Abstract
This chapter looks at foreign exchange market developments in the EU from the breakdown of the Bretton Woods system to the introduction of the Euro, setting this also within the optimal currency area literature. While several member states joined the original Euro Area (EA) in the years after the introduction of the Euro, and two more are in the process of joining, there remains a group of EU member states, comprising over 80 million people, not likely to join any time soon. Another 100 million people are in the “near-EU”countries, such as the UK, Switzerland, and the countries of the western Balkans, many of which are economically and socially heavily interconnected with the EU. The chapter looks at the reasons for joining or staying out. It also looks at two major institutional innovations tied to the EA: the Single Supervisory Mechanism and the European Stability Mechanism (ESM). The recent enhancements of the ESM are a big step forward in EA integration, further enhancing the dichotomy between the core and the periphery.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
The entry rate 2.95 Deutschemarks to the Pound was regarded as ambitious, particularly as inflation at 15% in the UK was three times that of Germany.
- 2.
For the UK high interest rates were arguably much less sustainable than for other countries because of the rapid pass-through to the public’s mortgage payments, while other countries had a much higher share of fixed rate mortgages or lower rates of home ownership.
- 3.
It is hard to quantify the losses incurred. A UK Treasury estimate in 2005 calculated this as around 3.5 billion Pounds, being the valuation gains that would have accrued had the UK pre-emptively undertaken the 24% devaluation that arose without first using the reserves to defend the old rate.
- 4.
As discussed below, this was an example of the so-called bicycle view of integration, that integration has to be continuously progressing, and that seeking to stop at any one point would lead to the rider falling off and the entire exercise falling apart.
- 5.
In March 2005 under pressure from France and Germany some flexibility was added into these criteria, in order to take the economic situation and structural reforms into account. “Exceptional and temporary excesses” are now authorized.
- 6.
Cukierman et al. [7].
- 7.
De Grauwe [9]
- 8.
It is interesting that the Bank of England participated fully in the preparations and early operations of the ECB. Two of the initial department heads—of statistics and of IT—were secondees from the Bank of England, as were other senior staff.
- 9.
Bayoumi and Eichengren [3]
- 10.
De la Dehesa and Krugman [8]
- 11.
Campos and Macchiavelli [5]
- 12.
They thus accept a definition that is contemporary-economic based, as indeed broadly does this study. Nicolaïdis [25] has pointed out (page 31) the western centricism of current identifications of the centre as being northwest Europe as a contrast to the original concept of Europe centred on Cretan Europe.
- 13.
Frankel and Rose [15].
- 14.
Entry into the EA requires certification by the Commission that a member state has fully satisfied the Maastricht criteria. Lithuania in 2006 was denied its requested 1 January 2007 entry, due to an 0.1 percentage point overshoot in inflation performance, compared to the Maastricht criteria, somewhat restoring the credibility of the EMU accession process, but upsetting Lithuania. Lithuania has so far been the only member state denied entry to EMU on the grounds of the Maastricht criteria. Its inflation performance deteriorated thereafter, but by 2014 Lithuania’s performance had improved, and it joined the EA on 1 January 2015.
- 15.
Interestingly, Cyprus, Ireland, and Malta had earlier all been part of the Sterling area, with their currencies rigidly tied to the Pound Sterling. Indeed, both Cyprus and Ireland pre-EMU had currencies denoted as Pounds (Malta had lira). For all three countries therefore entry into EMU marked an important step in their transition from one currency bloc to another, and arguably also a step in their achievement of full independence. Outside the British Isles, Gibraltar is now the only territory in Europe that has its currency tied to the British Pound; Spain sought to discuss its status in the context of UK negotiations over Brexit.
- 16.
See comments by Michael Faulend reported in Appendix 1.
- 17.
Hungary had originally expected to adopt the Euro by around 2008, although the setbacks of the GFC led this date to be pushed back. Hungary nevertheless adopted austerity measures to bring the economy into line with the Maastricht requirements. With the election of Viktor Orbán’s Fidesz party in 2010, however, the momentum ceased. In 2015 Orbán announced that Hungary would not adopt the Euro for decades to come. He asserted that Hungary would only abandon its own currency once Hungary’s GDP reached 90% of the EA’s average—which is not expected until very far into the future.
- 18.
Details can be found at: https://www.cnb.cz/export/sites/cnb/en/monetary-policy/.galleries/strategic_documents/analyses_of_alignment_2019.pdf (Section III.1).
- 19.
Puhl [28]
- 20.
Franks et al. [16]
- 21.
Panetta [26]
- 22.
Angeloni and Mongelli [2]
- 23.
The introduction and papers in Jones and Torres (eds.) [23].
- 24.
The fifth micro-state within Europe, Liechtenstein, is not fully enclosed by the EU, and has instead adopted the currency of its non-EU neighbour, Switzerland. Liechtenstein is however in the EEA, and participates, for instance, in the ESRB. Switzerland is not a member of the EEA and does not participate there.
- 25.
