Lecture #3

European monetary integraon: the second stage (1992‐2002)

欧州通貨統合の第二段階

基礎比較経済論 14 May 2012

From the previous class • The Breon‐Woods system: the internaonal monetary system that existed between 1944 and 1971 • Based on the USD, which was the only currency freely converble into gold • Collapsed in 1971 because the US gave higher priority to its own naonal interests (e.g. fiscal deficits and prinng of too many USD in the 1960s) アメリカ国益優先、財政拡大、ドル紙幣の増刷 • Since 1969, the EU countries started preparaons for a monetary union • I. The “snake” (1972‐1978)

From the previous class

• II. The European monetary system (EMS) 1979‐1998 欧州通貨制度 • (1) created the ECU, a basket currency • (2) fixed EU member currencies to each other via the ECU (official exchange rates) 公式為替レート • (3) tried to reduce the fluctuaons of market exchange rates within a band of ±2.25% 市場為替レート • (4) tried joint intervenons by central banks when market rates moved toward the “ceiling” or the “floor” of the band

• The EMS was supposed to be “symmetric” but actually became dominated by the German mark (DM) The German mark’s (DM) dominance 欧州通貨制度＝ドイツマルク圏 The main problem of the EMS ドイツの国益優先

• To keep their currencies aligned with the German mark, the other EMS member countries had to follow German monetary policy • If the German central bank (the Bundesbank) increased interest rates, all other EMS members had to do the same thing • But what happens if some did not raise interest rates due to fears of economic recession?  these countries might have to leave the EMS • And what happens if the Bundesbank gave priority to German naonal interests over the wider interests of the EMS member countries? The 1992‐1993 EMS crisis 欧州通貨制度の危機

• Two main reasons (1) Increase of interest rates by the Bundesbank in 1991‐92 due to fears of higher inflaon aer the German reunificaon ドイツ統一  ドイツの財政赤字増  インフレ 増の懸念  ドイツ中央銀行による金利引き上げ (2) Unwillingness of some EMS members to follow German monetary policy because of fears of a deeper economic recession Trigger: speculave aacks on the Brish pound and other currencies in 1992‐1993 Speculave aacks I

• Aacks on an overvalued pegged currency (when the markets feel a downward correcon is appropriate) • Speculators borrow the currency, sell it now, and intend to buy it back later when the currency weakens • Speculators may borrow the currency through bank loans Speculave aacks II

• Speculators must be confident that the government of the country whose currency is under aack: – Lacks the will to defend its currency • Is not willing to increase interest rates because of the negave impact on the domesc economy. – Or, lacks the resources to defend its currency • Does not have sufficient hard currency (foreign exchange reserves) to use in foreign exchange markets to support its currency. – For example, the country would need hard currency (e.g., US dollars) if currency is being sold. – The US dollars would be used to buy up its currency and hold its price on foreign exchange markets. The Brish pound crisis (16 Sept. 1992) “Black Wednesday” • The UK joined the EMS in 1990 at the official rate of £1 = 2.95 DM, where the BP was viewed as largely overvalued • Fluctuaons within a band of ±2.25% • The “floor” of the BP/DM band: £1 = 2.778 DM • FX market speculators  the assumpon that the UK government would be unwilling to raise interest rates to defend the peg • Consequences of the speculave aack on 16 Sept. 1992  the UK le the EMS and the BP depreciated to £1 = 2.41 DM The depreciaon of the Brish pound vis‐à‐vis the DM

Consequences for European monetary integraon

• The Brish pound and the Italian lira had to leave the EMS in 1992 • Other countries stayed within the EMS but had to devalue their currencies • In 1993, a decision to widen the band to ±15% • Awareness of the need for a common central bank, which should not favor any country’s interests • “The impossible trinity”: fixed exchange rates, free capital flows, and independent naonal monetary policy The Maastricht Treaty (1991) マーストリヒト条約

• Decided on the creaon of a single currency and a common central bank • Inially rejected by Denmark in a referendum (1992) • The name of the single currency (“euro”) decided in December 1995 • The European Central Bank (ECB) established in 1998 欧州中央銀行 • The euro launched in January 1999 for accounng purposes • From January 2002 onwards, euro banknotes and coins in circulaon The ECB building in Frankfurt Jean‐Claude Trichet, the former ECB president The euro banknotes

