Political

economy
 Ligne Rouge of class:

Center -

peripheny Bretton woods

City London and eurodollar -> Mundell Tailemma,

ifyou want
Kickes back speculative investment
->
Free CapitalistFlows Fiscal exchange
+

note because it's

advantageous, you
70S RiSiS can't have covereign fiscal policy
collapse ofthe Bretton Woods system and oil crisis

Liberalization of market
No
fiscal union
monetary union

Germany looking atyou

we are New world context
after toIstagflation-idea
fear ofmoral hazard thatwe have to keep
inflation check- in

Ifuture Role of ECB) +

financial contextof
Repo marbet
Asymmetry of Eurozone freecapital flows (because big banks means

I
power for the country) failure of macro-eco
+

I only ordo on dirigism not EU)

lack of fiscal tools ( Mutshell optimal cur. area gov. filled for the
Common market
financial whythe EU not:lacks
=>
so ECB will rely on is

tools to incentisize investment the fiscal instruments criteria Democracy

in the periphery (Repomanket) -
difficult to
regaincompetitiveness Conseq. peri countries

culturalizat of the hisi s

problem?
Respond to external shocks be prioritized
Social
conseq. =) exterparties
Come banks used E for speculative market logic
investment, not productive one
u banks mous sense only politically
(ECB Rules spelled the as global hedge Fund not economic logic
housing bubble) ->

Financial imbalances
Austerity
2008 Financial crisis
eurozone crisis meant periphery
countrywere a
in

european banks deeply embedded banks

eco
tough eco situation + come were

Response:bailout by
->
meant to collapse
1944 Bretton Woods

E
encourage
states to made with each other's as a to
way further peace, while
What it controlling and
restricting capital movements.
allows I don'twantto destabilize what
countries; avoid happened Germany in

avoid
->

speculative investmentbe itcould undermine the state, who would not have enough
money for
their
social system if
investors moved so control on investor movements

made to tax wealthypeople to reduce inequalities through 40s-70s

-

easier

now people had money to spend --

extend the consumer
Range

MS hegemon MS was the Richestcountry

so committed to make sure BS worked (e.g manshall plan)
Collapse production ofMS dollars outof the MS due to Londonwhich was the
financial capital of
the would thatallow escape BWS which undermined international
people to cooperation
According to Mundell TRilemma, the BWS, since ithas
fixed exchange and sovereign

monetarypolicy, forgoing free capital flow and forbidding speculative bubble

The Bretton Woods system restrict
free capital flow (speculative investment
because if
investors more, a state's social system would not have enough money.
From the 60s, the UK lacked income because of decolonization, and because
the UK needed to
money buy continue its economy
oil to -> London strated printing
more dollars and became a tax haven inthe BWS.

MS and UK saw the

benefits ofspeculative capitals:countries can attac
investors and more
capital would
flow into your county
↳
theyabused thissystem theyneed to disband to
-

increase
benefits
their in

having freecapital flows

 MundellTrilemma

model to
A help understand the system ofconstraints that politicians have to
face
I
trade-off in economywithin this, political choices are made

no control ofcapital flow ofcitizens

the
only 2 ofthe objectives on move
your $ freely
triangle can be achieved at the time
freecapital flow

A b

Fixed exchange rate a

Sovereign monetary policy
from
5) I countries can be exchanged freedom to choose interest Rate

in the same Ratio all the time

how we reach a common monetaryunion and reaching that pointwas unescapable

As for countries of the EU when they created the EMU, theycountries

lose sovereign over
monetarypolicy, though achieve free
their

capital flow and fixed exchange Rate.(by having only 1carmency:E)

 Asymmetry ofthe EU

eurozone not an optimal currencyarea

before, if no competition devaluate the

money
now, with eurozone notpossible

New
way to regaincompetitiveness

⑦ wage flexibility ② Labor mobility

cut
wages
to reduce product tiny ↳Rain drain

Pricebutoperhapsthe
-
Racism
-> competitivenes

③.Federal fiscal instruments (do not have I)

taxe people (wealthy) to
Redistribute poorest EU not possible
No
fiscal policy
enrobond exception - no
fiscal transfent

Why no
fiscal policy?
Germany no trustin EMU be the mannant
MORAL Hazzand

proposed contract
make sure is would not borrow too much on
financial market

Growth stability pact Result

feeling increased
after have
2005 to earn it"

After Maastrich more competences to EU given (fiscal)

No!! for Germany because control on National level but no EU

lack of democracy
 Financial

answer
asymmetryofeuro-area EU does nothave fiscal tools

financial tools

Boom and Bust pattern --

nature on
financial activity

you put
beton the
future, bet on the How you invest
financially
Risk related to you return (returns initial

when supply-demand meet

--
popularity How do
you fix prices
↳ bet on what
people willdo euphoria

When product is not reallyvaluable

 Why austerity as Response?
setof
political eco transition

financial public debt crisis

policies aim to reduce
crisis (bank bailout) .

government budget
deficitthrough
↳ austeritymeasures
↳
need more regulation
spending cuts, far increases

atNew
former government Greek
governmentcheated its statistics
Bail out ok 1st time butand time not okay because not
enough
To solve the 2nd time around:

I
↳Ican't allow Greece to restructure its debtbe it'd be politicallyenicide be it'sobvious that
States letbanks did shady stuff --
it's had if
the

the banks
publicknow that their$ go to
Iscounties
politicians can'tpump $ to come european banks themselves

they give $ to peripherical countries to

pay
their debtto come banks

The $ to peripherical countries come

is countries tax $

to to
justifyraising tax come countriesutizens come countries
frame itas:

① culturized Greek people lazy ③ Greek doing

austerity as
punishment
& We help them out ofsolidarity
 Inflation, how and why reaction?

1930 crisis --
Geopolitical
2008 subprime -
investmentmade bybanks (European Central Bank)

Covid 19-slockdowns froze part ofthe economy

I supply-demand shock
Ukraine war -

dependence on Russian gas

German opposition
nelsarECB Response -

monetarystrategies
>

in
MS monetary the ↑ Raise keyinterest rate
I

covereigknty,nor
manga Spain Raise cost of
keep
sovereignty
housing crisis importation

the eurozone
monetary policy

temporary ->
non use ofregulatorymechanisms
↓No
↳ monetary interest Rate 2%
persistance -
Revise
policy - 0 ->

quantitative lightening -- reduction of total value ofits assets

financial holdings
by decreasing

Action plan with climate

consideration into
monetary strategy - combate climate
change - contribution to price stability
objective
antiinflationarycredibility?? ECB's dilemma