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At long last, monetary union has dawned in Europe. Eleven member states now share the common currency, forming a larger EMU than many observers, who thought that monetary union would initially be restricted to the core countries of the European Union, expected. The next item on the EMU agenda now is the question how to bring the remaining members of the European Union into the monetary union. I.A. Mourmouras and M. G. Arghyrou address this question from the perspective of Greece, and, with it, future European Union members such as Hungary and Poland. Their book presents a careful and interesting study of the Greek monetary policy experiences over the past 25 years. It demonstrates how Greece moved from an inflation­ ridden economy characterized by rigid controls of the financial sector to an economy for which an independent central bank and inflation targeting are credible options. The study is not only interesting in itself but also in that it bears important lessons for the development of monetary policy and institutions in the candidate countries of the European Union.

Inhaltsverzeichnis

Frontmatter

Introduction

Introduction

Abstract
On May 2, 1998, at the Brussels European Summit, the leaders of EU governments finally chose the eleven founding members of the Economic and Monetary Union in Europe (EMU). In essence, they followed the European Monetary Institute’s recommendations (based on the Maastricht convergence criteria) regarding the first wave of countries which should adopt the common currency, the euro. This first group of EMU participants includes Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain, that is to say all current EU members, with the exception of Greece which did not manage to meet the Maastricht criteria, and the three countries which preferred to stay out on their own wish, namely, Denmark, Sweden and the United Kingdom (see Table 1 below). The Brussels summit has also confirmed that the conversion rates to be used for the transition to the euro will be the ERM central rates which prevailed on the 1st of May 1998. Thus, on the 1st of January 1999, national currencies of the eleven founding members and the euro became alternative expressions of what is economically ihe same thing. From the same date, the European Central Bank (ECB) started to conduct common monetary and foreign exchange policy in euros. On January 1, 2002, the ECB will begin issuing euros and start exchanging national currencies with euro notes and coins. During the transitional period 1999–2002 when exchange rates will be irrevocably fixed, new public debt issues will be denominated in euros, something that would aim in enhancing the liquidity and depth of the euro financial market.
Iannis A. Mourmouras, Michael G. Arghyrou

1999 and the European periphery

Chapter 1. The EMU INS and the EMU OUTS : Maastricht and beyond

Abstract
The long period of doubts, uncertainty and speculation regarding the introduction of the Economic and Monetary Union (EMU) in Europe is now over. The Brussels European Summit of May 1998 confirmed that the EMU will be launched according to the time schedule laid by the Maastricht Treaty (MT) back in 1991. Furthermore, the Summit adopted the recommendations of the European Commission and the European Monetary Institute (EMI) regarding the countries which should form the first wave of EMU participants. The 1st of January 1999 is the date of birth of the new currency, the euro, and of the EMU which includes eleven out of the fifteen members of the European Union (EU). The MT was the last in a series of attempts to promote monetary integration in Europe which started immediately after the collapse of the Bretton Woods system in August 1971. It followed the short-lived Snake Arrangement in the mid-1970s and the creation of the European Monetary System (EMS) in 1979. However, the EMU project is much more ambitious, simply because it involves the abolition of national currencies and their replacement with the euro. According to the MT, the sole responsible for the conduct of monetary policy within the EMU will be the European System of Central Banks (ESCB) with the European Central Bank (ECB) being its centre point. The role of the national central banks (CBs) will be limited to the execution of the ECB policy guidelines and the promotion of financial stability in individual countries. For good or bad, these changes are of paramount importance. By deciding to introduce the single currency in 1999, the European governments have crossed the Rubicon. Hence, a new economic reality has been created in the continent and that would affect, in various ways, both the EMU Ins as well as the EMU Outs. Furthermore, it will certainly affect the economic policy of those countries which aspire to become EU members at the turn of the century.
Iannis A. Mourmouras, Michael G. Arghyrou

Chapter 2. Greece and the European Monetary Union: a bottle half-empty or half-full ?

Abstract
As we have seen in the previous chapter, Greece is not alone within the group of the EMU Outs countries. However, there is one important difference between Greece and the other three countries, namely that Greece did not stay out of the EMU on her own wish. In fact, Greece was the only EU country which did not meet any of the criteria of nominal convergence set by the Maastricht Treaty. It is not that Greece did not make any effort to gain EMU qualification in 1999. All Greek governments in the 1990s have categorically stated that they aim at EMU participation as soon as possible and they pursued this objective by means of three stabilization/convergence programmes. The question which then arises is how hard did Greece try to be among the EMU Ins in 1999 or, in other words, why the did convergence programmes fail to secure an EMU place for Greece. This is an issue which has to be addressed in two levels: first, the economic background which accompanied the introduction of the convergence effort back in 1991; second, the nature of the policies followed in the 1990s. The above being as they may, the pressing question which is now faced by Greek policy makers is what economic measures should be taken so that Greece is admitted into the EMU in the foreseeable future. In other words, what economic strategy should Greece adopt in order to achieve EMU participation by 2002 ? Obviously, the answer is conditional upon an assessment of the reasons which prevented Greek entry in the EMU in 1999.
Iannis A. Mourmouras, Michael G. Arghyrou

