Week 10

Economic and Monetary Union (EMU)

An economic and monetary union (EMU) is a type of trade bloc featuring some combination of a common market, customs union and a monetary union established via a trade pact. A typical EMU establishes free trade and a common external tariff throughout its jurisdiction and enforces the freedom of movement of goods, services, and people. This arrangement is distinct from a monetary union which does not involve a common market. The EMU involves 4 activities 1. Implementation of effective monetary policy 2. Coordinate economic and fiscal policies 3. Ensure that the single market runs smoothly 4. Supervision and monitoring of financial institutions.

Pegged Exchange Rate regimes

A pegged exchange rate is where the currency of one country is tied to a usually stronger currency. A pegged-rate regime tends to provide stability which reduces volatility regarding exchange rates. Within the European Union, the German Mark was the stable currency which stabilised other currencies and this the Bundesbank was given the 'power' to set the interest rates. The power of the Mark essentially transferred this into a DM zone.

Single Currency

A single currency is one used by all members of an economic federation. For instance, the Euro replaced the national currencies of many European member states. The single currencies brings many advantages such as economic efficiency as transactional costs are reduces since no currency exchanges need to occur. Moreover, the Euro will bring with it a higher level of purchasing and borrowing power when compared to some other national currencies that it replaced. And lastly, speculation on currencies will no longer occur. Investment can occur without worrying about the exchange rates.

Currency war

Currency war, also known as competitive devaluations, is a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currencies. Since the Trump administration's tariff's on Chinese goods have been implemented, China has retaliated with tariffs of its own as well as devaluing its currency against its dollar peg—escalating a trade war into a potential currency war. This devaluing makes a nation's exports more competitive in global markets which lowers their current accout deficit.

Bad debt

Debt is when something, usually money, is owed by one party, the borrower or debtor, to a second party, the lender or creditor. It comes in many forms such as 'good' debt and 'bad' debt. Bad debt if money is borrowed to purchase depreciating assets. In other words, if the item being bought will not go up in value or generate any form of income. For example, credit cards as the interest rates charged are often significantly higher than the rates on consumer loans, and the payment schedules are arranged to maximize costs for the consumer.

Good debt

Debt is when something, usually money, is owed by one party, the borrower or debtor, to a second party, the lender or creditor. It comes in many forms such as 'good' debt and 'bad' debt. Good debt is an investment that will grow in value or generate long-term income. In other words, If the debt you take on helps you to generate income and increase your net worth, that can be considered positive. For example, loans for education and homeownership residential real estate also can be used to generate income by taking in a boarder or renting out the entire residence

Sovereign Debt

Debt is when something, usually money, is owed by one party, the borrower or debtor, to a second party, the lender or creditor. It comes in many forms such as 'good', 'bad' and sovereign debt. Sovereign debt is the amount of money that a country's government has borrowed, typically issued as bonds denominated in a reserve currency. Some sovereign debt, like with house loans can be collateralised using that country's gold reserves. Typically, states get sovereign debt through spending, insufficient taxations and increase in real interest rates

Deleveraging

Deleveraging is when a company or individual attempts to decrease its total financial leverage. In other words, it is the reduction of debt. The most direct way for an entity to deleverage is to immediately pay off any existing debts and obligations on its balance sheet. In essence, To deleverage is to reduce outstanding debt without incurring any new ones. However, too much systemic deleveraging can lead to financial recession and a credit crunch. On the other hand, Deleveraging can reflect a more efficient allocation of financial resources, a correction of over-inflated asset prices or a reduction of debt overhangs.

EU Commission

European Commission (EC) is the executive branch of the European Union, responsible for proposing legislation, implementing decisions, upholding the EU treaties and managing the day-to-day business of the EU. Commissioners pledge to respect the treaties and to be completely independent in carrying out their duties. This is in contrast to the Council of the European Union, which represents governments. The Commissioners are proposed by the Council of the European Union, on the basis of suggestions made by the national governments. Before the Treaty of Lisbon came into force, the executive power of the EU was held by the Council

Fiscal Federalism- Fiscal Compact- Treaty on Stability, Coordination and Governance

Fiscal federalism is concerned with "understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government. The fiscal compact or the treaty on stability, coordination and governance is an intergovernmental treaty introduced as a new stricter version of the Stability and Growth Pact. It came into force in 2013. The treaty defines a balanced budget as a general budget deficit not exceeding 3.0% of the gross domestic product. Action against non-complying countries will see the ECJ financial sanctions

Rollvers

In finance, 'rollover' refers to refinancing. These can involve the re-investment of funds to another plan. Rollover risk is a risk associated with the refinancing of debt. If interest rates have risen in the meantime, they would have to refinance their debt at a higher rate and incur more interest charges in the future. These only just postpone the fiscal impact that will be seen as they place pressure on both current and fiscal deficits.

