Post on 29-Dec-2015
European Monetary Integration II.
Dana Viktorová
© Viktorová, 2004 2
Stability and Growth Pact (1997)
fiscal stability/discipline is a cornerstone of
stable EMU sound government finances strengthen the
price stability and strong sustainable growth
and thus employment creation fiscal discipline mentioned in the Maastricht
Treaty (EDP) full provisions took affect as euro launched
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Stability and Growth Pact
if national fiscal instruments are a source of
externalities, they should be subjected to
collective control income externalities via trade borrowing costs externalities
budget deficits financed by government bonds
issue create undesirable movements on
financial markets threat for disciplined states
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SGP - Three Elements political commitment to budget surveillance preventive elements
preventing budget deficit going
above 3% reference value submission of stability and
convergence programmes early warning mechanism if
significant slippage in a budgetary
position dissuasive elements requiring to make
immediate corrections, allowing sanction
imposing ? excessive deficit procedure
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Stability and Growth Pact
end of independent fiscal policy ?? controversial issues
pro-cyclical effects asymmetry (binding during bad years)
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Code of Conduct of stability and convergence
programmes SCP submitted to Council & COMM updated annually euro area – stability programmes non euro area – convergence programmes assumptions on economic development assessment of medium-term objectives and their
effect on the budget (medium-term = length of
business cycle) when assessing budgetary position cyclical-
adjusted balances in addition to nominal
balances
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Case of the Czech Republic
CP public finance development ongoing procedure under Article 104
of the EC Treaty (EDP) – 2004 COMM report 12.5.2004 COMM opinion 24.6.2004 Council decision +
recommendation 5.7.2004
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Public Finance Situation in CR
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Public Finance Situation in CR
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European System of Central Banks
ESCB (1998) Statute of the ESCB (Treaty protocol) General Council (ECB + EU NCBs) independency Eurosystem (ECB + euro area NCBs) euro area (MS that adopted euro)
ECB (1998) supranational body Executive Board Governing Council
Decision making process
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European Central Bank (1998)
supranational body – MP authority loss of full influence in MP and ER policy authority in MP over the national governments
of participating MSs and other European
supranational institutions central bank independency vs. anti-inflationary
performance (more independent ? lower
inflation rate), correlation between CB
independency and price stability
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Monetary policy strategy/conduct
primary objective – maintain price stability “The primary objective of the ESCB
shall be to maintain price stability.
Without prejudice to the objective of
price stability, the ESCB shall support
the general economic policies in the
Community with a view contributing
to the achievement of the objectives of
the Community as laid down in Article
2”.(Art.105, the Treaty) fighting the inflation is absolute
priority supporting growth and employment
come next
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Monetary Policy Strategy (1998)
