Czech Economy and European Union - Essay Example

TASK A B)The Economic and Monetary Union chiefly regulates the economic policy, regulating it in three stages culminating with the adoption of the Euro.EMU is a unique construction with a common Central Bank to conduct and formulate the monetary policy across national boundaries of the European Union. C) The consequences of European Integration can be examined under three different heads: Economic Level-Upsizing and strengthening of the internal market thereby offering prospects of extended growth and prosperity in the region Political level-The Core of the Union is likely to shift East, considering the role of Mitteleuropa and Germany, also a new balance could strike in Russia and Central Asia. Social and Cultural level-Historically integration leads to diversification of cultures. European Integration can directly affect the educational levels of its new member states. D) The Convergence criteria is also known as the Maastricht Criteria. It defines the conditions that must be fulfilled by the EU member states to qualify for the third stage of the Economic and Monetary Union and adopt the euro. The member countries who want to adopt the euro must comply with the conditions listed in Article 121(1) of the European Community Treaty. The conditions include: 1. Inflation Rate: The inflation rate should not exceed 1.5 percentage points than that of the three best performing member statues of the EU. 2. Government Finance: This head contains limits for the Government deficit and the Government debt.Firstly, the ratio of the annual government deficit to the GDP should not exceed 3%(as reckoned at the end of the preceding fiscal year).Secondly, the ratio of the gross government debt to GDP should not exceed 60%(as reckoned at the end of the preceding fiscal year). 3. Exchange Rate: The aspirant countries should have been members of the Exchange Rate Mechanisms under the European Monetary System for two consecutive years and should and have devalued their currency during that period. 4.Long term interest rate: The interest rate prevalent in the aspirant countries should not exceed two percentage points than the three best performing member states. Fulfillment of Criterion by Czech Republic Maximum interest rate-3.0% Czech's interest rate-2.2% Government finance: Government deficit to GDP (maximum limit)-3% Czech Republic-3.6% Ratio of Government debt to GDP (maximum limit)-60% Czech Republic-30.4% E) The European Central Bank (ECB) is chiefly responsible for formulating the monetary policy for the 13 member states. The main objective if the ECB is to maintain price stability in the euro area. Additionally the Bank is bound to pursue the objectives stated under Article 12 of the Treaty of EU, ie; to achieve a high level of employment and sustainable economic growth. The banks functions by employing the following tools to achieve the aforementioned objectives: Main refinancing operation-injecting money in the banking system Deposit Facility Margin lending facility Conducting foreign exchange operations and managing the official foreign exchange reserves of the euro zone countries. The ECB must fix a single interest rate as a part of the monetary policy formulation. The rate is set by the governing council of the ECB which meets twice every month. Once the interest rate has been fixed the National Central Banks must implement and maintain it in their countries.Thi is done by initiating the "open market operations". For the foreign exchange operations, the bank operates a minimum reserve system. The credit institutions in the euro area must keep a minimum reserve with the ECB which has been currently set at 26% of their total liabilities. Additional tasks include issuance of bank notes in the euro area and promotion of smooth payment system. F) Impact of Euro adoption: Fundamentally the adoption of the euro is the most important example of structured co-operation inside the EU and marks the full monetary integration of the 13 member states. A preliminary study by the European Commission indicates that the single currency has already accelerated trade among the member states. While trade within the Euro area (between the EU members) expanded by 14% over 1999-2000, it increased only by 9% between the other European countries over the review period. G) Stages of European Monetary Integration and the Czech Republic Pre Accession Stage (1995-2004)-This stage covers the preparatory stage for the fulfillment of the Europe Agreement and the Copenhagen Criteria for EU entry. Stage I (2004- present)-Czech Republic's membership of EU marks the end of the pre accession stage of integration into European structures. In this stage the fulfillment of the convergence criteria commences. Stage II-This stage marks the entry into ERM II, exchange rate mechanisms of the European Monetary System. Stage III-Finally marks the entry into the Euro Area. The Czech Republic's integration into the EU was officially launched on 1st Feb 1995 when the Europe Agreement came into force. After the EU entry, the pre accession programme came into effect, which contains plans for publicfinance.The country's preparation for euro adoption is regularly monitored in the convergence reports. The date for entering the stage ii by Czech Republic largely depends on its ability to comply with the regulations. Participation in ERM II is a gateway to euro adoption. However a longer period in ERM II participation than the required minimum is considered undesirable. Intense technical preparations for entering the euro area (adoption of the single currency) will ensue the ERM II entry. H)Advantages of Czech EMU accession 1. Czech's final entry in the euro area will mean that it can participate in the formulation and implementation of the single monetary policy which aims at maintaining monetary stability in Europe. 