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ECONOMIC AND MONETARY UNION (EMU): The Currency without a State

ECONOMIC AND MONETARY UNION (EMU): The Currency without a State. Sixten Korkman Aalto University , Spring 2014 . Objectives of the course on EMU. Getting familiar with the basics of the EU Achieving a good understanding of the EMU - background , history , rationale

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ECONOMIC AND MONETARY UNION (EMU): The Currency without a State

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  1. ECONOMIC AND MONETARY UNION (EMU): The Currencywithout a State Sixten Korkman Aalto University, Spring 2014

  2. Objectives of the course on EMU • Gettingfamiliar with the basics of the EU • Achieving a goodunderstanding of the EMU - background, history, rationale - institutions and policies - problems and reforms - debate • Main emphasis on the policyissues; elementary open economymacrotheory to the extentthatithelps set out the policyissues • General references (on the EU/EMU in general): - Richard Baldwin and Charles Wyplosz (2009): ”The Economics of European Integration”, McGraw-Hill (mainlychapters 1-3,9-11, 16-19); - Paul de Grauwe (2012): ”Economics of Monetary Union”, Oxford University Press; - Sixten Korkman (2005): ”EconomicPolicy in the European Union”, Palgrave(chapters 1-4). - Sixten Korkman (2013): ”Euro: valuutta vailla valtiota”, Taloustieto - lots of articles in, for instance, Voxeu

  3. Main elementsof the course on EMU • The EU: history, identity, rationale • The EU: institutions, areas of competence, decisionmaking • The EMU: genesis 4. Policyissues in the EMU: theoreticalconsiderations • EMU: experiencesduring the firstdecade • The euro areadebtcrisis 7. ReformingEMU: the debate • Fiscaland Politicalunion: towards the United States of Europe? • Exitthe euro area? • The future of EMU

  4. 1. The EU: history, identity, rationale 1.1 EU: earlyintellectualprecursors 1.2 EU: milestones of itshistory 1.3 EU: definition 1.4 EU: rationale

  5. EU: earlyintellectualprecursors • WillianPenn(quaker and laterfounderof Pennsylvania): ”The present and futurepeace in Europe” (1693, in the light of the horrorsexperienced in Europe during the 30 years’ war) - a Europeanparliament(of kings and princes) with compulsoryarbitration powers - a rotatingpresidency, qualifiedmajorityvoting, a specificallocation of votes,atwo-languageregimeof Latinand French (in manyrespects a constructionquitesimilar to the EU of today) - the ”Turks and the Moscovits” wereassumed to participate • Charles de St Pierre: ”Le projet de paixperpetuelle” (1713) - peaceshouldbeassuredby a Europeanconfederation with a permanentarbitrationcouncil, gavesomeinspiratinmuchlater for the League of Nations • AristideBriand: ”Mémorandumsurl’organisationd’unrégimed’unonfédéraleeuropéenne” (1930) - a plan for the United States of Europe with economiccollaboration and provision of security to Eastern Europe againstSovietthreats - primeminister of France 11 times and received the Nobel peaceprice, butnothingcame of it as the Nazisgotpower

  6. EU: milestones of itshistory (1) • The devastatingconsequences of worldwar II, deathtoll: the Sovjet Union morethan 20 mion, Central and Eastern Europe over 9 mion (of whichPolandmorethan 6 mion) and: - Germany 6 363 000 - France 505 750 - Italy 355 000 - United Kingdom 325 000 - Austria 525 000 - Belgium 82 750 - Netherlands 250 000 - Finland 79 000 - Norway 10 250 - Denmark 4 250 - Sweden 0 NB: Unfetterednationalismwasblamed (Konrad Adenauer: ”Nationalism is war”), ratherthan Germany (lessonfrom WWI) or the capitalistsystem (the Sovjetview) NB: The postwarpoliticalconstellationwassuchthat the US and UK supportedEuropeanintegrationbecause of the coldwar, France sawit as a way of countering UK-US influence, Germany as the routetowardsre-establishing Germany as a ”normal” nation NB: Only Finland, Sweden and the UK wereneveroccupied (?)

