Chapter 3 - The european monetary system (2016)

Apunte Inglés
Universidad Universidad Pompeu Fabra (UPF)
Grado International Business Economics - 1º curso
Asignatura Introduction to business law
Año del apunte 2016
Páginas 17
Fecha de subida 20/04/2016 (Actualizado: 20/04/2016)
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III. European law INDEX Historical background ....................................................................................................... 2 Pillars of the European Union ........................................................................................... 4 Monetary union ................................................................................................................ 6 Organization and organs of the EU .................................................................................. 7 EUROPEAN COUNCIL (Countries’ interests) ................................................................. 7 COUNCIL OF THE EUROPEAN UNION (Countries’ interests) ........................................ 7 EUROPEAN PARLIAMENT (Citizens’ interests) .............................................................. 8 EUROPEAN COMMISSION (EU’s interests) ................................................................... 8 EUROPEAN COURT OF JUSTICE..................................................................................... 8 European central bank ................................................................................................... 10 Seminar 3: European law and the German case ............................................................ 12 Summary ......................................................................................................................... 15 PILLARS ....................................................................................................................... 15 REQUIREMENTS .......................................................................................................... 15 ORGANS ...................................................................................................................... 15 POWERS IN THE EU ..................................................................................................... 16 EUROPEAN COURT OF JUSTICE................................................................................... 16 CENTRAL BANK ........................................................................................................... 16 SEMINAR 3 .................................................................................................................. 16 1 avillagrasa IBE, 1st year - 2nd Term Historical background It was made to share resources of coal and steel (1951 - Belgium, France, Germany, Italy, Luxemburg, Netherlands). They had a very small economy so they decided to cooperate to help themselves, also to avoid another war. They created mechanisms to cooperate. The idea was to specialize and cooperate to booze all’s economy. After the success of the union to trade with coal and steel they created the EEC.
1951 - (ECSC) European Coal and Steel Community 1957 - 1958 - (EEC) European Economic Community and (EURATOM) European Atomic Energy Community They had 4 main institutions: - A commission - Council of ministers - Assembly - Court of justice 1979 - (EMS) European Monetary system: - ECU: basket of currencies to control the exchange rates between countries - Mechanism to regulate the rate of exchange (ERM) - Able to do common monetary policy - Extension of European credit facilities 2 avillagrasa IBE, 1st year - 2nd Term - European Monetary Cooperation Fund (October 1972): allocates ECUs to members’ central banks in exchange of gold and US dollar deposits.
1986 - Spain and Portugal enter to EEC {Idea to create a new currency because the north was doing very well but the south didn’t} 1993 - Treaty on European Union (Maastricht Treaty) 2002 - The Euro substitutes the countries’ currencies 2009 - Treaty of Lisbon: the EU now cares more about citizens, social and political affairs 3 avillagrasa IBE, 1st year - 2nd Term Pillars of the European Union Community integration is for all countries and they have to agree comply. Members can’t decide. This is for example, if Europe makes a law that says that if your flight is delayed you’ll have a refund, but even if Iberia doesn’t agree, it has to commit.
For intergovernmental cooperation, the countries have to agree on the subject of matter to make a supranational law (for example the Syria refugee’s problem right now).
1. THREE EUROPEAN COMMUNITITES (COMMUNITY INTEGRATION) It guarantees freedom of movement and a common commerce code. It is independent from the national governments.
Its scope is everything that affects how firms compete and how people participate.
If we have the same currency we don’t have to care about the exchange rate and depreciation/appreciation, so you decrease transaction costs and risk (because you know how much money you’ll get).
4 avillagrasa IBE, 1st year - 2nd Term Ex: Telefónica is very popular in South America. They are doing well, selling a lot, but the problem is that they are paid in pesos or other currencies, which are losing value respect to other currencies. Then, when they convert it to euros, they are losing money actually, even they’re doing well.
