Explain the consequences of the global financial crisis for monetary union.

(15)

Explain the consequences of the global financial crisis for monetary union. (15)
Nature of key consequences (AO1): Many countries were unable to keep their budget deficit below the agreed 3% of GDP e.g. Greece, Spain and Ireland ..... government borrowing costs have subsequently soared. The European Central Bank has also had to buy billions of euros of sovereign debt to ease the pressure on the countries seen as the most vulnerable, and plans to double its reserves to 10.8bn euros.... The growth of the Eurozone economy has weakened, growing only 0.3% in the final quarter of 2010, leading to a decline in confidence in the long-term survival of the euro.... Reasons for the consequences (AO2): The EU lacks a supranational body that can make a quick decision in times of crisis The proposed EFSF is not big enough to bail out further economies (Spain) The lack of flexibility imposed by a single interest rate has led to uncompetitive economies suffering rapid unemployment in the recent economic downturn

The crisis has led to persistent fears about the levels of debt in some member states, which has caused their cost of borrowing to reach record levels Lack of stability mechanisms embedded in the process - the member states are now negotiating introducing such mechanisms, but are facing difficulties ...indeed some countries (UK) fear this will lead to tax harmonisation or further reinforce the idea of a twospeed Europe The goal of monetary stability has also made it difficult for member states and the ECB to react quickly to the international financial crisis- the 2008 crisis saw individual member states introducing measures to combat the crisis rather than turning to the ECB

Why has the European Central Bank found it to be so difficult to manage monetary policy within the Eurozone? (15)

Why has the European Central Bank found it to be so difficult to manage monetary policy within the Eurozone? (15) Candidates should demonstrate awareness that the consequences of the ECBs decisions are wide-ranging, despite its narrow remit: The ECB is responsible for maintaining EU-wide inflation at 2%, and setting monetary policy to achieve this goal The ECB should maintain its independence from political influence or pressure. It has been successful in both these goals, resulting in the Euro becoming a world-class currency. However, other consequences of this success have not always been positive. For example: With different economic cycles, the ECBs one size fits all interest rates have not always been helpful to all the countries in the Eurozone Several member states have been unable to keep their budget deficits within the agreed limits of euro membership

The lack of flexibility imposed by a single interest rate has led to uncompetitive economies suffering rapid unemployment in the recent economic downturn The goal of monetary stability has also made it difficult for member states and the ECB to react quickly to the international financial crisisthe 2008 crisis saw individual member states introducing measures to combat the crisis rather than turning to the ECB Stronger candidates may make reference to the role the ECB played in the Irish economic collapse in 2010.

Predictions that the monetary union would fail have been misplaced. Discuss. (45)

Predictions that the monetary union would fail have been misplaced. Discuss. (45) Candidates should demonstrate awareness that there are sharply contrasting views on whether a one size fits all monetary policy can be suitable for all of the countries in the Eurozone. Arguments that monetary union has worked include: The establishment of a world class currency to rival the US dollar The feared inflationary effect of joining the Eurozone has not occurred (although the impact of monetary union on inflation is hard to judge with increasing globalisation) The Eurozone was relatively strong and stable before the 2008 economic crisis The Euro has survived the 2008 economic crisis-its value remained strong while the value of the US dollar and UK Sterling fell, and in fact it gained in popularity

Arguments that monetary union has failed/not worked as planned include: The expected growth in the EU economy has not occurred, indeed it has stagnated. Differing economic cycles in national economies needs more flexibility than the European Central Bank allow e.g. the property boom in Spain and Eire was the reverse in Germany where costs were squeezed down to pull through. 14 Eurozone states breached the Stability and Growth Pact rules in 2009- even economically strong countries like France and Germany have struggled to stay within the required debt and deficit rules, with both coming close to having sanctions imposed on them in 2003 Monetary union did not prevent Greece and Ireland from near-bankruptcy during the 2008 economic crisis The Eurozone members had to agree to set up a Eurozone-wide fund to remove

the fear that weak Eurozone states wouldnt be able to repay their debt The IMF has had to contribute to the economic bailout of countries such as Ireland and Spain, and argued that substantial reform is needed to prevent a domino effect across the Eurozone Candidates who only discuss the impact of events since the 2008-09 recession should be rewarded if they demonstrate a strong knowledge and understanding of these recent developments.