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Essay: Problem formulation

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  • Subject area(s): Finance essays
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  • Published: 1 October 2015*
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  • Words: 764 (approx)
  • Number of pages: 4 (approx)

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It is clear that there is indeed a relation between problems on the internal market and monetary cooperation. The question therefore is if this link is of decisive importance, and if so, to what extent. Can the monetary integration in the 1970s and in the most recent years be explained by the internal market? This is in line with the academic debate on the causes of the institution-building at an European level and the processes involved. Ernst Haas and Leon Lindberg are, among others, important participants in this debate. They try to explain the moments of European institution making with a so-called theory of neofunctionalism. Neofunctionalism will be explained further in chapter 1 but it is important to mention that the concept of spill-over is at the core of this theory. It can be argued that the rise of intra-EEC trade and capital mobility will reinforce support for monetary integration or EMU (Economic Monetary Union). More intra-EEC trade will heighten the importance of exchange rate fluctuations for stakeholders. Policy autonomy will be more under pressure as exchange rate stability is required. If it will be this economic integration that works as a spill-over for financial integration, the neofunctionalist argument will be strengthened. Moravcsik is a scholar who is strongly opposed to this view. He criticizes the central element of the neofunctionalist theory, the spill-over effect.
‘[Monetary integration] was not a straightforward result of direct ‘spill-over’ from rising trade interdependence. (‘) Almost no evidence supports the view that (…) the maintenance of the customs union ‘ often cited by the Commission and occasionally by national leaders ‘ significantly influenced national monetary preferences. Such arguments are inconsistent with patterns of support for policies. Rising trade independence alone cannot explain why business in weak-currency countries should favor pegged exchange rates. At most the stability of the common market was invoked as a justification for policies pursued for other reasons.’
Therefore in these chapters it is examined to what extend the customs union and higher levels of economic coherence have attributed to the emergence of EMU in the 1970s. To see whether Moravcsik is right, and to explain monetary integration in the 1970s and in recent years, the main question in this thesis is therefore: What was the motivation behind the search for monetary stability and integration in the 1960s-1970s in the European Economic Community? With monetary integration I mean mainly the creation of the Snake and EMS, and discussions in which these systems were involved. Can it be said that preserving the common market is the main argument for these development? And does further going monetary integration serves a geo-political goal, or is it rather an economic one? I will try to explain monetary cooperation in the 1960s and 1970s. The neofunctionalist theory is useful for that, for it gives some clear indicators that can be examined. The definition of spill-over is as follows: ”spill-over?? refers to a situation in which a given action, related to a specific goal, creates a situation in which the original goal can be assured only by taking further actions, which in turn create a further condition and a need for more action, and so forth.’ Two main elements are in this definition very important that can serve as indicator. First, a certain action in a certain area brings problems to another area that are really disturbing. There has to be a relation between the two sectors and they have to be intertwined in order for actions or problems in the first sector to influence the situation in the other sector as well. Second, these problems must be solved with more cooperation in the other area. If there are other alternative actions possible, than the relation is not strong enough to speak about a real spill-over effect. For the topic of this thesis this means the following. These two elements must be taken into account when researching relations between economic and monetary problems on the internal market and the euro and, as a result of that, integration in the field of monetary issues. Therefore it is first necessary to examine if there is indeed a relation between the internal market on the one hand, and the monetary field on the other. Do problems in the internal market really cause a need for monetary integration? I have argued before that this is indeed the case. Therefore the second question is very important. Namely, if this relation indeed exists, can it be said that this is of decisive importance or can it be that there are other causes as well? A third element could be added as well.

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