2. COMMON FOREGIN AND SECURITY POLICY (INTERGOV. COOPERATION) Common foreign and security policy: we decide issues that have to do with human rights and other issues; however this is not working well. The states have to agree on these policies.
3. COOPERATION IN CRIMINAL MATTERS (INTERGOV. COOPERATION) Police and judicial cooperation in criminal matters: have the same laws to cooperate in these cases. To combat terrorism, human and drug traffic, etc.
Now they are thinking of stop the Schengen area agreement (f reely circulation and trade, without controls within countries) to solve the refugees crisis. However, it will also reduce the general trade and the European GDP will decrease (about 0,8). This schengen agreement also helps fighting against terrorism and c rime (For example if an ETA member would be persecuted by Spain but also by other state members) or mafias that are in several countries at the same time.
5 avillagrasa IBE, 1st year - 2nd Term Monetary union Union = market integration + monetary union But not everybody could adopt the euro (enforced in 1999 but entered in 2000).
REQUIRMENTS 1. Inflation rate: it couldn’t be 1,5% higher than the average of the three countries with less inflation of the EU.
2. Government finances: Government deficit target is 3%, and Government debt should be less than 60% (respect to the GDP).
{Debt (what we borrowed to other countries) ≠ Deficit (Taxes - Gov. Exp.)} 3. Exchange rate: they needed to implement an exchange rate mechanism for 2 years, control it.
4. Long term interest rate: 2% points of the lowest inflation rate.
Greece wasn’t admitted until 2001 (even though it was known that they weren’t qualified to enter). UK, Sweden and Denmark are European Union states but are NOT in the monetary union (because they didn’t wanted to).
The European Union (25) only implies to have common laws about some subjects.
Some of them (18) also have the same currency (€). However, there are some countries that have Euros although they are not in the EU (like Andorra and Vatican).
AMSTERDAM TREATY (1999): They realized that the Maastricht treaty didn’t say anything about social issues. It was also created the Central Bank.
In 2004 a lot of new countries (from the old URSS or Yugoslavia) joined.
After this huge expansion, they decided to draft a constitution. Some countries hold referendums (people decided directly) and in other countries it was voted in the Senate and Congress (like in Spain). However, people voted against it.
TREATY OF LISBON (2009): includes new parameters, and basically reforms the union.
It sets the minimum requirements, institutional organizations and basic rights. After it the Maastricht Treaty stopped being used (it is already included in this one).
6 avillagrasa IBE, 1st year - 2nd Term Organization and organs of the EU We have 4 political main organs: - European Commission European Council Council of the European Union European Parliament There’s no separation of powers (in the traditional sense) but a “representation of interest” (it represents the interests of the union (the commission), interest of the citizens (parliament) and of the state members (Councils)).
There’s also European Court of Justice and European Central Bank (it takes into account its own statistics and inflation of the euro-zone. This means that they decide the best for all the countries in average, not the best for Spain or Germany, for example).
For European citizens only domestic law is binding, but European law can became domestic.
EUROPEAN COUNCIL (Countries’ interests) Has a permanent president. Its members are the government presidents of each EU country (Rajoy)  28 heads of state. However, they are accompanied by the minister of the issue that’s being discussed. They impose or propose how to act.
The votes are weirdly assigned. Germany is the one with more votes (99) and there’s a debate about it.
COUNCIL OF THE EUROPEAN UNION (Countries’ interests) There’s a rotating president (every 6 months). There are 28 members (one per state, ministers of whatever). They join depending on what’s being decided (ex: a meeting with all agriculture ministers).
FUNCTIONS - Draft the legislation Coordinate macroeconomic policies Approve budgets Apply treaties Coordinate foreign policy and appointments 7 avillagrasa IBE, 1st year - 2nd Term EUROPEAN PARLIAMENT (Citizens’ interests) It represents the people. It’s distributed in groups (not the same as the countries’ ones). The idea is that our representatives in the European parliament don’t have to act as our government says. People elect the deputies (Eurodeputies).
