Difficulties of a Single Monetary Policy for a Large Number of Countries
I. INTRODUCTION
The European Economic and Monetary Union (EMU) and the common currency the euro, was originally promoted as a source for economic growth and as a mechanism to make European markets less fragmented. However, the recent eurozone crisis has shown the complexity surrounding the issue of a single monetary policy for a large number of countries. Recent economic developments in the eurozone have therefore put an emphasis on the question if it is feasible to conduct a monetary policy of “one size fits all." This essay analyses the viability of a single monetary policy conducted by the European Central Bank (ECB) and highlights some of its design failures as well as what may be done to overcome these difficulties.
II. THE ECONOMICS OF EUROPEAN MONETARY UNION
The 1992 Maastricht Treaty, set out a gradual plan to implement an Economic and Monetary Union (EMU) in the European Union together with a common currency, the euro (Hansen, 2001). The treaty also implemented a set of convergence criteria, to achieve price stability, which member states need to comply with to adopt the new currency. By 2002, the euro was put into circulation and replaced former national currencies. ECB, which was established by the Treaty of Amsterdam in 1998, set and implement the monetary policy for the 18 member states that constitute the eurozone (Hansen, 2001). The primary objective of the ECB is to maintain price stability by keeping HICP inflation rates below, but close to, 2 per cent (ECB, 2014).
Many scholars have contributed to theories, which serve as a guideline to assess monetary integration. The appropriateness of a monetary union can be said for the sake of simpl...
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January 1, 1999 marked the beginning of the euro as an accepted currency in eleven European countries. Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain all adopted this single currency, becoming subdivisions of a common monetary policy. On this date, the exchange rates of each of the participating countries were set, and the euro was officially recognized as the legal currency. The push towards the development of a common currency began in 1957, when the Treaty of Rome stated a common European market as an objective, hoping that “an ever closer union among the peoples of Europe” would inevitably occur. The approval of the Single European Act in 1986 symbolized and cleared the way for accelerated European integration and the completion of a single European market. Consequently, European governments and industry began to place greater emphasis on the competitiveness of European industry and on the reduction of barriers within Europe that hindered industry’s global economic competitiveness. The European Union went a step farther in 1992 in the Treaty of European Union, creating the Economic and Monetary Union (EMU).
Therefore, Europe eventually adopted the Stability and Growth Pact to regulate and monitor the fiscal debts of each country (Beetsna and Uhlig 547). However, there are many uncertainties of a unified economic system. Many believe the Stability and Growth Pact does not fit these concerns, and European Commission President Romano Prodi described it as being “stupid” (Savage and Verdun 843). In this paper, the various problems of a unified monetary will be analyzed to show a need for some regulations, while also revealing the short-comings of the Stability and Growth Pact.
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The theme of this essay outlines two things. One, the key elements of Bretton woods system and second, the characterisation of Bretton woods system by Ruggie as ‘embedded liberalism’, and how far he succeeds in it. The Bretton woods system is widely referred to the international monetary regime, which prevailed from the end of the World War 2 until the early 1970s. After the end of the World War 2, the need of international monetary framework to boost trade and economic; growth and stability, was important. Taking its name from the site of the 1944 conference, attended by all forty-four allied nations; the Bretton Woods system consisted of four key elements. First, to make a system in which each member nation has to fix or peg his currency exchange rate against the gold or U.S. dollar, as the key currency. Secondly, the free exchange of currencies between countries at the established and fixed exchange rate; plus or minus a one-percent margin. Thirdly, to create an institutional forum, so-called International Monetary Fund (IMF), for the international co-operation on money matters: to set up, stabilize, and watch over exchange rates. Fourth, to remove all the existing exchange controls limiting (protectionism) policies by the members, on the use of its currency for international trade. In practice the first scheme, as well as its later development and final demise, were directly dependent on the preferences and policies of its most powerful member, the United States. According to John Gerard Ruggie, 1982, this Bretton woods system of monetary co-operation represented the type of liberalism which characterise “domestic social economic stability along with a liberal trading order.” He referred this system as ‘embed...
Lower interest rates: The benefit of a single monetary policy run by an independent central bank is that government failure will be removed from interest rate decisions. Eurozone will be able to make a credible commitment to low inflation and put in place the necessary policies to keep it low. The benefits of lower Return On Investment should be a more rapidly expanding economy.
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Eurozone crisis has had huge impacts not only on the economy of the UE but also on the other countries who have economic and financial relations with the members of the union. The reason why we have decided to examine the Eurozone crisis in detail is to have a better understanding of the mechanisms behind this extremely important and complex problem and also to make accurate inferences about the solution alternatives. In our pape...
The first difference between the United States Federal Reserve and the European Central Bank lies in their creation, due to the different events surrounding each country at the time. In the United States, "the Federal Reserve was spawned by the Crisis of 1907;" while in Europe, "the ECB sprung from the minds of European policy makers over decades" (Payden and Rygel 1). The Maastricht Treaty "provides the legal basis for the formation of the European System of Central Banks (ESCB), which comprises the European Central Bank and the national central banks (NCBs) of the 25 Member States of the European Union (EU)" (Gerdesmeier et al. 8). The ECB follows the German model of central banking, where the most important goal is to ensure price stability, while the Federal Reserve follows the Anglo-French model, where the central bank has many goals, including busi...
How the euro benefits us all. European Communities, Economic and Financial Affairs, 2007. Web: http://ec.europa.eu/economy_finance/publications/publication9869_en.pdf
The continuous internationalization of capital markets has risen the concern about its implications on conducting macroeconomic policies (Pilbeam, 2013, p.74). A possible predicament is the impossible trinity, or the tenet that a country can only pursue two of the following three options: perfect capital mobility, fixed exchange rates, or autonomous monetary policy (Shambaugh, 2004, p. 302). Nevertheless, as of September 2011, Switzerland has attempted to pursue all three options, by continuing an expansionary monetary policy after adopting an exchange rate floor of 1.20 CHF per euro (IMF, 2013, p. 5). In theory, this policy should be rendered ineffective given Switzerland’s perfect capital mobility and its fixed exchange rate system (Mundell, 1963, p. 484). Nevertheless, Swiss real GDP still increased between the implementation of the floor in 2011 and the termination of the monetary expansion in 2012 (OECD). The aim of this paper is to elaborate on this inconsistency using the Mundell-Fleming model. First, the structure of the model and its assumptions are explained, as well as the characteristics of Switzerland’s economy that are relevant to perform the analysis. Subsequently, the course of events in Switzerland from 2010 until 2012 will be analyzed and finally discussed in the conclusion.
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The first reason is the issue of euro. Considering a strong correlation between money and collective national identity, money can be used as an effective tool in facilitating the integration of diverse identities (Risse, 2003). Actually, the principal goal of the issues of euro is to promote the unification of the monetary system and foster integration of the economy in order to ease economic activities betwee...
There are advantages to large currency areas, including reduced transactions costs, and the reduced vulnerability of countries to real exchange rate shocks (e.g., those caused by speculative bubbles or protectionism). There are also disadvantages, principally foregoing counter-cyclic regional monetary policy. He finds the optimum currency areas will make the difficulty of maintaining full employment when one of the all countries in optimum currency areas suffers from one event. In addition, he also mentioned higher labor mobility is able to offset the asymmetric shocks and has easier time to find
In the absence of a common currency exchange between countries, business between these currencies becomes complicated. The foreign exchange market allows transfer of purchasing power among nations. It facilitates trade between regions, prompting many economies where the forex market is very important because this trade may constitute a large part of its GDP (Jones,