International
Financial Institutions
and European
Economic and
Monetary Union
Ing. Tomáš Heryán, Ph.D.
International Business Finance
FIU/NKIFA
• International financial institutions are integral part of the international
monetary system as they built up the institutional framework
• Several institutions with global or remarkably international influence
– International Monetary Fund
– World Bank and World Bank Group
– Central banks of major economic centers (Federal Reserve System, European Central
Bank, Bank of Japan, Bank of England)
– Regional development banks
– Bank for International Settlements
– European Investment Bank
• Listed institutions differ in size as well as objective
Key international financial institutions
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Conceived on Bretton Woods conference in July 1944
• Established in 1945 with headquarters in Washington, D.C.
• 189 member countries make near-global membership
• Executive management consists of 24 Directors each representing a single
country or groups of countries
• Primary aims
– Promote international monetary cooperation
– Facilitate the expansion and balanced growth of international trade
– Promote exchange stability
– Assist in the establishment of a multilateral system of payments
– Make resources available to members experiencing balance-of-payments difficulties
Basic facts about the IMF
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Surveillance = monitoring national, global, and regional economic and
financial developments and advising member countries on their economic
policies
– IMF regularly monitors the strength of national financial sectors (around 15 countries
undergo in-depth assessments annually)
• Lending = providing members with loans in hard currencies to support
policy programs designed to correct balance of payments problems
– Almost 200 new loans disbursed since 2008
• Capacity Development = offering technical assistance in its areas of
expertise, as well as training for government and central bank officials
– IMF helped establish Central Bank of Kosovo and trained its staff
Main channels of the IMF activities
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Board of Governors
– Highest decision-making body of the IMF
– Each member country represented by one governor and one alternate governor
– Approve quota increases, special drawing right (SDR) allocations, the admittance of new
members, compulsory withdrawal of members, and amendments to the Articles of
Agreement and By-Laws
– Elects Executive Directors
• Executive Board
– 24-member Executive Board conducts the daily business of the IMF
– 8 Executive Directors nominated by large countries forming single-state constituencies
and 16 represent multiple-state constituencies
– Takes decisions on all aspects of IMF work including conditions on loans, technical
assistance, IMF budget, health checks of member countries economies
IMF governance and organization
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Managing Director
– Chairman of the IMF’s Executive Board and head of IMF staff (approximately 2,700
from 148 countries)
– Appointed by the Executive Board for a renewable term of five years
– Based on tradition, the Managing Director is an European citizen
– Kristalina Georgieva (Bulgaria) has been the Managing Director since October 1, 2019.
• Governance Reform
– Reform package approved in December 2010 and became effective in January 2016
– Quota increase and shift in shares
– Protecting voting power of the poorest
– New version of quota formula
– New composition and more representative Executive Board
IMF governance and organization
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Quota system
– Each member of the IMF is assigned a quota (based on size of its economy)
– 75% paid in national currency and 25% in world major currencies
– Regular reviews of quota resources and allocations
– Latest review (the 14th), concluded in 2010, included an agreement to double quota
resources to SDR 477 billion (about USD 649 billion)
• Multilateral and bilateral borrowing
– General Agreements to Borrow (1962) and New Agreements to Borrow (1997) together
comprise lending capacity of 34 billion SDR (47 billion USD)
– Bilateral borrowing temporarily supplements other resources in periods of uncertainty
• Gold holdings
– Gold holdings amount to about 90.5 million troy ounces (2,814.1 metric tons)
Funding of the IMF
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Created by the IMF in 1969 as a supplementary international reserve asset,
in the context of the Bretton Woods fixed exchange rate system
• Collapse of the Bretton Woods system and shift to floating exchange rates
lessened importance of SDR as a reserve asset
• SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential
claim on the freely usable currencies of IMF members
• IMF may allocate SDRs to member countries in proportion to their IMF
quotas
• Has no physical form, used as a unit of account
• Its value is set daily using a basket
– Effective October 1, 2016 the SDR basket consists of USD, EUR, CNY, JPY, GBP
Special Drawing Rights (SDR)
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
SDR valuation
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
SDR interest rate
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• IMF helps its members tackle balance of payments problems and restore
sustainable economic growth
• 25% of a countries quota is deposited with it’s central bank to supplement
its international reserves and can be used unconditionally
• Other IMF lending is conditional: the country must adopt policies that
promise to correct its balance-of-payments problems
– Letter of intent (program of economic stabilization); the conditionality hardens with
every further credit line
• IMF lending is temporary (6 months – 4 years), repayment periods are 3.5
years – 10 years
• New types of lending facilities during recent global financial crisis
IMF lending
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
IMF credits outstanding
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Bretton Woods twin to the IMF established in 1945 as the International Bank
for Reconstruction and Development
• 189 member countries (membership conditioned by membership in the IMF)
• Executive management consists of 25 Directors appointed from five largest