  7. Dresden February1945 (morethan 1200 heavy bombersdroppingalmost 4000 tons of high-explosivebombs

  8. EU: milestones of itshistory (2) • 9.5.1950: the Schumandeclaration, based on ideas of Jean Monnet, proposing the pooling of French and Germansteelproductionunder a single jointauthority with supranationalpowers to makewarbetweenthesehistoricalrivals ”notmerelyunthinkablebutmateriallyimpossible” and as ”a firststep in the federation of Europe” • 1951: The EuropeanCoal and Steel Community(ECSC) is set up with sixmembers (Germany, France, Italy, Benelux) • 1957: the EuropeanEconomicCommunity (EEC) is set upby the six with a wideremit (customsunion, single market, common agrculturalpolicy) • 1986: the Single European Act generalizedqualifiedmajorityvoting (QMV) and set the deadline of 1992 for completing the internalmarket (through the abolition of physical, fiscal and technicalbarriers) • 1992: the Maastricht treaty with a blueprint and timetable for the EMU

  9. EU: milestones of itshistory (3) • Subsequenttreatieshaveextended the role of the EU in someareas (such as justice and home affairs) and have made institutionaladjustments to pave the wayfor enlargment to the east • The latesttreaty, the Lisbontreaty(2007), introducedchangesrelated to institutions and governance(as a follow-up to the failure of the ”Constitutionaltreaty” to beratified in France and the Netherlands) • The EU hassuccessivelybeenenlargedfrom the originalsix to bynow 28 members: • 1973: the UK, Denmark and Ireland • 1981: Greece • 1986: Spain and Portugal • 1995: Austria, Finland and Sweden • 2004: the CzechRepublic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia, Slovenia, Malta, Cyprus • 2007: Bulgaria, Romania • 2013: Croatia

  10. EU: definition The EU defined(shorter version): The EU is an instrument for pursuing common Europeaninterests, basicallybysupranationalmeans The EU defined(longer version): The European Union, based on a community of values, is a system of governance for pursuing the common interestsof Europeanstates and citizens, throughintegrationbycommon policies and coordination of policies, within a framework of common institutions, uponwhichmemberstateshaveconferredsupranationalpowers in the treaties. (Korkman (2005)) NB: To statethat the EU is morethan an international organizationbutlessthan a federativestate (as is oftensaid) is correctbutnotveryinformative

  11. Comments: community of values • Europe is a geographicalentity, with contestedborders, butit is also a culturalcommunity: itrests on sharedvaluesbased on itshistory and culture • The heritage of Europeancivilizationincludes, e.g., classicalantiquity, Christianity, the Enlightenment; cf. Ernest Renan: ”Europe is Greek in itsthought and art, Roman in itslaw, and Judeo-Christian in itsreligion” • The baggageincludesnumerousisms (ideologies) as well as twoworldwars in the 19th centuryonly • The Europeanidentity is difficult to identify and diversity is one of itscharacteristics (but the identityexists and the EU is an expression of it) • The common weltanschauunginludesvalueslikefreedom, humanrights, rule of law and democracy (increasinglyembraced in much of the world)

  12. Comments: common interests • Aboveall: preservation of peace in Europe (throughinterdependence, integration and democracy, fosteredby and within the EU) • strengthening the Europeaneconomy and itscompetetiveness • defending the ”European Social Model” and the welfarestate • enhancingenvironmentalconsiderationsin Europe and globally • ensuring a globalrolefor Europe • The activities of the EU areindeedwideranging

  13. The chickengame Player A Beaggressive Player B No Yes Be No 2 (2) 3 (1) aggressiveYes 1 (3) 4 (4) The outcome is unpredictable, italldepends. However, seriouschickengames on securityareinconceivable in the EU, notleastbecause of the largeinterface of actors.

  14. The prisoner’s dilemma Player A Beaggressive Player B No Yes Be No 2 (2) 4 (1) aggressiveYes 1 (4) 3 (3) The outcome is conflict, butthiscanbeavoidedif the playersare playing a repeatedgame, capable of realising the mutualinterst, again, the EU is such a forum for integration

  15. Comments: states and citizens • The EU is primarily an entitycomposed of states • Butitalsohas the ambition to be a union of peopleor of citizens • EU citizenshavewelldefinedrights , includingbutnotrestricted to those in the charter of fundamentalrights • Communitylegalnormsare to beregarded as the ”law of the land” in memberstates and maybeinvokedbyindividualsbeforetheirstatecourts (the doctrine of ”directeffect”) • Citisenscanvote for members of the EuropeanParliament • Nevertheless, memberstategovernmentsare the keyactors in the EU