The Maastricht criteria: part I マーストリヒト条件

• Inflaon should not exceed by more than 1.5 per cent the average of the three lowest rates among EU countries • Long‐term interest rates should not to exceed by more than 2 per cent the average interest rate in the three lowest inflaon countries • ERM membership: at least two years in ERM2 without devaluaons • Budget deficit: less than ‐ 3 per cent of GDP • Public debt: less than 60 per cent of GDP The Maastricht criteria: part II Fiscal deficits and public debt (1998) Fiscal deficits and public debt (2010) Increase of long‐term interest rates in some countries in 2010 Eurozone enlargements ユーロ圏の拡大

Started with 11 members in 1999 • “Opt‐outs” by UK, Denmark and Sweden

Now, 17 members • Greece joined in 2001 • In 2007‐2009, another 4 members (Slovenia, Slovakia, Malta and Cyprus) joined • Estonia joined in January 2011 • All other Eastern European countries are expected to join (7 countries) The eurozone today Special country cases

I: Countries who are not members of the EU but are using the euro with permission by the ECB • Monaco, San Marino, the Vacan • These countries can also mint their own euro coins

II. Countries who are not members of the EU but are using the euro without permission by the ECB • Montenegro, Kosovo, Andorra (“unilateral euroizaon”) The ECB: instuonal structure

 (1) Execuve Board (six members)  (2) Governing Council (the main authority): the members of the execuve board plus the governors of the euro member countries NCBs (i.e. 6 + 17 = 23 members now) ECB理事会 In the US: the Federal Open Market Commiee (FOMC, 12 members) 連邦公開市場委員会 In Japan: the BOJ Policy Board (9 members) 金融政策委員会、金融政策決定会合  (3) General Council: the governing council plus the governors from non‐member countries NCBs (i.e. 6 + 27 = 33 members now) ECB’s independence

• The idea of independence: central banks should be protected from polical interference • High degree of ECB independence in the eurozone – The Maastricht treaty: member governments or other European instuons must not try to influence ECB decisions – ECB sees controlling inflaon as its main goal (not economic growth or unemployment) – Members of the Execuve Board are appointed for eight years and cannot be removed earlier – Full financial independence The ECB: monetary policy I 欧州中央銀行の金融政策

Policy interest rates used by the ECB’s Governing Council • (1) Main refinancing rate（政策金利）: one‐week loans by the ECB to commercial banks; at present (18 Nov. 2011), the interest rate is 1.25% • (2) Marginal deposit rate: overnight deposits by commercial banks at the ECB; the interest rate is 0.50% • (3) Marginal lending rate: overnight emergency loans by the ECB to commercial banks; the interest rate is 2.00% The ECB: monetary policy II 欧州中央銀行の金融政策

Policy interest rates used by central banks in the US, Japan and the eurozone • (1) The US: the federal funds rate フェデラル・ファンド金利（翌日返済） 0%‐0.25% • (2) Japan: the overnight rate of unsecured interbank loans 無担保コール翌日物金利レート 0%‐0.1% 「ゼロ金利政策」 • (3) The eurozone: the main refinancing rate (the “repo rate”) 1.25% Market interest rates in the eurozone

• (1) EONIA (euro overnight index average) • The weighted average rate for unsecured overnight loans • The problem of “excess liquidity”: the average EONIA rate was around 0.7% in the beginning of Oct. 2010; today (1 Nov. 2011) = 0.87% • (2) EURIBOR (the euro interbank offered rate) • Computed daily for different maturies up to 12 months • The 3‐month euribor rate was around 0.95% in the beginning of Oct. 2010; today (1 Nov. 2011) = 1.58% Policy rates 政策金利 in the US, UK and the eurozone ECB interest rates Quesons for discussion

• Advantages and disadvantages of having a single currency (the euro)? • Why the UK did not join the euro in 1999‐2002? From today’s point of view, do you think it was a wise decision? • Should the UK join the euro in the future? • Should the eurozone enlarge further, or shrink instead?