shareholder countries or elected from other member countries
• Devoted to poverty reduction and development in poor countries
• Two goals for the world to achieve by 2030
– End extreme poverty by decreasing the percentage of people living on less than USD 1.90
a day to no more than 3%
– Promote shared prosperity by fostering the income growth of the bottom 40% for every
country
Basic facts about the World Bank
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• The IBRD opened in 1946 with the balance between post-war reconstruction
and development tilting quickly towards reconstruction
• In 1956, the IBRD Executive Directors created the International Finance
Corporation (IFC) to promote private enterprise in developing countries
• In 1960, the Executive Directors created the International Development
Association (IDA), a “soft loan” version of the IBRD
• In 1966, the International Center for Settlement of Investment Disputes
(ICSID) was introduced to provide arbitration between foreign investors and
host country governments
• In 1988, the Multilateral Investment Guarantee Agency (MIGA) was
introduced to encourage the flow of FDI to developing countries
History of the World Bank
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Components of the World Bank
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Administrative structure of the World Bank
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Body Composition Function
Board of Governors One Governor and one Alternate
Governor for each member
Meets annually; highest decisionmaking
body; vision and mission of
WB
Executive Board 25 Executive Directors plus President Day-to-day operations; approve loan
and bond issues
President Traditionally U.S. citizen,
David Malpass (2019)
Chair of Executive Board; responsible
for staffing and general business
Vice President Assists President
Advisor Council Appointed by Board of Governors Advises on general policy matter
Staff Citizens of members Run departments of WB
• The World Bank has a plethora of Vice Presidencies
• These are structured around
– Regions (Africa, East Asia and Pacific, Europe and Central Asia, Latin America and the
Caribbean, Middle East and North Africa, South Asia)
– Networks (financial and private sector development, human development, operations
policy and country services, poverty reduction and economic management, and sustainable
development)
– Functions (external relations and development economics)
• The World Bank has over 10,000 staff members who work both in the head
office in Washington, DC as well as in over 100 country offices around the
world
World Bank Administration
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Countries qualified for World Bank activities
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• International Bank for Reconstruction and Development
– 189 member countries
– Fiscal year 2016: Commitments of USD 29.7 billion for 114 approved operations
– Cumulative lending since 1945: USD 658.7 billion
• International Development Association
– 173 member countries
– Fiscal year 2016: Commitments of USD 16.2 billion for 161 approved operations (14.4
billion in credits, 1.3 billion in grants, 0.5 billion in guarantees)
– Cumulative lending since 1960: USD 326.1 billion
Summary of the World Bank activities
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Structure of the World Bank lending (last year)
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Lending by region in fiscal year 2016 Lending by sector in fiscal year 2016
World Bank top borrowers
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
IBRD top borrowers in fiscal year 2016 IDA top borrowers in fiscal year 2016
Final comparison of the IMF and World Bank
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
International Monetary Fund World Bank
Oversees the international monetary system Seeks to promote the economic development of the world's
poorer countries
Promotes exchange stability and orderly exchange relations
among its member countries
Assists developing countries through long-term financing of
development projects and programs
Assists all members that find themselves in temporary balance
of payments difficulties by providing short- to medium-term
credits
Provides to the poorest countries whose per capita GNP is less
than USD 865 a year special financial assistance through IDA
Supplements the currency reserves of its members through the
allocation of SDRs
Encourages private enterprises in developing countries through
its affiliate IFC
Draws its financial resources principally from the quota
subscriptions of its member countries
Acquires most of its financial resources by borrowing on the
international bond market
Has at its disposal fully paid-in quotas now totaling SDR 145
billion (about USD 215 billion)
Has an authorized capital of USD 184 billion, of which
members pay in about 10 percent
Has a staff of 2,700 drawn from 150 member countries Has a staff of 7,000 drawn from 180 member countries
• Final stage of long-lasting process of economic integration in Europe
• EMU has been a long standing objective since late 1960s
• Euro area with single currency and monetary policy emerged in 1999
• Economic and monetary union involves
– Policy harmonization to remove obstacles to factor mobility
– A more marked and wider range of common policies, especially in relation to
macroeconomic policy
– Irrevocably fixed exchange rates or, as in the case of the EU, a single currency
– A common monetary policy – that is, one interest rate and exchange rate policy
determined by a single Central Bank
– Some pooling of foreign exchange reserves
– Possible inter-state transfers to offset economic distortions arising from EMU
Economic and monetary union (EMU)
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
European Union and Euro Area (Eurozone)
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• United Kingdom (GBP)
– Before Brexit: „opt-out“ clause and five economic tests by Gordon Brown
– Brexit will leave United Kingdom outside the EU
• Denmark (DKK)
– „Opt-out“ clause
– Adoption of Euro refused by referendum
• Sweden (SEK)
– Referendum + political decision to not fulfill one criterion
• BG, CZ, HR, HU, PL, RO
– Convergence criteria must be fulfilled first
– Political will to accept the euro must exist
Why some EU members do not have the euro?
