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EU Econ Policies

Terms in this set (19)

Community Method
Characterized by the sole right of the EC to initiate legislation. Supranational decision making bodies huge roles in the community.
Codecision by Europarl and council
Gives the European Parliament more authority as opposed to intergovernmentalism.
Consent procedure
council has to obtain parailments assent before certain decisions are taken. Parlaiment cannot amend proposal.
Cooperation procedure
First and second reading by parliament. The European Constitution envisaged abolishing this procedure and replacing it either by a codecision procedure or by non-legislative acts of the Council. In the cooperation procedure, the Council may still exercise a veto by refusing to express its opinion on the amendments proposed by the European Parliament or on the amended proposal from the Commission, thereby blocking the legislative procedure.
Consultation
parliaments powers are limited under this procedure in so far as it can only hope that the Commission takes its amendments into account in an amended proposal.
QMV
A qualified majority is reached if two conditions are met: 55% of member states vote in favour - in practice this means 16 out of 28. the proposal is supported by member states representing at least 65% of the total EU population.
Intergovernmentalism
a. Common foreign and security policy, policing, judicial cooperation
b. The commission's right of initiative is shared with EU countries and confined to specific policy areas
c. European Council plays a key role (EP only consultative) and Council acts unanimously
Criteria for an optimum currency area
a. Labor mobility
b. Real wage flexibility
c. Fiscal transfers
d. Cross-border investment (cross-border holding of financial instruments)
i. But limited to wealthy or institutional investors
ECB Institutional Framework
a. Board of Supervisors
i. 19 member states + four ECB representatives
ii. Responsible for overseeing "systemic" banks with balance sheets over €30 billion or 20 percent of their national GDP
b. Governing Council
i. Executive Board + NCB Governors
c. Executive Board
standing facilities
• Standing Facilities (marginal to obtain overnight liquidity from the central bank, deposit facilities for overnight deposits)
Open market operations (main refinancing operations)
• Open and Main Refinancing Operations (Buying and selling of marketable securities with the aim of increasing or reducing money market liquidity) (Tender = auction) (Buying bonds from banks = lower interest rate, selling bonds to banks = raise interest rate)
•
Taylor rule
rt= p+P+a (pt-p*) +bxt

Central idea is that central banks set the interest rate to counter changes in inflation and the output gap.

Rt*- desired interest rate
A- Coeffucuebt and should always be larger than 1
P - long term real interest rate
P with dot *- inflation target
Xt- is the output gap
Debt sustainability equation and meaning
(r - x)b = (t-g)-m ̇
r = interest rate
x = growth rate of GDP
b = coefficient
t = tax revenue / GDP
g = government spending / GDP
m = monetary base / GDP

If nominal interest rate > the nominal growth rate of the economy,
either the primary budget shows a sufficiently high surplus (t > g)
or money creation is sufficiently high in order to stabilize the debt - GDP ratio.

Important conclusion is that, if a country has accumulated sizeable deficits in the past, it will now have to run large primary budget surpluses in order to prevent the debt - GDP ratio from increasing automatically.
Price stability (ECB definition)
Price stability shall be defined as a year on year increase in the harmonized index of consumer prices for the Euro Area of below 2%.
solvency problem
with a higher interest rate the government debt burden increases, forcing the government to reduce spending and increase taxation
Bagenot Doctrine
Central bank should provide liquidity to banks that are solvent but illiquid
Liquidity provision then should be unlimited
If bank is insolvent, no liquidity support
But it is difficult to distinguish between illiquidity and insolvency
Solvency vs. Liquidity
Solvency Vs. Liquidity. While solvency represents a company's ability to meet long-term obligations, liquidity represents a company's ability to meet its short-term obligations.
Stability and Growth Pact
a. Countries have to achieve balanced budgets over the business cycle.
b. Countries with a budget deficit > 3% of GDP will be subject to fines. These fines can reach up to 0.5% of GDP.
c. These fines will not be applied if the countries in question experiences exceptional circumstances, e.g. a natural disaster or a decline of their GDP of more than 2% during one year.
d. In cases where the drop in GDP is between 0.75 and 2% the application of the fine will be subject to the approval of the EU finance ministers.

This gives up flexibility and is replaced by rules. Threatens risking automatic stabilizers that would make things better according to the Opotimum currency areas.
EUrobond
countries are jointly liable for the joint debt issue.
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