EUROPEAN COMMISSION (EU’s interests) It represents the union interests. They can’t help any member more than another.
Sometimes what the other organs have said is not what’s best for the union. It is very difficult to coordinate 28 states.
MEMBERS - President 1st Vice-president 6 Vice-president FUNCTIONS - Executive responsibilities Administration: budget of the EU, which says where does the money put by the members Guardian of the treaties: assure they are being enforced External relations: represent the union The commission has the monopoly over the legislative initiative. This means that the council and parliament can ask to submit a law but the Commission, at the end is the one that decides.
EXECUTIVE POWER: Councils and Commission LEGISLATIVE POWE: Council and Parliament JUDICIAL POWER: we have a unique judicial system. There are EU level courts, the EUROPEAN COURT OF JUSTICE Is the responsible of interpreting the Community law, and it has to ensure that countries comply with their obligations. A lot of legislation of the countries is form Europe. The European laws are interpreted by the European court of justice. The interpretation they give is binding for all the state members. I can’t go to this court if it is not related to European law. For those cases I have to go to the domestic courts. If the Spanish action contradicts the European law, Spain has to amend it.
8 avillagrasa IBE, 1st year - 2nd Term Depending on where does the case start and the issue we can have one or two appeals.
MEMBERS - 27 judges 8 advocates general: they are appointed by member states by common accord for 6 years.
TYPES OF PROCEEDINGS 1. The community thinks that a state member is violating a treaty. EU can send the state members to the European court of justice if it understands that it’s violating a law/treaty. Also if one country wants to sue another (for not following a rule).
2. When we have a member state or a European instruments that does an illegal action or fails to act. There’s an action (or inaction) that damages the European law and the member state says that there’s no compliance with the European law.
3. Whenever we have a case before any court, and this court has to apply the European law and see if it is complaining with the Lisbon treaty. This is, if a judge doesn’t know how to understand an European law, before issuing the case, he has to do a preliminary ruling (how should I interpret this?). The European court of justices answers says “this provision should be interpreted like that...”. Once the judge has the answer, they can’t apply the law in any other way (independently of your understanding of it).
4. Appeals against General court.
9 avillagrasa IBE, 1st year - 2nd Term European central bank The primarily objective of it is to maintain price stability1. This means that the ECB can only act if there’s a problem or it’s necessarily to maintain price stability. For example if inflation is above or below the target (2%). It has to look for the objectives of the union (less unemployment (the ECB can’t act in this case) and sustainable and noninflationary growth). This means that, if they can reduce inflation but it would increase the level of unemployment, they can’t do it. This is: they don’t have to do anything to lower the unemployment rate, but can’t make policies going against it. They have to persuade their goal (lower inflation) but within the goals of the union (high employment).
The ECB was established with the Amsterdam treaty. Currently the president is Mario Draghi.
The national CB governor has to stay for, at least, 5 years, while the members of the executive board have to stay 8 years (non-renewable).
MACRO REMINDER The money in the economy is the high powered money decided by the central bank.
But there’s also the “electronic” money we pay with the credit card and bonds. When the CB decides how much money to put in the economy, it can do open market operations (buying, and so increasing money supply or selling, and so decreasing money supply bonds) or change the reservation ratio (if the reserve increases, the money supply increases, and the other way around). Another thing it can do is being the lender of last resource, which is a loan that they charge in exchange of the discount (interest) rate (and when it goes up there’s less money because less banks borrow, and the other way around if the interest rate decreases because it’s cheaper to have money). It could also do a quantitative easing.
The central bank changes the supply of money because an increase in the supply causes a decrease in the consumption (because now we have more money but prices have gone up) due the decrease in the interest rate. So, in summary, if it reduces the supply of money they can reduce inflation.
