• Why would outsiders use the Euro?
  • stable currency → relinquish control
• Trade union: yes, EU single market
• Monetary union: almost
• Fiscal union: no
  • Transfer of taxation → EU can’t tax or transfer benefits between MS
• some people say that you need all three to function properly as a group of countries
  • Competition between low tax rates
  • Bailouts not possible without fiscal union
• ERM (exchange rate mechanism)
• International monetary system
  • US dollar dominates the world
• Foreign Exchange Transactions
  • mostly done in London & NYC
  • more in Euro area in 2022
• Currency pegging
  • set value of currency against another one → ex: chf always 1.5 euro
  • specific rate is difficult so mostly kept in a band (1.2-1.3 e.g.)
  • chf has a soft peg
  • undervaluing is good for exports, bad for imports
  • process:
    • come up with an ideal exchange rate
    • own USD / EUR to buy and sell your currency on the foreign exchange market
  • you follow ECB closely
• why not adopt euro?
  • can set your own interest rates
  • have own central bank
• Government debt:
  • taking up loans to fund public spending
  • welfare program, education, infrastructure, etc.
  • risks:
    • bankruptcy
• most countries run deficits
• generating money: taxes, loans/bonds
• interest rates are main control mechanism of any central bank

Moravcsik Text

• Assumption that you are similar enough for single currency
• At creation of euro: gamble taken that countries will converge & that the political will was there
• Germany’s interests:
  • 2% inflation rate
  • competitive exchange rate → weaken currency to be good for exports
• Convergence did not happen → EU maybe not optimal currency area
• Creditors and Debtors were aware of the risk of loans preceding the financial crisis