Class Notes (839,246)
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POLI 243 (112)
Mark Brawley (109)

Germany and Monetary Union

7 Pages

Political Science
Course Code
POLI 243
Mark Brawley

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Germany’s Role in European Monetary Union Motive of the Union 25/03/2013 12:37:00 ← The Roots of Monetary Union • The Werner Report (1969) o Manipulated currencies during free trade can upset trade policy, but no insistence for the same currency o Report addresses these issues single currency makes more sense for a single unified market (hypothetically) • Issued in the context of the Bretton Woods Regime o Rules set after WWII, committed to hold exchange rates relatively stable • Bretton Woods collapses (1971-1973) o US takes its own currency off gold o Rules are not followed by the major currencies • Europeans try the “Snake” o Bretton Woods worked well, but don’t want to be built on other currencies, rather to stay together o Would undermine gains of common market • The “Snake” loses members – becomes a deutsche mark zone o Same problems with Bretton Woods came up o Mendell and Flemming: fixed exchange rate, open markets, domestic monetary policy autonomy  US goes for inflation, which ruins fixed exchange rates  Same build up of tensions in Europe o Commitment with Germany and neighboring small states with similar economies and want for similar economic policies  All want low inflation, export goods that are safe ← ← The challenges of the 1970s and 1980s • Fixed exchange rates remain difficult, because speculation continues o Symptom: trying to keep exchange rate, but it is costly o Governments follow supply/demand with currencies to keep each other at par o Speculators look at exchange markets and know what the future prices will bmake a lot of money • European Monetary System (1979) o Fixed exchange rate system that makes speculation harder o ECU created basket currency is not introduced into public use, determined by the members coming together  Favored large currencies (German deutsche) o National currencies fixed to ECU (+/- 2.25%) • Don’t fix underlying problem of autonomous domestic policy o Side deals required to get others to commit  Italy gets more leeway (+/- 10%)  Ireland gets extra help o Support comes from Germany ← ← The EMS in operation • EMS rates become rigid o Never changing fixed exchange rates goes back to original problems • As becomes more like fixed regime, need for domestic monetary convergence increases • No agreed policies – and diverging inflation rates o Inflation is bound into contracts, harder to get out • Delors Committee (1989) recommends monetary union o Ultimate fixed exchange rate to keep domestic autonomy ← ← Potential gains from monetary union • Create new common currency, the euro • New institution, the European Central Bank o Controlling supply/demand, who/where is it issued, confidence, relative value • Will end fight against speculators • Eliminate exchange rate risk among members o Eliminates uncertainty o Risk discourages international lending, trade agreements between firms helps stimulate more activity in Europe • Reduce transaction costs • European firms decide to keep other currencies, • Maastricht Treaty (1991) o Single monetary zone, having monetary union o Commitment by European states ← ← Issues for Germany on monetary union • Concern: ensuring low inflation o Stable relationship between workers and management • What will the euro’s traits be? • What will the ECB look like • How will other policies be adjusted ← Reluctant Leadership within Europe 25/03/2013 12:37:00 ← Issues for Germany concerning monetary union • Costs of adjustment related to process o Monetary union is the ultimate fixation of exchange rates. Need to get similar domestic actions = a lot of adjustment, leaving in different ways o Germany: no change in domestic policies, keep hard currency, no inflation o Italy, France: usually high inflation, but reach out to those who don’t support it.
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