2. Positive effects are expected on the country's domestic economic policy as well. This is mainly because the pre requisites of the membership will ensure balanced public budgets and structural reforms for long term development. 3. The irrevocable fixing of the currency within the EMU will increase the stability within the financial sector.Exchage rate fluctuations pose a serious threat to a small open economy especially with liberalized capital flows. 4. The Euro area members are Czechs most important trading partners, therefore the enterprise sector in the country will significantly benefit from the elimination of exchange rate risk. Potential Risks of EMU accession for Czech I) The likely risks of EMU accession faced by Czech are mainly related with the response of the economy to changing economic conditions that will be triggered under the irrevocably fixed exchange rate system.Secondly, for the economic policy of Czech the loss of independent monetary policy will mean loss of an important tool that helps to mitigate the distinct effects of economic development and facilitates economic congruence. A well functioning financial market, flexibility in the labor and product markets and a stabilizing fiscal policy can mitigate the risks. J) The expected date for the adoption of euro by Czech Republic is January 2010. K) The CNB is involved in instituational, technical, organizational and legislative arrangements for euro adoption. The CNB had published a survey of tasks within it's competence and outlined the future course for the preparation of euro adoption in the beginning of 2005.There are six working groups which are involved in the legislative, technical and organizational aspects of euro adoption. The CNB is working closely with all the groups. However the financial sector is the exclusive responsibility of the CNB and the communication group is its joint responsibility with the Ministry of Finance. TASK B A) Types of exchange rates: Exchage rate system can be classified according to the degree of control maintained by the government over the exchange rates. i) Fixed exchange rate system: The rates are determined by the market forces without governmental intervention. ii) Freely floating system: In this case the rates are allowed to move freely on a daily basis. However the government may intervene to prevent the rates from moving too much in one direction. iii) Managed float exchange rate system: The national currency's value is pegged to that of a foreign currency and it moves in line with that currency. B) Central Banks manage exchange rates to smooth out the exchange rate movement, to respond to temporary disturbances and to establish an implicit exchange rate system. The Central Bank can control the reserves of foreign currency held by it in the foreign exchange market. This is known as direct intervention. Also it can intervene in the foreign exchange market without adjusting the money supply-that is known as nonsterlized intervention. Whereas in case of sterilized intervention, The Central Bank operates by offsetting transactions in Treasury securities market to maintain the money supply. D) ERM II: The European Exchange rate mechanism was a system introduced by European Community in March 1979.The main objective of this body was to achieve monetary stability and reduce exchange rate fluctuations. Also it was a run up to the Economic and Monetary Union and adoption of the euro for the member states, which finally took place on 1 January 1999.In 1999 however,ERM II replaced the original ERM.Currenicies in ERM are allowed to float within a range of 15% with respect to the fixed rate pegged against the euro. REFERENCES 1. Answers.com; Convergence Criteria. Available at-http://www.answers.com/topic/convergence-criteria 2. Wikipedia; European Central Bank. Available at-http://en.wikipedia.org/wiki/European_Central_Bank 3. Wikipedia; Economic and Monetary Union http://en.wikipedia.org/wiki/Economic_and_Monetary_Union_of_the_European_Union 4. Bank of biz/ed; European Central Bank (ECB) http://www.bized.co.uk/virtual/bank/economics/europe/ecb/does.htm-ECB 5. European Union; "The Euro at five: Ready for a global role"-Address by Dr Gunter Burghardt http://www.cnb.cz/en/international_relations/cr_eu_integration/-EMU 6. Economic Web Institute; Exchange Rate-Valentino Plana (2001) http://www.economicswebinstitute.org/glossary/exchrate.htm#types 7. Wikipedia-European Exchange Rate Mechanisms (ERM II) http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanism#Current_status_of_the_ERM_II 8. Ministry of Finance of the Czech Republic- "The Czech Republic's Euro Area Accession Strategy" http://www.mfcr.cz/cps/rde/xchg/mfcr/hs.xsl/eu_acc_stra_13438.html Read More