two pillars strategy (money base M3
targeting + monitoring of non-
monetary indicators)
provisions of single monetary policy in the
Constitution
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Monetary Policy Conduct
1998-2003 quantified definition of
price stability defined as a year-on-
year increase in the HICP in the euro
area between 0 – 2 percentage rate
over a medium term redefinition of quantitative expression
of price stability 5/2003 – onwards inflation objective
defined as below but close to 2,0
percentage level room for interpretation ? close to
2%, medium term
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ECB’s Challenges
increase of oil prices (2000) movements in the FX and stock markets
(2002) worldwide economic slowdown geopolitical tension because of Sept. 11
maintaining of the low inflation –
price stability little volatility in ST IR
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National Shares of GDP at Current Market Prices in
Enlarged Euro Area 1996 1997 1998 1999 2000 2001 2002 2003 2004 Belgium 3,60 3,57 3,54 3,57 3,56 3,50 3,47 3,50 3,51 Czech Rep. 0,82 0,82 0,86 0,84 0,87 0,93 1,04 1,03 1,07 Germany 31,84 30,81 30,36 29,98 29,19 28,53 28,00 27,61 27,26 Estonia 0,06 0,07 0,08 0,08 0,09 0,09 0,10 0,11 0,11 Greece 1,66 1,77 1,73 1,79 1,77 1,81 1,88 1,99 2,05 Spain 8,15 8,19 8,33 8,57 8,78 8,99 9,28 9,66 9,87 France 20,76 20,52 20,56 20,53 20,42 20,30 20,28 20,21 20,22 Ireland 0,97 1,17 1,23 1,36 1,48 1,59 1,70 1,75 1,82 Italy 16,46 17,03 16,94 16,79 16,77 16,76 16,74 16,88 16,87 Cyprus 0,13 0,12 0,13 0,13 0,14 0,14 0,14 0,15 0,15 Latvia 0,07 0,09 0,09 0,10 0,12 0,13 0,13 0,13 0,14 Lithuania 0,11 0,14 0,16 0,15 0,18 0,19 0,20 0,21 0,22 Luxembourg 0,24 0,25 0,27 0,28 0,31 0,31 0,30 0,31 0,32 Hungary 0,60 0,67 0,66 0,68 0,73 0,80 0,92 0,95 1,01 Malta 0,05 0,05 0,05 0,06 0,06 0,06 0,06 0,06 0,06 Netherlands 5,50 5,50 5,57 5,67 5,78 5,91 5,91 5,89 5,78 Austria 3,16 3,05 3,03 3,03 3,02 2,97 2,94 2,93 2,90 Poland 2,05 2,24 2,38 2,34 2,60 2,85 2,69 2,40 2,42 Portugal 1,50 1,55 1,59 1,64 1,66 1,69 1,71 1,69 1,67 Slovenia 0,27 0,28 0,30 0,30 0,30 0,30 0,31 0,32 0,32 Slovakia 0,28 0,31 0,31 0,29 0,32 0,32 0,34 0,37 0,40 Finland 1,71 1,79 1,83 1,82 1,87 1,86 1,86 1,85 1,83 Enlarged Euro Area 100,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00 100,00
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New Decision-Making Process in Enlarged ECB
new decision-making – changes in allocation
of votes if more than 15 NCB or 22 NCB EB remains at 6 members acc. GDP (5/6) and agg. balance
sheet (1/6) share MS divided into
groups 2-group rotation system ? 5
gov.= 4 votes & 11-16 gov.= 11
votes 3-group rotation system ? 5
gov.= 4 votes & half of gov.= 8
votes & remaining gov.= 3 votes
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Level of Difficulty in the Enlarged Governing Council of
the ECB
Euro Area
Number of Governors
- Member States
Governing Council of the ECB
Single Majority
Number of Additional Votes to vote with
the Executive
Board
Percentage Level of
Difficulty (%)
EMU I
11 17 9 3 27,3
12 18 9* 3 25,0 13 19 10 4 30,8
EMU II
14 20 10* 4 28,6 EMU III
15 21 11 5 33,3
16 22 11* 5 31,3 17 23 12 6 35,3
EMU IV
18 24 12* 6 33,3 EMU V
16 - 21 21 11 5 39,6 - 61,9
EMU VI
22 - ? 21 11 5 ? 65,1
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New Member States
economic position – emerging economies in
the middle of the catching-up processes economic differences – transformation
processes
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Meeting Maastricht Criteria
euro area enlargement chronology political power behind convergence
assessment veto power trade off ??
