The Changing World

Context
● The world has undergone significant changes since the end of World
War. At that time, most countries, and especially Europe, were divided by
superpower-dominated blocs and the economies were recovering from the
devastating effects of war. Although the transition to a free market has led to
disappointing outcomes, most countries of Eastern Europe have concentrated
on integrating their economies with Europe and on becoming part of the
European Union. International Monetary Fund dropped the term «industrial
countries» and replaced it with «advanced countries,» which include the
high-income countries and Hong Kong, Korea, Singapore, Taiwan, and
Israel. Meanwhile, the oil-exporting countries were accumulating foreign
exchange reserves and experiencing huge current account surpluses from the
second oil crisis while industrial and oil-importing countries saw their
current account deficits mounting to unprecedented levels.
●The Organization of Petroleum Exporting Countries
surpluses were invested in the financial centers of
Europe, America, and Asia, a fact that allowed banks
to increase their lending to the developing countries.
In the 1990s there was a remarkable shift toward the
market economy in advanced and developing
countries alike.
Economic and Monetary
Union
● A new initiative, the EMS, was launched on March 13, 1979, with the
aim of stabilizing exchange rates and promoting closer monetary
cooperation leading to a zone of monetary stability.
● The German mark assumed a central role as the currency with the best
inflation performance. The remaining members used the fixed exchange
rate against the German mark as a means of increasing their own anti-
inflationary
credibility.
● The Single Market Act of 1986, which created the single European
market in 1992, made the creation of the Economic and Monetary Union
(EMU) a Community objective and obliged member countries to work
towardeconomic convergence for the achievement of EMU.
● There was a three-stage process to EMU. In Stage 1 (1990–1993), all
member state currencies were to join the ERM of the EMS on equal
terms.Periodic exchange rate realignments were possible.

● Stage 2 (1994–1998) began in 1994 with the establishment of the

European Monetary Institute (EMI).
● Stage 3 began in 1998 with the introduction of the common currency (the
euro), the irrevocable locking of exchange rates (Exhibit 5.4), and the
formulation of a common monetary policy according to the provisions of
theTreaty by the European System of Central Banks (ESCB) and the ECB.
CHART title
Official Currency Conversion Rates of the Euro (national currency
units/euro)
Country Currency Conversion rate
Austria Schilling 137603
Belgium Belgian franc 403399
Finland Markka 594573
France French france 655957
Germany Deutsche mark 195583
Greece∗ Drachma 340750
Ireland Punt 0787564
Italy Italian lira 193627
Luxembourg Luxembourg franc 40339
The Netherlands Guilder 220371
Portugal Escudo 200482
Spain Peseta 166386
● The Maastricht Convergence Criteria. A successful transition to a monetary
union requires a high degree of convergence among member countries with
respect to a low rate of inflation, sound fiscal finance, and exchange rate
stability.
• Inflation—According to Article 109 (j) and Article 1 of the
Protocol Agreement, a high degree of price stability is required.

● Fiscal discipline—Article 109 (j) requires fiscal discipline position

without excessive budget deficits.
● Exchange rate stability—Article 109 (j) requires the observance of
normal fluctuation margins of the ERM of the EMS (later replaced by
ERM II) without realignments or severe tensions for at least two years.
 ● Long-term interest rates—Article 109 (j) requires the durability of con-
vergence achieved by member states, being reflected in long-term interest
rates.
● The Growth and Stability Pact. The Maastricht Treaty requires that
member countries consider their economic policies as a matter of common
interest, take all necessary measures for the coordination of their policies, and
avoidexcessive budget deficits.
● Monetary Policy. Monetary integration is a gradual process during which
a member country conducts its own monetary policy but with increasing
restrictions.
The Maastricht Treaty created an economic policy framework based on
close coordination of the policies of member states, the single market, and the
definition of common objectives according to the principles of free market and
free competition.
Economic Integration
in Latin America and
the Caribbean
The Latin American Free Trade Association was established in 1960
by Mexico and by most of the South American countries except for
Guyana and Surinam, which aimed at accelerating the process of
integration and at establishing a common market. In 1980 the Latin
American Integration Association superseded LAFTA. The Managua
Treaty of 1960 established the Central American Common Market
between Costa Rica, El Salvador, Guatemala, Honduras, and
Nicaragua, which was dissolved in 1960 and revived in 1990.
●Southern Common Market(MERCOSUR) was formed by Argentina, Brazil,
Paraguay, and Uruguay in 1991.Bolivia and Chile joined it in 1996 as associate
members. Its main objectives are free movement of factors of production,
coordination of macroeconomic policies, and functional cooperation.

●Caribbean Community(CARICOM) was formed between Antigua,

Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts-
Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and
Tobago inCARICOM operated along the lines of the European Free Trade Area
and replaced the Caribbean Free Trade Association , which was established in
1966. Progress toward trade liberalization has been slow and the establishment
of a com-mon external tariff has been postponed several times as it was difficult
to reconcile between the interests of the more developed and the less developed
member states.
Economic Integration
in the Middle East
The Middle East has had less success with economic integration than
has any other part of the world. The Arab League was created in
1945 in order to promote close links among Arab states and to
promote political, economic, social, and military cooperation. The
AL has 22 members extending from the Gulf to Mauritania and
Morocco. In 1965 Egypt, Iraq, Jordan, andYemen set up the Arab
Common Market to promote economic cooperation and integration
but practically it never got off the ground.Gulf Cooperation Council
was established between Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia, and the United Arab Emirates whose goal is to form a
common market.
Thank you!