Summary: Economics Of European Integration

Read the summary and the most important questions on Economics of European Integration

• Chapter 15 OCA

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• What is inflation and how to avoid it ?

  Printing more money = inflation. Governments are sometimes tempted to print more money in order to raise income. As inflation follows money growth with a long lag (2 years at least), they do it without anticipating the disastrous consequences...
  Best way to avoid it: CB must be independent & assign monetary policy a clear, unambiguous and legally binding price stability objective. High degree of transparency needed.
  Pb: political pressure, it's hard to be completely independent. In a monetary union, more easy for the central bank to extract itself from gvt pressure.

• What are the costs of a currency area ?

  Single monetary authority unable to react to each and every local particularity. Diversity --> asymmetric shocks --> exchange rate damn useful.
  
  

  • Shocks and the exchange rate: exchange rate fixity & sticky prices make a recession situation very hard to recover from. In a monetary union, exchange rate adjustment can only come from changes in prices and wages. If those are sticky, adjustment takes a lot of time = hardship. 
  • Asymmetric shocks
  • Symmetric shocks with asymmetric effects
  • Policy preferences no longer matter

• Is Europe an optimum currency area ?

  1. Labour mobility: lower than in USA, cultural and welfare protection reasons. Fatas' study in 2000: showed how much low labour mobility affect the response to an asymmetric shock in Europe (people stay at home unemployed). NOT FULFILLED
  2. Diversification: differs among non-member & member countries
  3. Openness: YES
  4. Fiscal transfers: NO cyclical transfer system in the EU, small budget spend over the Commission, CAP and Structural Funds (poor regions, no those hit by shocks)
  5. Homogeneous preferences: NO, different inflation rates & approaches to fiscal policy. Key preoccupation of the EU = guaranteeing macroeconomic stability. ECB --> national deficits are bound by an excessive deficit procedure.

• Chapter 16 EMU + monetary policy

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• What is the Eurosystem, the ECB executive board, the Governing Council & the General Council ?

  • ESCB = ECB + national central banks (NCBs). 
  • ECB is run by the executive board (6 members appointed by the heads of state of the EMU). It prepares + chairs the meetings of the governing council + in charge of implementing its decisions + provides instructions to the NCBs on how to carry out the common monetary policy.
  • The Eurosystem is run by the Governing Council of the ESCB = ECB executive board + the governors of the NCBs. The Governing Council decides on monetary policy.
  • The General Council = governing council + NCBs governors of non-EMU countries. Liaison role, no authority.

• What is the current monetary policy strategy ?

  Raising the i when the economy booms & lowering it when it slows (against the wind)
  + price stability: when inflation rises, ECB raises the i and the MP curve shifts up, when inflation lowers, ECB reduces the i and MP curve shifts down.

• How does the Eurosystem operate ?

  
  /!\ Monetary policy beyond NCBs control = it's the Governing Council who controls now.
  
  

  • OBJECTIVES: price stability (inflation rate below 2%) & high level of employment and sustainable and non-inflationary growth
  • INSTRUMENTS: not possible to control long-run interest rates, credit, asset prices & exchange rate... ECB control the very-short term interest rate: European Over Night Index Average (EONIA). 
  • STRATEGY: 2 pillars: economic analysis (review of eco conditions : growth, employment, exchange rates...) & monetary analysis (evolution of monetary aggregates).

• How does the ECB set the EONIA ?

  • Establishes a ceiling : the rate at which Eurosystem stands ready to lend to banks
  • A floor : the rate at which the Eurosystem accepts deposits (the deposit facility - REPO)
  • & steering the market in-between : weekly auctions (main refinancing facility)
  • The ECB only indirectly affects interbank rates

• Why does independence brings a democratic deficit & how to redress it ?

  Independence => ECB can resist the "printing press" temptation / pressure. PB: misbehaving gvt are eventually punished by voters ≠ nobody punishes ECB => democratic deficit => ECB must be accountable.
  Reports to the EU Parliament. PB: limited visibility

• Chapter 17 Fiscal Policy

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• What is the role of fiscal policy ?

  • Macroeconomic stabilization (set of macroeconomic policies aimed at impacting the macroeconomic outcome of the economy through: revenues of the gvt (tax policy) & expenditures of the gvt.
    
  • Collective insurance
  • Provision of public goods
  • Redistribution

• What is the difference b/w automatic stabilizers VS. discretionary action ?

  • Automatic stabilizers : the fact that tax receipts decline when the economy slows down, & conversely. Welfare spending rises when the economy slows down, & conversely. Fluctuations can be smoothed like this, just by automatic stabilization.
  • Discretionary action : what the State does