even fulfilling Maastricht criteria - NMS remaining different from core-group (GDP growth, inflation rate) because of the catching-up
though converging towards euro area average over time, economic synchronization
completion of convergence process
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Relationship between Maastricht Fiscal
Criteria
PY
Dg
PY
D)(
D is public debt
Y is the GDP
P is the price level
is inflation
g is the growth rate
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Real Convergence
closing a gap of income levels measured by GDP per capita by means of higher economic
performance real GDP growth in national currency
vs. in euro currency
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Real GDP per Capita in PPP, Comparative Levels (EU15=100)
19961997
19981999
2000
2001
New MS
Euro zone 120
10
20
30
40
50
60
70
80
90
100
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Real GDP per Capita in PPP,
Comparative Levels (EU15=100) 1996 1997 1998 1999 2000 2001 2002f 2003f 2004f 2005f
Euro zone 12 99,3 98,9 99,0 98,9 98,7 98,6 98,2 97,9 97,8 97,7 Cyprus 74,2 73,1 73,6 74,5 76,2 78,4 76,8 78,0 78,8 79,9
Czech Republic . . . . 59,6 60,6 61,9 62,7 63,2 64,1 Hungary 44,7 45,8 46,8 47,8 48,8 51,5 53,4 55,3 56,6 57,9 Estonia 32,3 35,0 35,8 35,2 37,5 38,6 40,2 42,2 44,7 47,0
Latvia 27 28,9 29,7 30,1 31,5 33,4 34,8 36,6 37,8 39,2 Lithuania 32 33,7 35,4 34,3 35,1 37,2 39,1 41,4 43,2 45,0 Malta . . . 71,3 70,9 69,5 69,1 69,2 69,8 69,9
Poland 39,1 37,8 40,4 41,8 41,8 41,9 41,7 42,9 43,7 44,8 Slovakia 41,7 43 43,4 42,9 43,7 44,7 47,1 49,1 49,5 50,1 Slovenia 62,3 63,7 64,4 66,6 66,4 67,9 69,0 69,7 70,6 71,8
New MS . . . . 45,7 46,6 47,3 48,7 49,6 50,7
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Equation to Express a Real GDP Growth Rate in the Euro
Currency
EMUNDCEUR p - p er - y y
( EURy ) … real GDP growth rate in euro currency
right hand side … sum of real GDP growth rate in domestic currency ( DCy ), relative
change of nominal exchange rate DC/EUR and the difference of national inflation rate
( Np ) and inflation rate in euro area ( EMUp )
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Real GDP Growth, National & Euro
Currencies 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Avrg. CZE -0.1 2.6 4.8 3.9 0.3 -2.2 -0.4 3.3 3.1 2.0 2.9 3.3 1.9 HUN -2.3 2.9 1.5 1.3 4.6 4.9 4.2 5.2 3.8 3.5 2.9 3.3 3.0 POL 3.8 5.2 7.0 6.1 6.8 4.8 4.1 4.0 1.0 1.4 3.7 4.0 4.3 SKV -4.1 4.9 6.8 6.6 6.5 4.1 1.9 2.2 3.3 4.4 4.0 4.5 3.8 SLO 1.3 4.9 4.1 3.3 4.6 3.8 5.2 4.6 2.9 2.9 2.2 3.4 3.6 EMU -0.8 2.4 2.2 1.4 2.3 2.9 2.8 3.5 1.6 0.9 0.4 1.8 1.8
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Avrg. CZE . 8.1 11.7 11.0 -5.5 15.8 -2.6 8.0 14.3 2.8 -1.6 . 6.2 HUN . -1.7 -4.5 8.2 11.7 4.2 13.4 9.0 17.6 10.8 -5.7 . 6.3 POL . 10.1 26.1 10.9 11.3 10.2 8.4 19.6 12.7 -13.0 -14.9 . 8.1 SLO . 13.3 14.8 5.9 14.0 -3.1 11.5 10.4 10.8 8.4 11.2 . 9.7 SKV . . . . . . . 4.0 6.4 3.0 2.9 . 4.1 EMU -0.8 2.4 2.2 1.4 2.3 2.9 2.8 3.5 1.6 0.9 0.4 1.8 1.8
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Nominal Convergence
decrease of disparities in price levels through two channels (combination of
both channels) ER channel – ER appreciation inflation channel – higher domestic
