STEPS TO INTEGRATION

1
STEPS TO INTEGRATION

• FREE TRADE AREA
•    -  free movement of goods and services
• CUSTOMS UNION
• - free movement of goods and services and
  factors of production - common external tariff
  (and policies)
• COMMON MARKET
•     - customs union common policies e.g.
  taxation, transport, social etc.
• ECONOMIC INTEGRATION
•     - common market centralised control of
  monetary and fiscal policies  (EMU)
• POLITICAL INTEGRATION
• EMU other common policies e.g. democratic
  institutions, defence policy etc.

2
BARRIERS TO INTEGRATION

• FRAGMENTATION OF MARKET
• - physical frontiers
• - technical restrictions
• - differing tax regimes
• - non-tariff barriers
• - public purchasing policies
• FINANCIAL RESTRICTIONS  
• - barriers on capital movements
• - exchange controls
• - exchange rate instability
• - lack of harmonisation of financial market
• - differing bank regulations
• SOCIAL - differing levels of development
• - special problems

3
EXCHANGE RATES

• Fixed  
• - absolutely fixed - adjustable pegs -
  crawling pegs      
• Floating  
• - pure - managed      
• Basket of Currencies  
• - composite mix of currencies - examples  

4
FIXED RATES

• Advantages  
• - creates more certain environment for trade
• - reduces speculation
• Disadvantages  
• - creates strains in terms of managing Balance
  of Payments
• - not in keeping with market approach - can
  lead to instability and damaging devaluations
  (and
• revaluations)

5
FLOATING RATES

• Advantages  
• - automatic adjustment of Balance of Payments
• - freedom to choose domestic policies
• - consistent with free market approach
• Disadvantages  
• - exchange rate instability
• - reduce international trade
•    

6
EXCHANGE RATES (con)

• Factors determining exchange rates - demand for
  exports and imports - inflationary pressures -
  changes in interest rates - speculation -
  political factors    
• Intervention on Foreign Markets - using reserves
  - borrowing abroad - raising interest rates -
  deflationary policy - supply-side policies -
  controls on imports

7
FIRST EMU EXPERIMENT

• Background
• 1970 - Werner Report
• Economists v Monetarists
• 1972 - The Snake Agreement
• 1973 - Setting up of EMCF
• Breakdown of system
• Setting up of EMS

8
EUROPEAN MONETARY SYSTEM (EMS)

• EMS comprised three elements    
• ECU (EUROPEAN CURRENCY UNIT)      
• ERM (EXCHANGE RATE MECHANISM)        
• EMCF (EUROPEAN MONETARY COOPERATION FUND)
• EMS WAS A PRECURSOR OF ECONOMIC AND MONETARY
  UNION    

9
EUROPEAN CURRENCY UNIT (ECU)

• ECU was a composite currency made up of a basket
  of member countries    
• USES    
• - Used as denominator of community transactions
• - All currencies in ERM linked to ECU
• - Used in supporting currencies
• - Had considerable value as a private asset
• - Servedas basis for single European currency

10
EXCHANGE RATE MECHANISM (ERM)

• Cornerstone of EMS
• - Fixed exchange rate system with both
  adjustable and
• crawling pegs
• Problems - not all member countries participated
  in system
• - currency bands were far too wide (after 92)
• - system not able to deal with currency
  pressures in 92 and '93
• - in some respects present ERM did work
  effectively
• - had very important consequences for Ireland

11
EXCHANGE RATE CRISIS 92-93

• Causes
• - rigidity in system
• - poor response to Maastricht
• - doubts about monetary union
• - abolition of exchange controls
• - nature of the way the system worked
• - lack of willingness to support currencies
• Irish Experience
• - reasons for crisis
• - efforts to support currency
• - effects of attempted support

12
EUROPEAN MONETARY COOPERATION FUND (EMCF)

• Founded in 1974     - On joining members
  submitted 20 of gold and foreign
• reserves in return for ECU's    
• Funds were used for settling transactions  
• - very short-term lending facilities
• - short-term loans
• - medium-term loans
• - functions transferred to EMI in 1994