Description
European Currency Crisis. It starts off with the background of European Union. It talks about the role of Germany in the crisis. It then also talks about the UK and France's story as well.It finally rounds off with the various stages of Maastricht treaty.
THE EUROPEAN CURRENCY CRISIS
The European Union: Background
? From the late 1970’s to the early 1990’s the EU
member countries formed the European Monetary System (EMS) ? The EMS was formed because the members of the EU wanted to reduce exchange rate variability ? It has two components:
? European Currency Unit (ECU) ? Exchange Rate Mechanism (ERM)
? Advantages:
? Enhanced the importance of Europe in the global
economy ? Helped create a unified Europe ? Helped improve the functioning of the Common Agricultural Policy (CAP)
European Monetary System
? Effect of the EMS
? Countries were required to intervene to make
sure that their currencies stayed within the prescribed band of 2.25% ? Bands were maintained with respect to the German Mark
Germany’s role in ERM Crisis
? Similar to that of US in Bretton Woods agreement ? Deutschemark was chosen because of
? ? ?
? ?
Bundesbank’s credibility crisis started during ReUnification of West Germany on controlling inflation Trigger for the merger with East Germany Merger of a developed prosperous economy with developing smaller economy West German Govt. spent enormous amount of money in an attempt to make this merger work Half of all savings transferred to East Germany Budget deficit rose to 13.2% from 5%
Germany’s role in ERM Crisis
? The old East German Marks were converted to DM at a ? ? ? ?
?
rate of roughly 1.8:1, far exceeding the value of East German Mark The Inflationary pressures started to build in the economy Government started pursuing contractionary monetary policy Combination of contractionary monetary policy and expansionary fiscal policy led to increase in interest rate by 3% in 1991 and 1992 Since German interest rates were higher than rest of the world there was an inflow of money in the German economy This inflow caused the DM to appreciate and NX to fall
The Crisis: UK
? United Kingdom
? Black Wednesday - September 16, 1992 ? Speculations happened on a large scale with a
rapidly weakening currency ? British government hiked up the base interest rate from an already high 10% to further 12% ? Buying up of the Sterling Pounds ? Britain was eventually forced to withdraw from the ERM because they were unsuccessful in maintaining the sterling at a level above the agreed lower limit
The Crisis: France
? France
? Rising political pressure for a cut in the French
interest rates ? Speculations that France would have to devaluate the franc or withdraw from the ERM ? France and Germany tried to defend the franc
? Central banks of France and Germany intervened aggressively
? Attacks against the Franc became impossible to
beat, the German and French governments gave up ? The ERM was discontinued ? EU finance ministers and central bankers decided to allow widening of the currency trading bands
Italy, Spain and Portugal
? Italy
? Italy too was forced to pull the Italian Lira out of
the European ERM
? Spain and Portugal
? Spain and Portugal also had to devalue their
currencies against the German Mark
The European Monetary Union
? The Signing of the Maastricht Treaty ? The formation of the European
Economic and Monetary Union (EMU) ? The creation of the Euro
Stage 1 (Jul 1,1990 – Dec 31,1993)
? Maastricht Treaty (Treaty on European Union – TEU) ? Signed on February 7, 1992 in Maastricht, Netherlands ? Convergence criteria for a country to qualify for
participation in EMU
? Inflation within 1.5% of the best 3 of the EU for at least a year
? Long-term interest rates required to be within 2% points of
the best 3 in the European Union for at least a year ? Being in the narrow band of the ERM ‘without tension’ and without initiating a depreciation, for at least two years ? A budget deficit/GDP ratio of no more than 3% and a government debt/GDP ratio of no more than 60%
? The treaty came into force on November 1, 1993
Stage 2 (Jan 1,1994 –Dec 31,1998)
? The European Monetary Institute was established as the
forerunner of the European Central Bank, with the task of strengthening monetary cooperation between the member states and their national banks, as well as supervising ECU banknotes. ? On December 16, 1995, the new currency, the Euro €, as well as the duration of the transition periods were established.
