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Chapter 24

Political Science Chapter 24 Summary.docx

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McGill University
Political Science
POLI 243
Mark Brawley

Political Science Chapter 24 Summary Germany’s Role in European Monetary Union - Exchange rates cause economic and financial disruptions so to create stability countries in Western Europe especially use regional arrangements - Six original members of European Common Market decided to retain a kind of stable exchange rate within a band of plus or minus 2.25 per cent—AKA the snake - European Monetary System (EMS) constructed out of the Snake who later enacted w/ its Exchange Rate Mechanism (ERM) where they pledged to maintain currencies in plus or minus 2.25 per cent band, & currencies anchored to a basket composed of participating currencies - Each currency had to fix its value against a single basket of currencies rather than against each other individually The Performance of the EMS - In the 1980s, European countries were pleased w/ performance of the EMS b/c it offered stability w/o locking them in permanently; it allowed countries w/ disparate domestic monetary practices to create some sort of exchange rate stability; adjustments were made when necessary but exchange rates were usually firm - Ecu- an attempt to create a single currency—representing in practice the basket to which each individual currencies was fixed; but it was never issued thus it never had intended impact - As a basket currency, ecu was comprised of parts of each of the member’s currencies thus asymmetries within the system persisted - The deutschemark (DM) was largest component of ecu, so wherever DM moved, basket had to follow—was impossible for DM to be out of alignment w/ ecu - So Germany’s central bank was free to set an independent policy while central banks of other EMS members couldn’t - The EMS conceded their freedom to pursue their own macroeconomic policy goals Deciding on the Next Step: Monetary Union - Delors Committee recommended making exchange rate rules basis for a tighter monetary coordination= monetary union being long-term goal; wanted a single currency for the EU - Would cause: stable exchange rates, all risk in currency instability would be eliminated and transaction costs associated w/ economic activity among member states would be reduced - 3 phases: 1.) A period of last national capital controls being removed 2.) Members would coordinate their macroeconomic policies; monetary policies would be synchronized by having each member’s central bank become a member of the European System of Central Banks 3.) An EU-wide central bank (the ECB) would be created, a new common currency introduced and coordinated fiscal policies followed The Goals of Monetary Union - Bsted on liberal principles (argued for trade liberalization) - 1 strand: emphasizes monetary unification eliminates cost of currency conversion - Counter: overall benefits of unification for eliminating cost of currency conversion would be small; it would be useful to individual not large companies and banks - 2 strand: accepted German leadership of new monetary union as a given; emphasized benefits other states would receive by joining a monetary system where Germany served as the anchor - Many believed EMS was too costly to maintain b/c it reflected compromise between fixed and floating exchange rates - Political concern driving European integration: desire to unite German ambitions w/ other European powers and lessen friction; union makes them economically bound Germany’s Bargaining Position and the Process of EMU - Some saw act of union as way to force monetary policy convergence; others saw policy convergence as necessary in process leading up to monetary union - Germany wanted to force policy convergence before union; it wanted states to prove their ability and willingness to adhere to union’s stated goals before they would be allowed in - German policy makers didn’t want to pay for efforts to maintain monetary union once it was attained so they felt states needed to make difficult adjustments up-front - Propositions of how members would be admitted to monetary union: 1.) Required existing members to vote unanimously for admission 2.) Required a qualified majority of existing members to approve admission; Germany supported unanimity b/c it wanted veto power - How should they discipline members of the union? Germany wanted automatic fines that would penalize countries violating union’s performance criteria - Germany’s preferences were aimed to balance achi
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