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• 1960-1970s
– Alternative plans proposed by France and Germany
– Final „compromise“ version approved in 1970
– Dismal global economic outlook and lack of specification of the plan's practical
implementation made the plan unsuccessful
• 1980s
– Delors Committee prepared a new plan
– Schedule, institutions, implementation procedures set up
– Basis for the Maastricht treaty
Historic plans to create monetary union
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Stage One (July 1, 1990 – December 31, 1993)
– Exchange controls were abolished, capital movements liberalized
– Set up of formal convergence
• Stage Two (January 1, 1994 – December 31, 1998)
– Name of the new currency decided
– Practical framework for the euro adoption defined
– European Central Bank established
• Stage Three (January 1, 1999 – continuing)
– 11 countries joined Euro Area (Greece two years later)
– Single monetary policy came into effect
– Euro coins and notes introduced in early 2002
Three stages for the EMU implementation
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Nominal convergence
– Five convergence criteria (Maastricht criteria) for countries joining the Euro Area
• Real convergence
– Economic cycle, structure of economy
– Real exchange rates, productivity, labor costs
– International trade, international investments
• Institutional convergence
– Legal institutions and legal acts
– Shareholders‘ and creditors‘ rights, investor protection
– Market regulations
– State capacity on enforcing contracts and tax collection
Convergence is key in the EMU
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Maastricht convergence criteria
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
What is
measured
Price stability Sound public
finances
Sustainable
public finances
Durability of
convergence
Exchange rate
stability
How it is
measured
Consumer price
inflation rate
Government
deficit as % of
GDP
Government debt
as % of GDP
Long-term
interest rate
Deviation from a
central rate
Convergence
criteria
Not more than 1.5
percentage points
above the rate of
the three best
performing
Member States
Reference value:
not more than 3%
Reference value:
not more than
60%
Not more than 2
percentage points
above the rate of
the three best
performing
Member States in
terms of price
stability
Participation in
ERM II for at
least 2 years
without severe
tensions
Indicators of real convergence in the EMU
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Real effective exchange rate Real labor productivity
• Benefits
– elimination of intra-EU transaction costs lower
interest rates
– uniform interest rates
– removal of exchange rate uncertainty in intraEMU
trade
– removes the option of competitive devaluations
between EU states
– financial integration
– economic cushioning from domestic political
instability
– creates a new international currency to represent
the EU’s combined economic weight
Costs and benefits of EMU
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Costs
– short term deflation
– loss of the exchange rate as a tool of national
economic policy
– loss of power to set interest rates and control the
supply of money
– potential problems related to a lack of ‘real’
convergence and potential policy conflicts
– the inappropriateness of one monetary policy for
so many states
• ECB is the central bank with responsibility for conducting monetary policy
for the euro area
• European System of Central Banks (ESCB) comprises the ECB and the
national central banks of all EU Member States whether they have adopted
the euro or not
• Eurosystem comprises the ECB and the the national central banks of those
countries that have adopted the euro
– The Eurosystem and the ESCB will co-exist as long as there are EU Member States
outside the euro area
• Euro area consists of the EU countries that have adopted the euro
European Central Bank (ECB)
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• Governing Council
– Main decision-making body of the ECB consisting of the six members of the Executive
Board and the governors of the national central banks of the 19 euro area countries
– Responsible for formulation of monetary policy which includes decisions relating to
monetary objectives, key interest rates, the supply of reserves in the Eurosystem
– Responsible also for decisions relating to the general framework under which supervisory
decisions are taken
• Executive Board
– Consists of the President, Vice-President and four other members
– Responsible for implementation of monetary policy and managing day-to-day business
• General Council
– Consists of the President, Vice-President and the governors of the national central banks of
all EU Member States
European Central Bank administration
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
• The primary objective is to maintain price stability in the euro area
• Price stability defined as a year-on-year increase in the Harmonized Index of
Consumer Prices (HICP) for the euro area of below 2%
• Operational framework consists of the following instruments
– Open market operations
• Main refinancing operations
• Longer-term refinancing operations
• Fine-tuning operations
• Structural operations
– Standing facilities
• Marginal lending facility
• Deposit facility
– Minimum reserve requirements to credit institutions
Objective and instruments of the ECB monetary policy
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Inflation and exchange rate development
International Financial Institutions and European Monetary Union (International Business Finance – presentation 02)
Inflation rate in euro area (HIPC, 1999-2017) USD/EUR exchange rate (1999-2017)
THANK YOU FOR YOUR
ATTENTION
J