Exam review for term 2

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University of Toronto St. George
Political Science
Randall Hansen

Europe Finals Euro - Move towards Euro began in 70s and 80s spurred by collapse of Bretton Wood agreement which pegged everybody to the US dollar - Us dollar and thus mark increased which was bad for trade in Europe so moves towards fixed exchange rate and then common currency began - Case for Euro economic and political - 1. Reduced transaction costs (Up to .6% of GDP) - 2. Exchange rate stability: more stable trade and investment within Eurozone - 3. Increased capital flows - 4. Greater price transparency as it would be easier to compare prices between countries - 5. Dynamic effects on trade and economic liberalization - This is all very exciting but there are risks - 1. Asymmetrical Exogenous shocks: countries cant devalue their currency if there are local economic issues. This can only cause increased unemployment which will be made worse by low labour mobility in Europe (people like to stay where they are in Europe) and low wage flexibility (strong unions) - 2. Hard to make a one size fits all economy in Europe as different countries waver between boom and bust at different times - Political Benefits - 1. EU has to move forward or it dies. Euro was the 90s big idea - 2. It could be a common symbol of Europeanness - 3. Commission believed that the common currency necessarily grew out of common market - Path to Euro - Mitterand comes to power in France, tried to socialize but all he got was inflation. The franc was failing and socialism wasnt working. Saved himself by commiting to the European Monetary system. Helped the EMS and ssaved France - EMS worked well, ensured broad exchange rate stability and routinized devaluation - Delors was put in charge of determining path to common currency - 1. Free capital movement in the EC and closer monetary and macro-economic cooperation - 2. Launch of European system of central banks to moniter and coordinate national monetary policies, transfer supervisory power to EU institutions, progressively narrow currency fluctuations within an exchange rate mechanism - 3. Establish irreversibly fixed exchange rates and grant full authority for monetary policy to EC institutions www.notesolution.com- Momentum gained - By 80s all EMS currencies were pegged to the mark and thus had effectively no control over interest policies so common currency offered hope of some regained financial sovereignty - For Germany there was less motivation but at the same time they had no right to claim entitlement over European interest policy - Political change is always a spur. German unification got shit going - Convergance Criteria brought forth at Maastricht - Committed people to common currency and not just fixed exchange rates - 1. Price stability: average inflation rate of not more than 1.5% above the average of the three best countries - 2. Budget discipline. Deficit cant exceed 3% of GDP and debt cant exceed 60% - 3. Currency stability: 2 years normal fluctuation without devaluation - 4. Interest rate convergence, average long term interest rates not exceeding the three best performing countries by 2% - Run up to stage 3 - German unification - 1992-93: currency crisis. Pound, lira are thrown out of the EMS. Spain pre-emptively devalued, finland knocked out and france was only saved by German intervention and expansion of bonds - Embittered UK strengthened the resolve of others to meet the CC - People began to focus on the 3% and stopped caring about the 60% - France, Italy and Portugal made painful cuts to reach the 3% - Currencies locked in in 1999. Euro introduced in 2002 - UK, Denmark, Sweden stayed out. Greece missed 99 deadline but cooked books to make it in for 2002 - ECB established in Frankfurt with Duigenberg (Germanys choice) as first prez - ECB has a mandate to keep inflation under 2%. This causes ECB to only care about inflation and not things like unemployment - As of 2009:: - Things seemed to be doing okay. No massive exogenous shock, nobody pulled out of the union and the switchover went well. Euro became second ranking currency in the world - Stability - Euro dropped at first, then rose sharply. - Driven more by American ecomony than European - L:ots of movement but no collapse - At first peripheary boomed while mainland suffered but now opposite - Current Crisis - Low inflation rates partly fed housing boom - Also Germay restored its competitiveness - Housing crash led to sharp fall in tax receipts and this all coincided with worldwide recession www.notesolution.com
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