European Economic Stability and Governance
Price Stability
The Treaty stipulates: ‘The achievement of a high degree of price stability […] will be apparent from a rate of inflation which is close to that of, at most, the three best-performing Member States in terms of price stability.’ In practice, the inflation rate of a given Member State must not exceed by more than 1½ percentage points that of the three best-performing Member States in terms of price stability during the year preceding the examination of the situation in that Member State.
Government Finances
The Treaty stipulates: ‘The sustainability of the government’s financial position […] will be apparent from having achieved a government budgetary position without a deficit that is excessive.’ In practice, the Commission, when drawing up its annual recommendation to the Council of Finance Ministers, examines compliance with budgetary discipline on the basis of the following two criteria: -the annual government deficit: the ratio of the annual government deficit to the gross domestic product (GDP) must not exceed 3% at the end of the preceding financial year. If this is not the case, the ratio must have declined substantially and continuously and reached a level close to 3% (interpretation in trend terms according to Article 104 (2)) or, alternatively, must remain close to 3% while representing only an exceptional and temporary excess; -government debt: the ratio of gross government debt to GDP must not exceed 60% at the end of the preceding financial year. If this is not the case, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace (interpretation in trend terms according to Article 104 (2)).
Exchange Rates
The Treaty stipulates: ‘the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State. The Member State must have participated in the exchange-rate mechanism of the European monetary system without any break during the two years preceding the examination of the situation and without severe tensions. In addition, it must not have devalued its currency (ie the bilateral central rate for its currency against any other Member State’s currency) on its own initiative during the same period. After transition to stage three of EMU, the European Monetary System was replaced by the new exchange-rate mechanism (ERM II).
Long-Term Interest Rates
The Treaty stipulates: ‘the durability of convergence achieved by the Member State (…) being reflected in the long-term interest-rate levels.’ In practice, the nominal long-term interest rate must not exceed by more than 2 percentage points that of, at most, the three best-performing Member States in terms of price stability. The period taken into consideration is the year preceding the examination of the situation in the Member State concerned.
Basic Tasks of the Eurosystem
– To conduct foreign exchange operations. – To define and implement monetary policy. – To promote the smooth operation of payment systems. – To hold and manage the official foreign reserves of the participating EU Member States.
Other Tasks of the Eurosystem
– Advisory functions. – Issuance of banknotes. – Contribution to prudential supervision and financial stability. – Collection and compilation of statistics. – International cooperation
Price Stability – Objective of the Eurosystem
Management of Interest Rate: When the interest rate falls down, consumption and investment rise. The effect is that production also rises. Finally, the inflation rate goes up when the economy grows quickly. When the inflation rate increases, the interest rate is risen by central banks, with the consequence of a decrease in demand, investments, etc. In addition, a rise of interest rates uses to encourage the arrival of foreign capital.
Advantages of a Common Currency
– Elimination of exchange rate risks. – Removal of transaction costs. – More stability and price transparency. – More macroeconomic stability. – A stronger currency against the rest of currencies. – No currency speculation.
Risks of a Common Currency
1. No more independence for central banks to fix interest rates and to define monetary policy:
a) For competitiveness.
b) To counteract crisis.
2. Economic adjustments can only be achieved through:
a) Public expenditure (limited in the EU)
b) Labor mobility (difficult) (Brexit?)
c) Salaries flexibility
d) More competitiveness
3. Economic sanctions if convergence criteria are not kept.
What is the Eurogroup?
Informal body where the ministers of the euro area member states discuss matters relating to their shared responsibilities related to the euro. Its main task is to ensure close coordination of economic policies among the euro area member states. It also aims to promote conditions for stronger economic growth. The Eurogroup is also responsible for preparing the Euro Summit meetings and for their follow-up. The Eurogroup usually meets once a month, on the eve of the Economic and Financial Affairs Council meeting. The Commission’s vice-president for economic and monetary affairs and the president of the European Central Bank also participate in the Eurogroup meetings. The first informal meeting of finance ministers of the euro area countries took place on 4 June 1998 at the Château de Senningen in Luxembourg. The Eurogroup elects its president for a term of 2.5 years. The current President is Mário Centeno. The Eurogroup adopts its work program every 6 months. The program defines main areas of focus and sets preliminary agendas for the upcoming Eurogroup meetings.
THE EUROPEAN BUDGET
1. Employment: 75% of the 20-64-year-olds to be employed
2. R&D: 3% of the EU’s GDP to be invested in R&D
3. Climate change and energy sustainability: greenhouse gas emissions 20% (or even 30%, if the conditions are right) lower than 1990:
- 20% of energy from renewables
- 20% increase in energy efficiency
4. Education: Reducing the rates of early school leaving below 10%. At least 40% of 30-34-year-olds completing third level education
5. Fighting poverty and social exclusion: at least 20 million fewer people in or at risk of poverty and social exclusion