POLSCI 160 Lecture Notes - Lecture 31: Economic And Monetary Union Of The European Union, Government Budget Balance, Balanced Budget
5 Jan 2017
School
Department
Course
Professor
Capital Mobility
● Advantages of Mobile Capital
○ Greater access to investment
○ Higher returns for investors
● Dangers of Mobile Capital
○ When financial flows are much larger than economic activity
■ Speculation can overwhelm fundamentals
■ Small errors can have large consequences
○ Systemic risk
○ Flights of capital from developing countries
■ Capital is thought to be safer in developed countries
European Monetary Union (EMU)
● Created a single currency (the Euro) for its members
● Advantages of the Euro
○ Encourages trade
■ Less cost involved in trade
■ No more exchange risk
■ Easier for consumers to compare costs
○ Fiscal discipline
■ Each country must reduce its government budget deficit to 3% or less of
its GDP to join the Eurozone
■ Also reduce total public debt before 60% of its GDP
○ Monetary discipline
■ European Central Bank (ECB) controls inflation and supports the value of
the Euro
○ Advances European unification in the EU
■ Common currency is a powerful unifying symbol
● Disadvantages of the Euro
○ Eliminates exchange rates as a tool of economic adjustment
■ Exchange rate cannot change regardless of an individual states’
economic condition
○ Limitations on national governments to respond to economic conditions
■ States cannot go over the 3% deficit rule or else they face fines
○ Goes against national identity
■ Many do not want European unification, and the Euro is a symbol of that
● Conditions for Monetary Union (ex: Euro) to work well
○ Common economic shocks
■ When economies grow and fall together, there is no need for changes in
exchange rates
○ Mobile labor
■ Free moving workers even out economic differences across regions
○ Inflation vs. unemployment preferences are similar
■ If all states want the same thing, there are no disagreements over policies
to pursue
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Document Summary
When financial flows are much larger than economic activity. Capital is thought to be safer in developed countries. Created a single currency (the euro) for its members. Each country must reduce its government budget deficit to 3% or less of its gdp to join the eurozone. Also reduce total public debt before 60% of its gdp. European central bank (ecb) controls inflation and supports the value of. Common currency is a powerful unifying symbol. Eliminates exchange rates as a tool of economic adjustment. Exchange rate cannot change regardless of an individual states" economic condition. Limitations on national governments to respond to economic conditions. States cannot go over the 3% deficit rule or else they face fines. Many do not want european unification, and the euro is a symbol of that. Conditions for monetary union (ex: euro) to work well. When economies grow and fall together, there is no need for changes in exchange rates.