This reflects the high priority that the ECB gives to monetary control. The US Federal Reserve, by contrast, is more relaxed about such a process, perhaps seeing the seignorage benefits from having its currency used overseas. Ecuador and El Salvador adopted the US as their currency in 2000 and 2001 respectively. The fashion for such conversions has faded; both countries have suffered serious economic difficulties.
- 26.
Panetta [26]
- 27.
This was the process devised by the EC at the time of the entry of Bulgaria and Romania to ensure continued progress in combatting corruption. In its 2019 review the Commission commended Bulgaria for good progress, and was less positive about the progress of Romania.
- 28.
See, for instance, Eichengren [10]
- 29.
This point is ironic, given that it has been the large flows of workers, particularly from the new member states to the old member states, that have provided a backlash against integration, and against the EU itself.
- 30.
Tietmeyer’s writings and speeches focus single-mindedly on monetary stability
- 31.
IMF Independent Evaluation Office [20]
- 32.
Čihák and Decressin [6]
- 33.
Sapir [29]
- 34.
Gortsos and Lagaria note that the imbalance between ESMA on the one hand and EBA and EIOPA on the other has been increasing as part of the EU’s work to integrate capital markets. Gortsos and Lagaria [17].
- 35.
Verón [34]
- 36.
The explicit reference to excluding insurance is interesting, and would presumably prevent extension of the SSM beyond the banking sector without changing the Treaty in the event it was thought desirable to do so.
- 37.
The ESM is the subject of the following chapter.
- 38.
- 39.
Howarth and Quaglia [18] set out further the political economy of the decisions regarding the BU.
- 40.
Schäuble [30]
- 41.
IMF [21] and Thierry Tressel “ Banking Union and the single market: Consistent Setup and Risk Mitigation” in Enoch et al. (2014), pp. 169–192; Barend Jansen, Alessandro Gullo, and Nikita Aggarwal in Enoch et al. [22] pp. 193–206; and Thierry Tressel, “The Single Supervisory Mechanism), in Enoch et al. (2014), pp. 207–232. See also IMF [19].
- 42.
Binder and Gortsos [4] for a collection of the legal instruments relating to the BU, as well as discussions on the policy background, as well as a number of institutional and substantive issues.
- 43.
There was some question about this location, as the SRM was required to be an independent agency. Urgency of establishment and reluctance to attempt Treaty change limited the choices. As author of the BRRD, the EC was considered particularly able to take on the SRM role expeditiously.
- 44.
See, for instance, Sapir [29]
- 45.
Véron [33]
- 46.
See presentation by Popa reported in Appendix 1.
- 47.
See presentation by Popa reported in Appendix 1.
- 48.
European Central Bank [13].
- 49.
Véron [32].
- 50.
European Commission [14].
- 51.
Angeloni [1]
- 52.
Conceivably if the Covid-19 pandemic leads at some point to banking failures, a resulting bank consolidation could be an instrument for increasing cross-border banking. Such cross-border integration would serve also to increase risk diversification and thus reduce aggregate risk.
- 53.
Enria [12]
- 54.
Moloney [24]
- 55.
In a “doom loop” a crisis may start in the private sector, with the failure of some banks, and lead to public sector support, for instance, to restructure the banks or to compensate depositors. This adds to the indebtedness of the public sector, causing its borrowing costs to rise, in turn causing further pressures in the private sector, leading to a further round of bank problems. Breaking the doom loop could involve providing support to the public sector (or directly to the private sector) so that the initial support does not lead to losses in turn requiring additional support. This issue is discussed further below.
- 56.
See https://www/esm.europa.eu/about-esm/content/europe-response-corona-crisis
- 57.
Estonia signed on 8 February 2021, because of a change of government at the time.
- 58.
The IMF is mandated under its Article IV to conduct surveillance over its member states’ exchange rate policies. Regional surveillance requires the concurrence of the recipient. With this concurrence the IMF has been conducting surveillance over EA over much of the EA’s existence, focusing on areas under its authority. National Article IV consultations for EA members do not cover the policy areas determined at the EA level; similarly, trade and other issues under the auspice of the EU are not covered in Article IV consultations for EU member states. The IMF also conducts surveillance at the EU level covering those policies of member states that are made at the EU level, including trade and trade-related policies. So IMF surveillance is conducted at member state, Euro Area, and at EU levels.
- 59.
Zaccaroni [35].
References
Angeloni, Ignazio. 2020. Beyond the pandemic: Reviving the banking union. London: VoxEU.
Angeloni, Igvazio, and Francesco Mongelli. 2007. Monetary integration and the new EU member states: What sets the pace of EU integration. Journal of Common Market Studies 45 (2): 367–409.
Tam, Bayoumi, and Barry Eichengren. 1993. Shocking aspects of European monetary integration. In Adjustment and growth in the European monetary union, ed. F. Giavazzi and F. Torres. Cambridge: Cambridge University Press.
Jean-Hinrich, Binder, and Christos Gortsos, eds. 2016. Banking union: A compendium. Basingstoke: Macmillan.
