Lecture Presentation part 1 EMU evolution

Economic & Monetary Union: Evolution Prof P. Nicolaides

The course road map

Evolution of EMU & rationale

Recent case law

Treaty provisions on EMU & capital

Banking Union: SSM & SRM

Crisis: State aid

Crisis: New rules & institutions

Themes  Origins and evolution of monetary cooperation  Establishment of EMS  Establishment of EMU & euro  Crisis and new institutions

Period 1: 1958 – 1992: Tentative steps & experimentation         

No reference to MU in original EEC treaty 1969 [Hague]: Heads of state or govt request report 1970: Werner report recommends MU in 10 years 1972: Currency management “snake in the tunnel” => fails 1979: Establishment of EMS 1987: SEA & liberalisation of capital flows 1989: Delors report on EMU 1990: “One market, one money” 1991/1992/1993: Treaty of Maastricht • UK opt-out, DK opt-out

Pierre Werner, 1913 - 2002

EMS  Structure: • ECU (European Currency Unit) • ERM (Exchange Rate Mechanism) • EMCF (European Monetary Cooperation Fund)  Purpose: reduce exchange rate fluctuations • Permissible margins: ± 2.25% & 6.0% => later raised to 15%  EMS had better record because responsibility to intervene was reciprocal

Cont.  Performance: • 1979 - 1987: 11 realignments • 1987 - Sept. 1992: 1 realignment • September 1992: • devaluation [6-11%] of sterling, lira, peseta, escudo, punt • exit from ERM of sterling & lira (re-entry of lira Nov 1996)  But note fundamental dilemma: MS were committed to fixed exchange rates, but they had to realign them to avoid crises

“Report on Economic & Monetary Union” [Delors Report], 1989  Necessary conditions for a monetary union: • total and irreversible convertibility of currencies • complete liberalization of capital transactions and full integration of banking and other financial markets • irrevocable locking of exchange rate parities • common monetary policy

Cont.  Necessary conditions for economic union: • single market within which persons, goods, services and capital can move freely • competition policy and other measures aimed at strengthening market mechanisms • common policies aimed at structural change and regional development • macroeconomic policy coordination, including binding rules for budgetary policies

“One market, one money”, 1990 [and two misconceptions?]  Single market needs single currency: • The processes of completing the single market by 1992 and now of achieving EMU are continuous ones • Without a completely transparent and sure rule of the law of one price for tradable goods and services, which only a single currency can provide, the single market cannot be expected to yield its full benefits • Indeed only a single currency allows the full potential benefits of a single market to be achieved

Cont.  Monetary union does not need political union: • On these grounds the economic case becomes strongly advantageous. Political union objectives may further be added. But the case can stand powerfully on economic criteria alone

Treaty of Maastricht, Dec 1991  Establishes 3-pillar system  EMU in 3 stages: • 1993: free capital movements • 1994: EMI • 1999: irrevocable fixing of exchange rates  How much of a historic accident? [German re-unification?]

Period 2: 1992 – 2008: Ambition & innocence           

1992: DK “no” to ToM => 1993 2nd referendum => opt-out 1994: Establishment of EMI 1997: SGP 6/1998: Establishment of ECB 1/1/1999: Single currency adopted by 11 MS 9/2000: DK “no” to euro 1/1/2001: GR joins eurozone 1/1/2002: Coins and notes in circulation 9/2003: SE “no” to euro 2005: Reformed SGP [and FR & NL “no” to constitutional treaty] 2009: EU celebrates 10 years of single currency

New eurozone members  2007: Slovenia  2008: Cyprus & Malta  2009: Slovakia  2011: Estonia  2014: Latvia  2015: Lithuania

Period 3: 2008 – 2016: Crisis but also deeper integration  12/2007: Rescue of Northern Rock  9/2008: Collapse of Lehman Brothers • Credit markets freeze • State aid: guarantees; emergency liquidity; recapitalisation of banks; relief from toxic assets  Banking crisis becomes sovereign debt crisis: • 2010: Greece • 2010: Ireland • 2011: Portugal • 2012: Spain • 2013: Cyprus • 2015: Greece

Multiple crises lead to new rules & institutions Reformed SGP [6-pack, 2-pack] & European Semester European Financial Stabilisation Mechanism European Financial Stability Facility => ESM ESRB & European supervisory authorities TSCG Banking union: • SSM • SRM • Deposit insurance  Capital market union      

Expanding case law  Commission v Council [SGP]  Pringle  ESMA  GR & CY [“haircut”]  ECB guideline [on central counterparty clearing houses]  OMT

EU today: Towards deeper integration? ?? TSCG Coordination of fiscal policy Banking union Common currency & monetary policy Common policies for cohesion [e.g. regional] Common policies for beneficial cooperation [e.g. R&D] Common policies for market functioning [e.g. competition] Tax approximation/harmonisation Common regulations, mutual recognition [e.g. diplomas; standards] Free movement and establishment of factors of production No border restrictions – free trade

EU today: Towards more differentiation in future?

Source: ECA

Cont.

Source: Bruegel Source: EP

European Council agreement of 19 February 2016  Recalling that Treaties & references to process of European integration and to process of creating an ever closer union among the peoples of Europe, contain also specific provisions whereby some MS are entitled not to take part in or are exempted from application of certain provisions or chapters of the Treaties and Union law …  Treaty provisions also allow for the non-participation of one or more MS in actions intended to further the objectives of the Union [enhanced cooperation]. Therefore, such processes make possible different paths of integration for different MS, allowing those that want to deepen integration to move ahead, whilst respecting the rights of those which do not want to take such a course

Conclusions  The crisis has not led to the collapse of monetary union  New rules and new institutions have deepened integration  Questions: • What are the new rules? • How do new institutions function? • Are new rules and institutions effective? • Are they sufficient to prevent future crises? • Are new institutions accountable & legitimate?