The CB also has to define and implement monetary policy and manage foreign reserves. To be easier to track where does the money come from and where does it go, now all current accounts have the same code. In its website there’s a lot of information easily displayed.
1 NO CONFUDIR CON LOS OBJECTIVOS DELFED (USA): promote maximum employment (they have to act), stable prices and moderate long term interest rate.
10 avillagrasa IBE, 1st year - 2nd Term FUNCTIONS - Define and implement monetary policies Conduct foreign exchanges (1€=x$) Promote smooth and easy payment systems Hold and manage the foreign reserves (given by member states) Can give advice Makes statistics Make bills (issuance of banknotes = fer bitllets) Supervise financial stability 11 avillagrasa IBE, 1st year - 2nd Term Seminar 3: European law and the German case Germany always uses preliminary ruling a lot, so they can’t be turned on by Europe (faint - proposa molt). Spain usually doesn’t use it a lot, which means that sometimes we misinterpret it.
European law has to be followed by the member states as well as their own state law.
Sometimes the EU regulation gives a minimum, which means that the states can go above it but not below. The state law has to adapt to the European. The law is applied by all the countries, but if they can’t arrive to an agreement, they will have to ask the Court of European Justice.
Lending facilities: relationship between ECB and other banks. Borrow/lending relations.
The higher is the discount rate, the less it’s borrowed (it’s more expensive).
Fiscal policies: made by the Government.
Monetary policies: made by banks. They use instruments to increase/decrease money supply and so the interest rate. The central bank can use open market operations, minimum requirements and lending facilities (all instruments).
THE CASE The ECB is buying bonds from countries in the 1st market. However, a party (Germany) said it violated so it put it to court. They argue that they were doubtful of the legality of it (based on the treaties of the EU) but also the German constitution because it implies that Germans’ money is being used to do thing out of the scope of the government.
German courts can issue the case, even if it has to do with both German and European law. The EU said that they were complaining with their law. Since the EU has said that, they have given a preliminary ruling. This means that Germany constitution has to change to adapt to European law (all countries have to be the same).
 The ESM The European central bank can only buy from countries that are going through the ESM (European Stability Mechanism it’s a program to help and rescue countries).
In 2012 some countries had very bad financing situation because they had so much risk of defaulting that they had to ask for loans (sell bonds) and nobody wanted to buy them, even though the high interest (which they wouldn’t be able to return).
There’s an explicit prohibition for the ECB of bailing out (rescatar), because that would cause a Moral Hazard problem and causes inflation too. So, if you have a liquidity problem (like Spain) you can’t go to the ECB or the commission (because they don’t have any power in this issue). But there was that problem of liquidity, and countries 12 avillagrasa IBE, 1st year - 2nd Term couldn’t depreciate their currency and nobody wanted their bonds. So they agreed in helping countries.
Spain requested a loan to the ECB but the government wasn’t bankrupt, they were used to bail out the banks. The ECB puts some conditions to be followed by the country (monitored by the Troika) until they give the money back.
They said that they would give loans but with a maturity between 1 and 3 years (because they didn’t wanted to be a s/t creditor or a l/t creditor). It acts like a normal creditor (paragraph 4).
 Why do Germans say that this doesn’t comply with EU law? They say that it was exceeding the scope of the union because that was a countries’ thing since it is a fiscal policy (countries’ governments decide about) and not a monetary policy. They claimed so because when you do monetary policy you have to be doing fiscal policies that affect all the community, however this only affects some countries (the ones in the ESM programme). So, their argument is that if it was monetary policy they would be willing to buy bonds from any country.
ARGUMENTS: 1. Ultraviolates and has the effect of bailing out economic policy (moral hazard) 2. Moral hazard problem ANSWER OF THE EUROPEAN COURT OF JUSTICE They don’t agree with Germany because it says that it is ensuring the objectives of the EU (control inflation and ensure price stability).