Campos, Nairo, and Corrado Macchiavelli. 2018. A history of the European core and its periphery: How can optimal currency areas form? London: Vox CEPR.
Cihák, Martin, and Jörg Decressin. 2007. The case for a European banking charter. IMF working paper 2007/173. Washington, DC.
Cukierman, Alex, Stephen B Webb, and Bilin Neyapti. 1992. Measuring the independence of central banks and its effect on policy outcomes. World Bank Economic Review 6 (3). Oxford: OUP.
De la Dehasa, Guillermo, and Paul Krugman. 1992 Europe and the regions. Group of Thirty, Occasional paper 39, Washington, DC.
De Grauwe, Paul. 2018. The economics of monetary union. 12th ed. Oxford: OUP.
Eichengren, Barry, “The breakup of the Euro Area”, in “Europe and the Euro”, by Alberto Alesina and Francesco Giavazzi (eds.), University of Chicago Press, Chicago. 2010.
Enoch, Charles. 2014. Structural measures for the New European Architecture. In From fragmentation to financial integration in Europe, ed. Charles Enoch, Luc Everaert, Thierry Tressel, and Jian** Zhou. Washington, DC: IMF.
Enria, Andrea. 2019. Just a few bad apples? The importance of culture and governance for good banking. Speech at the Conference of the Federation of International Banks. Dublin, 20 June 2019.
European Central Bank. 2020. Risk report on less significant institutions (LSIs). Frankfurt: European Central Bank.
European Commission. 2020. Impact assessment study of the most important differences between accounting standards used by banks in the EU. Final report. 15 April 2020.
Frankel, Jeff, and Andrew Rose. 1998. The endogeneity of the optimal currency area. Economic Journal 108 (449): 1009–1025.
Franks, Jeffrey, Bergljot Barkbu, Rodolphe Blavy, William Oma, and Hanni Schoelermann. 2018. Economic convergence in the Euro Area: Coming together or drifting apart? IMF WP/18/10. Washington, DC.
Gorstos, Christos, and Katerina Lagaria. 2020. The European authorities (ESAs) as “Direct” supervisors in the EU financial system. Frankfurt: European Banking Institute.
Howarth, David, and Lucia Quaglia. 2016. The political economy of European banking union. Oxford: OUP.
International Monetary Fund. 2018. Financial sector stability assessment: The Euro Area. Washington, DC: IMF.
International Monetary Fund, Independent Evaluation Office. 2016. The IMF and the crises in Greece, Ireland, and Portugal. Washington DC: IMF.
International Monetary Fund. 2014. Financial sector stability assessment: The European Union. Washington, DC: IMF.
Jansen, Barend, Alessandro Gullo, and Nikita Aggarwal. 2014. Legal underpinnings of a banking union. In From fragmentation to financial integration in Europe, ed. C. Enoch et al., 371–392. Washington, DC: IMF.
Jones, Erik, and Francisco Torres, eds. 2018. Governance of the European monetary union. Recasting political, fiscal and financial integration. London: Routledge.
Moloney, Nick. 2014. European banking union: assessing its risks and resilience. Common Market Law Review 51: 1609.
Nicolaïdis, Kalypso. 2019. Exodus, reckoning, sacrifice: Three meanings of Brexit. London: Unbound.
Panetta, Fabio. 2020. Deepening and widening economic and monetary union: Finding the right speed. Speech before European Parliament, ECB. Frankfurt. 18 February 2020.
Pisani-Ferry, Jean, André Sapir, Nicolas Verón, and Guntram Wolff. 2012. What kind of banking union? Brussels: Breugel.
Puhl, Jan. 2013. Core or periphery? Poland’s battle over embracing the Euro. Hamburg: Der Spiegel.
Sapir, André. 2016. European banking supervision: The first eighteen months. Brussels: Breugel.
Schäuble, Wolfgang. 2013. Banking union must be built on firm foundations. Financial Times, London, 12 May, 2013.
Tressel, T., and Jian** Zhou. 2014. Macroprudential oversight and the role of the European Systemic Risk Board. In From fragmentation to financial integration in Europe, ed. C. Enoch et al., 371–392. Washington, DC: IMF.
Verón, Nicolas. 2020. Banking regulation in the Euro Area: Germany is different. Washington, DC: PIIE.
———. 2015. Europe’s radical banking union. Brussels: Breugel.
———. 2011. Europe must change course on banks. Vox EU, column 22, December 2011.
Zaccaroni, Giovanni. 2020. The future of the ESM within a Hybrid EU law. DCU Brexit Institute. 1 December, 2020
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2021 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this chapter
Cite this chapter
Enoch, C. (2021). Economic and Monetary Union and Beyond: Differentiation in the EU. In: Europe Beyond the Euro. St Antony's Series. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-77115-7_5
Download citation
DOI: https://doi.org/10.1007/978-3-030-77115-7_5
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-77114-0
Online ISBN: 978-3-030-77115-7
eBook Packages: Political Science and International StudiesPolitical Science and International Studies (R0)