest rates, low inflation, access to capoital markets Economic boom financed with cheap money No currency devaluation to counteract increasing ULC Domestic businesses are increasingly loosing competitiveness Hay fire of cheap money is burnt out. Economy is not competitive

Increasing Loss of Competitiveness 2018 Numbers

Price of bonds falls and interest rate increases. 1. Timeline of the Crisis cont. Hay fire of cheap money is burnt out. Economy is not competitive Governmental spending to counteract increasing unemployment, low consumption, and failing companies Public debt explodes Investors slowly start to react and buy less Greek bonds and increasingly take out Credit Default Swaps to get insurance against default Price of bonds falls and interest rate increases. “Bad” speculators refuse to buy bonds despite skyrocketing interest rates. Price of Credit Default Swaps goes through the roof and markets start to freeze

1. Timeline of the Crisis cont. Greece receives first (2010) and second bailout (2012) from EU, ECB, and IMF (Troika) worth Euro 250 billion. Conditions of the bailouts were austerity measures and structural reforms. Greece does not fulfill conditions, runs out of money, and votes for radical left Syriza party Third bailout (2015) from EU and ECB worth Euro 100 billion. Syriza agrees to more austerity measures and structural reforms. If Greece were to exit the Euro and default on its debt, ECB and EU would potentially loose more than Euro 600 billion How Crises and Bailouts Have Changed Greece’s Economy

Quasi Permanent Transfer Payments 2. Potential Solutions Quasi Permanent Transfer Payments (Model East Germany) Greek economy does not become competitive. Long-term transfer payments (€ 60 billion per year?) are necessary to keep up the standard of living. Structural Reforms This is the favorite model by European politicians. Debt relief coupled with severe structural reforms to make the Greek economy more competitive. This would lead to a drastic decrease of the standard of living for years to come.

2. Potential Solutions cont. Exit the Currency Union Investors of Greek bonds get a haircut. New currency will be heavily devaluated. Access to international capital markets is obstructed. High interest rates. Drastic increase of import prices. Temporary decrease of standard of living. Danger of inflation. Economy becomes competitive. Exports, tourism, and production for domestic consumption increase. 4. ?