An assessment of monetary strategies

Chapter 3. Monetary Developments in Greece: 1975–97

Abstract
This chapter reviews the main monetary developments in Greece during the period 1975–97. It also refers to the monetary objectives for the period 1998–99 as they were announced by the Bank of Greece (BoG) after the March 1998 devaluation of the drachma. Over the last ten years or so, the Greek monetary environment has changed significantly. The main differences can be found in the following areas: (1) the objectives pursued by monetary policy and the instruments used in order to meet these objectives; and (2) the institutional framework where (i) changes caused by the process of financial liberalization have created a completely new monetary and financial environment (ii) the Bank of Greece (BoG) has been granted independence in the conduct of monetary policy.
Iannis A. Mourmouras, Michael G. Arghyrou

Chapter 4. Recent Greek Monetary Policies

Abstract
Having reviewed in the previous chapterlhe main monetary developments in Greece, we are now ready to attempt an evaluation of Greek monetary policies after 1975. Following the introduction of monetary targets in Germany in December 1974 and in the United Kingdom in 1976, Greece adopted monetary targeting in 1976 and this policy regime lasted until 1988. With a few exceptions, all monetary targets set during this period were missed. Here, an evaluation of the monetary targeting policy regime in Greece will be attempted. It is argued that for monetary targets to be an effective policy, a constant (or sufficiently predictable) velocity of circulation and no money financing of government deficits have to be assumed. We draw special attention to a structural feature of the Greek monetary system, the direct financing of the government’s deficit from the central bank (a policy that has been effectively banned since 1st January 1994 in accordance with the Maastricht Treaty provisos). This money financing was the main cause of the constant overshooting of monetary targets that resulted in the high inflation rates experienced in Greece throughout this period. Next, an evaluation of the current policy regime will follow, namely, that of nominal exchange rate targeting. The experience from other countries has shown that for a small open economy, exchange rate targeting is quite an effective policy for bringing inflation down (mainly through its effect on imported inflation), but only in the short term. In the long term, such a policy might have serious effects upon the current account of the country. In Greece, there is little disagreement among economists and policy-makers that the strong drachma policy has been successful in bringing down the inflation rate to 6% in 1997. However, this has been achieved at the expense of higher and higher external imbalances during the years that this policy has been implemented. Moreover, what is the cause for further concern is that despite the recent welcome drop in Greek inflation, the latter still remains three times higher than the European average inflation rate.
Iannis A. Mourmouras, Michael G. Arghyrou

A new credible strategy

Chapter 5. From Intermediate Targets to Formal Inflation Targets in Greece

Abstract
Having examined in detail the Greek experience with exchange rate targeting and the serious limitations associated with the continuation of this two-stage approach to monetary policy, we are now ready to develop a new, alternative proposal regarding the future course of Greek monetary policy on the road to EMU participation. More specifically, in this chapter we argue in favour of abandoning altogether intermediate monetary targets in favour of the adoption of formal, direct inflation targets. Direct inflation-targeting should not be seen as merely just a policy rule; rather, it should be seen as a full monetary policy framework whose ultimate objective is the achievement and maintenance of price stability. In other words, inflation targeting is not an anti-inflationary policy in the sense this latter term is used in the theory and practice of stabilization policies; it is rather a unified monetary policy regime defined in terms of targets, instruments and policy indicators. Its main attraction is that it addresses the time-inconsistency problem inherent in monetary policy without presenting some of the problems associated with the implementation of intermediate monetary targets.
Iannis A. Mourmouras, Michael G. Arghyrou

Chapter 6. An Independent Bank of Greece: an idea whose time has come

Abstract
The Bank of Greece (BoG) was founded in 1928 with a mandate to safeguard the value of the national currency. Before that, the National Bank of Greece, the largest commercial bank of the country was also performing the main fonctions of a central bank. The first appointed Governor of the Bank of Greece was A. Diomides who stayed in office for about three years. Generally speaking, during its first twenty years or so the BoG enjoyed a significant degree of independence.
Iannis A. Mourmouras, Michael G. Arghyrou

Chapter 7. Summary and Lessons for EU Candidates

Abstract
Our principal objective in this book was to address the European dimension of the Greek economy and Greek monetary policy on the road to the euro. Apart from providing an evaluation of recent monetary policies in Greece, we expose a number of weaknesses of the current monetary strategy (ERM participation). The obvious rationale behind the participation in the ERM-II is that if Greece’s ultimate objective is to become a full member of the EMU it has to display a pro-European face and joining the ERM-II is a good opportunity of doing so. In addition, there is also the standard argument that the shadowing of the euro will be a commitment to low inflation. This might sound good, but, as we argued in this book, there is a number of problems at both the theoretical and practical level with participation in the ERM-II.
Iannis A. Mourmouras, Michael G. Arghyrou

Backmatter

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