lecture15 - Chapter 20 Optimum Currency Areas and the...

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Chapter 20. Optimum Currency Areas and the European Experience. Part 1.
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The Road to EMU European Monetary System EMS Crisis European Monetary Union European Central Bank Theory versus reality Theory of Optimal Currency Areas
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January 1, 1999 – eleven countries European Union adopted a common currency, euro Greece joins in 2001 300 mill consumers (10% more than US) Euro – even more than a fixed exchange rate, give up not only monetary policy but give up national currency and hand control over their monetary policy to European Central Bank How and why did Europe set up its single currency? Will the euro be good for its members’ economies? How does euro formation affect US economy ?
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Date of foundation: 1st November, 1993. New members since 1st January, 1995: Austria, Finland, Sweden. For the ten new members as of 1st May, 2004, see below. Member states (EUR: Euro currency): Austria (EUR) Belgium (EUR) Denmark Finland (EUR) France (EUR) Germany (EUR) Greece (EUR) Ireland (EUR) Italy (EUR) Luxembourg (EUR) Netherlands (EUR) Portugal (EUR) Spain (EUR) Sweden United Kingdom of Great Britain and Northern Ireland Ten countries have joined the EU on 2004-05-01 : Cyprus (Greek part), the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia
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European Monetary System (EMS) After Bretton Woods Break up, several European countries attempt various mechanisms to fix their exchange rates to each other. 1969 December – European leaders initiated the European Monetary Unification. They decide to form a committee to establish concrete steps towards eliminating European exchange rates movements, centralize EU monetary policy decisions, and lowering trade barriers in Europe. Why do you think they thought this way? - To enhance Europe’s role in the world monetary system : after currency crises in 1969 European countries hoped that would defend their economic interests more effectively in face of the US. - To turn European Union into a truly unified market – significant barriers to trade – goal: transform Europe in a unified market similar to US.
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European Monetary System (EMS) 1971-1973 dollar crises – countries did not want to give up the ability to use monetary policy - Germany, Netherlands, Belgium and Luxembourg (+other countries later) – informal joint float against the dollar – “the snake” (beginning of the EMS) In 1979 , eight countries created a formal system of mutually fixed Exchange rates, called the European Monetary system (EMS). Set E relative to each other, and float jointly against the dollar The bilateral exchange rates were not held exactly fixed. They were allowed to fluctuate within bands (“margins”) of centered on an assigned par value versus each of the other currencies. (ERM) Mechanics: each currency had a central parity in terms of ECUs, “ European currency units ” (a synthetic basket of member currencies). Can use central parities to determine bilateral rates.
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