ARGUMENTS (there’s no moral hazard): 1. Because it is something temporal and they can “cut” whenever they want 2. The ESM would still be ruling (fiscal reason) 3. Bounds can only be bought in the secondary market, so they need someone to buy them in the 1st market, so no moral hazard Si no compleixes amb les retallades et poden sancionar. Si ets insolvent encara no se sap què passarà (el cas de Grècia, que no pot pagar). De moment encara no havia passat, així que no s’ha solucionat.
 El text surt al examen http://economiapuntes.blogspot.com.es/2013/09/el-mercado-de-bonos-explicadocon.html (mercat secundari vs. Primari) 13 avillagrasa IBE, 1st year - 2nd Term For the moment the ECB has spent 0€ in the ESM program (they has 60million per month) because it wasn’t necessary.
Since the ECB lent to the country (not the bank), so the citizens are the ones that have to pay. Spain changed the constitution to say that we will pay 1 st the debt, and then the other stuff (pensions, SS, etc.). They did that to be more trusted (but we weren’t asked to).
14 avillagrasa IBE, 1st year - 2nd Term Summary PILLARS 1. Three European communities 2. Common foreign and security policy 3. Police and judicial cooperation in criminal matters Countries help each other with common laws agreed by them (pillars 2 and 3) and the union protects the citizens with common laws that don’t have to be agreed by them (pillar 1).
REQUIREMENTS 1.
2.
3.
4.
Inflation (max. 1,5% higher than the average of the 3 countries with the lowest) Long term interest rate (around2% from the lowest inflation) Government finances (deficit 3% and debt 60% GDP) Exchange rate (stable) ORGANS European council (represents countries) - Permanent president - 28 heads of state - Functions: Approve budgets Draft legislation Apply treaties and foreign policies Coordinate macroeconomic policies Council of the European Union (represents countries) - Rotating president (every 6 months) - Ministers of each country - Ministers meet to discuss a specific topic European parliament (represents citizens) - Distributed in groups (Eurodeputies, elected by people) - Don’t have to do what national government say Commission of he EU (represents Union) - Can’t favour any country - Functions: Executive responsibilities Administration (EU budget) Assure treaties are enforced External relations (represent the union) 15 avillagrasa IBE, 1st year - 2nd Term POWERS IN THE EU Powers and responsibilities are shared horizontally (independently) and vertically (cooperation).
Executive power: European Council, Council of Ministers and the Commission Legislative power: Council and the European Parliament Judicial power: National courts and EU level courts (European court of justice and the 1st Instance court)  There isn’t separation of powers but there’s representation of interests.
EUROPEAN COURT OF JUSTICE It interprets the EU law, and what they say is binding. European law can’t be contradicted by local law.
Types of proceedings: a.
b.
c.
d.
For a member violating a treaty/law: State vs. State or state vs. union.
State or US institution fails to act or does something illegal Appeals before general court Preliminary ruling: when a judge doesn’t know how to interpret the law he can ask. The answer of the EU is binding.
CENTRAL BANK They decide how much money should be in the economy (H), so they can use: a. Open market operations b. Change reserve ratio c. Be the lender of last resource Its objective is price stability, so it has to act to accomplish while respecting union’s objectives (high employment and price stability) SEMINAR 3 Germany sues the EU after the ECB bought government bonds to PIGS, because they say it goes against European and German law, so they made a preliminary ruling. They argued: 1. May cause moral hazard 2. Affects Europe’s interest rate 3. Only helps some countries 16 avillagrasa IBE, 1st year - 2nd Term But the EU contra-argued: 1. they are bought in the 2nd market, so they still have to find a buyer in the 1st market (no moral hazard problem) 2. it’s controlled and they can stop helping 3. PIGS are in the MPS (Mechanism for Price Stability) and they are under the union supervision.
Since preliminary rulings are always binding, they now have to change the German law.
17 avillagrasa IBE, 1st year - 2nd Term ...

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