POLI 243 Lecture Notes - Lecture 21: Economic And Monetary Union Of The European Union, European Central Bank, Currency Union

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Germany and European Monetary Union
March 30
Remember: hard money (high value, deflated), soft money (low
value, inflated)
Mundell Flemming constraints (What do states want?): open capital flows, fixed
exchange rates (stability), domestic monetary policy autonomy
o Variation of preferences from an analytical liberal perspective bottom-up
approach
Issues for germany concerning monetary union
Maastricht treaty
Size and share of the costs of adjustment
o How will everyone adjust to a common set of policies (convergence)
o How much will the germans have to pay to help everyone adjust
o Don’t want to give up domestic practices (low inflation, high liquidity)
1st suggestion: build institutions first central bank, currency then force compliance
with the rules
2nd suggestion: states prove they can comply with the rules and then can join adhere to
German monetary policy
Germany's preferences:
o Require unanimity on entrants essentially german veto
Germany and neighbors with 'hard currency' would have a block of vote,
otherwise countries with inflationary policies (with different preferences)
would join
o Institutions of discipline (European central bank and member countries)
o Willing to make side-payments/incentives, want to make the deal work
70s 'snake' failed when larger economies left the agreement and Germany
was left with the DM and small economies tied to it
Explaining Germany's Role
Systemic factors:
o Problem: DM potentially rivalled the dollar (70s and again in the 90s)
Germany achieves monetary goals
Dollar = international currency
70s issue: US broke the link between the dollar and gold after dissolving
bretton woods. Too much currency in circulation compared to the DM
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