Soft Institutionalism

Institutionalism refers to the belief where the emphasis is placed on the usefulness of established institutions, often at the expense of the individual with the 'soft' referring to the fact that nothing agreed is integrated into hard law. The Maastricht Treaty regarding the Economic and Monetary Union of the EU was dubbed as being 'soft institutionalism' because the treaty's convergence criteria were not bound in law and no fiscal pact was made therefore no regional fiscal integration was seen. In other words, no fiscal sovereignty was yielded. Moreover, the 1997 stability and growth pact was not enforced.

European Stability Mechanism

The European Stability Mechanism is a European Union agency that provides financial assistance, in the form of loans, to eurozone countries or as new capital to banks in difficulty. It replaced the temporary European Financial Stability Facility and the European Financial Stabilisation Mechanism. When applying for ESM support, the country in concern will be analyzed and evaluated on all relevant financial stability matters by the 'troika': 1. If it is no longer sustainable for the state to draw on capital markets, when seeking to cover the state's financial needs. 2. if the roots of a crisis situation are primarily located in the financial sector and not directly related to fiscal or structural policies at the state level

Troika

The 'Troika' is used to refer to the decision group formed by the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF). Especially, the president and German, French and US government within the EC. Its usage arose in the context of the "bailouts" of Cyprus, Greece, Ireland and Portugal necessitated by their prospective insolvency caused by the world financial crisis of 2007-2008. Since the ECB is not the lender of last resort, austerity was seen within Greece

European Central Bank

The European Central Bank (ECB) is the central bank for the euro and administers monetary policy within the Eurozone. he ECB is one of the world's most important central banks and serves as one of seven institutions of the European Union. The main objective of the ECB is to maintain price stability within the Eurozone. Its main task is to implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks. In return to its high degree of independence and discretion, the ECB is accountable to the European Parliament

European Exchange Rate Mechanism (ERM)

The European Exchange Rate Mechanism was a system introduced by the European Economic Community in 1979 to reduce exchange rate variability and achieve monetary stability in Europe in preparation for Economic and Monetary Union and the introduction of a single currency, the euro. After the adoption of the euro, policy changed to linking currencies of EU countries outside the eurozone to the euro All new EU members having joined the bloc after the signing of the Maastricht treaty in 1992 are obliged to adopt the euro under the terms of their accession treaties.

The Eurosystem

The Eurosystem is the monetary authority of the eurozone, the collective of European Union member states that have adopted the euro as their sole official currency. Within the system, a central bank, the ECB is present which is independent. The monetary policy is centralised and the ECB is not allowed to assume the position of 'lender of last resort'. However, the single currency Euro sees partial adoption and not all ERM members are integrated. Moreover, the fiscal integration has only occurred in the superficially via non-binding precepts

Maastricht Treaty

The Maastricht Treaty was signed in 1992 by the members of the European Communities to further European Integration. It renamed European Economic Community to European Community to reflect its expanded competences beyond economic matters. The treaty involved three main points 1. The Economic and monetary union: trade bloc featuring some combination of a common market, customs union and a monetary union. 2. Justice for home affairs: denotes a policy-making domain of the EU covering asylum and immigration policy 3. Common foreign and security policy: organised, agreed foreign policy of the European Union (EU) for mainly security and defence diplomacy

Optimum Currency Areas

The Optimum Currency Area by Mundell is a theory that states that geographical region in which it would maximize economic efficiency to have the entire region share a single currency. countries that share strong economic ties may benefit from a common currency. This allows for closer integration of capital markets and facilitates trade. However, a common currency results in a loss of each country's ability to direct fiscal and monetary policy interventions to stabilize their individual economies. Mundell also highlighted that labour and capital mobility were the most important aspect of this approach

Rogoff-Reinhart Thesis

The Rogoff-Reinhart Thesis stated that if one has more than 90% of GDP debt, growth has been hindered alongside ones ability to pay. This is because you are devoting more of your individual productive economy into paying the debt. This, however, was proven to be empirically wrong as calculations errors were put forth by other academics. For instance, in their excel spreadsheet, they had not selected the entire row when averaging growth figures thus accidentally omitting 5 countries out of the 20 they looked at.

Eurozone

The eurozone is a monetary union of the 19 of the European Union member states who have adopted the Euro. The monetary authority of the eurozone is the Eurosystem. The other members of the European Union continue to use their own national currencies, although most of them are obliged to adopt the euro in the future. The Eurozone current consists of countries like Austria, Belgium, Greece and Italy. ECB, which is governed by a president and a board of the heads of national central banks, sets the monetary policy of the zone. The principal task of the ECB is to keep inflation under control.

Fiscal gap

The fiscal gap is a measure of a government's total indebtedness. It is defined as the difference between the present value of all of the government's projected financial obligations, including future expenditures. Fiscal gap accounting method can be used to calculate the percentage of necessary tax increases or spending reductions needed to close the fiscal gap in the long-run. Since World War II, the U.S. government has run at a fiscal deficit in most years. their fiscal gap was predicted to be 175 trillian USD in 2009 which rose to $222 trillion in 2012.