  16. Comments: common policiesand coordination of policies • Common action is supranational in character and maytake the form of, e.g., communitylegislationor of delegation of power to specificcommunityinstitutions (such as competitionpolicy to the Commissionormonetarypolicy to the ECB) • Coordination of policies is intergovernmental in character (is voluntary, memberstatesretainright of veto) • Policiesworkmainlythroughenhancingintegration, eliminatingbarriers to cross-bordermobility (”negativeintegration”) orcoordinatingorharmonizingpolicies (”positiveintegration”)

  17. Comments: common institutions • The common institutions of the EU haveconsiderablesupranationalpowers • The mostimportantare the Council, the EuropeanCouncil, the Commission, the EuropeanParliament and the Court of Justice • Permanentinstitutionsenhancescontinuity and effectiveness of action • The articulation of the relationsbetween the institutions (as set out in the treaty) is quiteimportant • The allocation of roles in the EU is noteasilycomparable to the separation of power at the national level (a la Montesquieu) as the EU has a two-ormultilevelstructure

  18. Comments: the treaties • The EU is competent (haspower) only to the extentthatpowerhasbeenconferred to itbymemberstates in the treaties (byunanimity) • The EU has an existence and life of itsown (unlikefora for intergovernmentalcooperation) butitsremits and limitsaredefinedbymemberstates in the treaties • The EU is therefore a legal-institutionalconstructioncreated to ensure the rule of law in international relationswithin the area (an importantsafeguard for smallcountries) • However, the Court of Justiceoccasionallyrefers to ”the doctrine of impliedpowers”, extendingpowers in favour of the Communitywherethesearedeemednecessary for the Community to beable to serve the legitimateendspursuidbyit (implyingthat the powers of the treatiesmaybeinterpreted in a waywhich de facto increasesCommunitycompetenceif the CoJsodecides!)

  19. The EU defined: finalcomments • The EU (and the EMU) wasfromitsinceptionmeant to be a solution to the ”Germanproblem” (the power of the biggest nation and the wish to avoiditbecoming a hegemon) • NB: there is no predefinedultimategoal, no ”finalitépolitique” (evenif the USE oncewas) • The EU is an open construction, open to new membersprovidedtheyfulfill the ”Copenhagencriteria” (democracy, humanrights, viablemarketeconomy) • The appropriateambitions of the EU arecontestedissues: someperceiveit as a giganticbureaucraticmonster (and criticizeit for excessiveinterventionism), othersseeit as nothingmorethan a framework for unfetteredmarketcompetition (and wantit to assumebroaderresponsibilities in, e.g., the social area) • ”To understand the EU, youshouldbe a genius – or at least a Frenchman” (Madeleine Albright) • The EU is an institutionalizedframework for managinginterdependence

  20. EU: rationale (in the area of economicpolicy) Preliminary question: When is there a rationale for economicpolicy? Answer: to compensate for ”marketfailures” • Createpreconditions for markets (e.g. providepublicgoods, ensurecompetitiveconditions) • Manageexternalities • Exploitscaleeffects • Handleinformationfailures (asymmetricinformation) • Improve the distribution of income • Reducemacroeconomicimbalances

  21. EU rationale (cont.) When is therea case for international (economic) policycooperation? Answer: whenthere is a marketfailure with an internatonal dimension • Provide international publicgoods and ensurecross-bordercompetition • Managecross-borderexternalities • Exploitscale and networkeffectsacrossborders • Achieve international redistribution • StrengthenEurope’s international influence • Avoid ”harmfulpolicycompetition” • Enhancedeeperpoliticalintegration (the originalpurpose of the EU)

  22. EU: questions • Whatare the roots of the EU? • Main dates of the EU? • Whojoined and when? • EU: short definition? • EU: elements of a longer definition? • EU: rationale?

  23. Part I: Sort of summary • The EU corresponds to a historicaldream, notably to the vision of Europeanpeace and prosperity • The EU is sui generis, a laboratory for experimentation in cross-bordercooperation with significantsupranationalelements • The EU is complex – but for goodreasons: the case for Communitycompetencediffersaccording to the issue at hand • The institutions of the EU areimportant, as are the treaties, butso is the politicalwill of memberstates (and the Franco-Germanrelationcontinues to be of general Europeansignificance) • The EU is an elephant, a marriage, a bicycle, a camel, a giant and a dwarf… • The policiespursued at the EU levelare a mess (as arepolicies in memberstates) and need to beseverelycriticized – butif the EU didnotexist, itwouldhave to beimmediatelycreated

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