inflation case of CR – 1. infl.ch., 2. ER ch. inflation pressures due to transition …
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Comparative Price Levels of (EU15=100)
1995 1996 1997 19981999
20002001
2002p
New MS
Euro zone 12
0
20
40
60
80
100
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Comparative Price Levels of (EU15=100)
1995 1996 1997 1998 1999 2000 2001 2002p
Euro zone 12 102,0 101,7 98,8 98,1 97,4 96,1 96,8 97,2 Cyprus 79,2 78,3 79,1 79,7 80,6 81,4 81,2 83,1
Czech Republic . . . . . 45,3 48,8 53,1 Hungary 42,1 42,4 44,5 44,0 44,9 46,6 50,2 54,9 Estonia 38,3 44,1 46,1 49,7 51,3 51,2 54,0 56,1
Latvia 33,5 37,5 42,2 43,7 45,9 51,7 52,6 50,4 Lithuania 27,9 33,1 39,5 41,8 43,1 48,4 49,9 51,1 Malta . . . . 68,6 71,8 72,9 71,9
Poland . . . . 48,0 54,0 60,7 57,4 Slovakia 38,1 38,6 40,6 40,9 38,7 42,5 43,2 43,5 Slovenia 72,8 70,0 70,2 72,6 71,8 70,4 70,6 72,6
New MS 43,0 45,0 47,0 48,0 48,0 51,8 56,3 56,1
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Development in the Czech Republic, 1993-2003
1993 1994 1995 1996 1997 1998 Average 1993-98
Real GDP growth in CZK - 0.9 2.6 4.8 3.9 0.3 - 2.2 1.7 Inflation rate in CR 20.8 10.0 9.1 8.8 8.5 10.7 11.2 Inflation rate in EMU 3.2 2.7 2.5 2.1 1.6 1.1 2.7 Inflation differential 17.6 7.3 6.6 6.7 6.9 9.6 9.1 Nominal exchange rate CZK/EUR 33.58 34.17 34.06 33.91 38.22 35.02 34.83 Nominal change CZK/EUR . 1.8 -0.3 -0.4 12.7 -8.4 1.1 Real change CZK/EUR . -7.1 -6.4 -6.6 -6.7 -9.6 -7.3 Real GDP growth in EUR . 8.1 11.7 11.0 -5.5 15.8 8.2
1999 2000 2001 2002 2003 Average
1999-03 Average 1993-03
Real GDP growth in CZK -0.4 3.3 3.1 2.0 2,9 2.2 1.8 Inflation rate in CR 2.1 3.9 4.7 1.8 0,1 2.5 7.3 Inflation rate in EMU 1.1 2.1 2.4 2.2 2.1 2.1 2.1 Inflation differential 1.0 1.8 2.3 - 0.4 - 2,0 0.5 5.2 Nominal exchange rate CZK/EUR 36.13 35.09 31.98 31.60 32.41 33.44 34.19 Nominal change CZK/EUR 3.2 -2.9 -8.9 -1.2 2.5 -1.5 -0.2 Real appreciation CZK/EUR -1.0 -1.8 -2.3 0.4 2.0 -0.5 -3.9 Real GDP growth in EUR -2.6 8.0 14.3 2.8 -1.6 4.2 6.2
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Balassa-Samuelson Theorem
EURCZKCZKCZK NERRER %% increase in productivity in tradable sector (TS)
increase in wages in TS
increase in wages in non-tradable sector (NTS) due to
wage contagion without adequate increase in productivity
increase in NTS prices
increase of the national inflation rate
national currency ER pegged
then RER appreciation
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Comparison of Income and Price Levels in 1996 and 2002 for New Member States and
Euro Area (EU15=100)
25
35
45
55
65
75
85
95
105
25 35 45 55 65 75 85 95 105
Income Level
Pri
ce L
evel
LAT
CZE
CYP
LIT
EST
POL
SKV
HUN
EUR
NMS
SLOMAL
Nominal convergence
Real convergence
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Enlargement of the Euro Area under the Economic Conditions
of 2003
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
-2,0 0,0 2,0 4,0 6,0 8,0 10,0
Real GDP Growth Rate
HICP
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Maastricht Constraints for Nominal and Real
Convergence
aspiration to fulfil Maastricht criteria
might induce distortions into economy too restrictive monetary policy appreciation of nominal ER due to
investment inflows ? RER
appreciation