Stage 2 (contd…)
? The European Council adopted the Stability and Growth
pact to ensure budgetary discipline, and also established a new Exchange Rate Mechanism (ERM II) to provide stability with the Euro and other national currencies. ? On June 1, 1998, the European Central Bank (ECB) was created, and on December 31, 1998, the conversion rates between the 11 participating national currencies and the Euro were established.
Stage 3 (Jan 1,1999 – present)
? As of January 1, 1999, the Euro now became a real
currency, and a single monetary policy was introduced under the authority of the ECB ? A three-year transition period began before the introduction of actual euro notes and coins, but legally the national currencies have already ceased to exist ? On January 1 of 2001, 2007 and 2008, Greece, Slovenia and Cyprus respectively, join the third stage of the EMU, ? Slovakia joined the EMU on the first day of 2009.
Current Scenario
? The Euro is the second largest reserve currency
and the second most traded currency in the world after the U.S. dollar ? The Eurozone is now the 2nd largest economy in the world ? Several countries like Hungary, Bulgaria, and Romania are considering joining the new ERM II and possibly the Eurozone ? Over 175 million people worldwide use currencies which are pegged to the Euro, including more than 150 million people in Africa
Conclusion
? With more than €751 billion in circulation, the Euro
is the currency with the highest combined value of cash in circulation in the world ? The Euro produces a greater degree of European market integration than fixed exchange rates ? Although Germany was the catalyst in the crisis, much of the fault can be attributed to all those involved, including the member countries and speculators.
Thank You
doc_285843180.pptx
European Currency Crisis. It starts off with the background of European Union. It talks about the role of Germany in the crisis. It then also talks about the UK and France's story as well.It finally rounds off with the various stages of Maastricht treaty.
THE EUROPEAN CURRENCY CRISIS
The European Union: Background
? From the late 1970’s to the early 1990’s the EU
member countries formed the European Monetary System (EMS) ? The EMS was formed because the members of the EU wanted to reduce exchange rate variability ? It has two components:
? European Currency Unit (ECU) ? Exchange Rate Mechanism (ERM)
? Advantages:
? Enhanced the importance of Europe in the global
economy ? Helped create a unified Europe ? Helped improve the functioning of the Common Agricultural Policy (CAP)
European Monetary System
? Effect of the EMS
? Countries were required to intervene to make
sure that their currencies stayed within the prescribed band of 2.25% ? Bands were maintained with respect to the German Mark
Germany’s role in ERM Crisis
? Similar to that of US in Bretton Woods agreement ? Deutschemark was chosen because of
? ? ?
? ?
Bundesbank’s credibility crisis started during ReUnification of West Germany on controlling inflation Trigger for the merger with East Germany Merger of a developed prosperous economy with developing smaller economy West German Govt. spent enormous amount of money in an attempt to make this merger work Half of all savings transferred to East Germany Budget deficit rose to 13.2% from 5%
Germany’s role in ERM Crisis
? The old East German Marks were converted to DM at a ? ? ? ?
?
rate of roughly 1.8:1, far exceeding the value of East German Mark The Inflationary pressures started to build in the economy Government started pursuing contractionary monetary policy Combination of contractionary monetary policy and expansionary fiscal policy led to increase in interest rate by 3% in 1991 and 1992 Since German interest rates were higher than rest of the world there was an inflow of money in the German economy This inflow caused the DM to appreciate and NX to fall
The Crisis: UK
? United Kingdom
? Black Wednesday - September 16, 1992 ? Speculations happened on a large scale with a
rapidly weakening currency ? British government hiked up the base interest rate from an already high 10% to further 12% ? Buying up of the Sterling Pounds ? Britain was eventually forced to withdraw from the ERM because they were unsuccessful in maintaining the sterling at a level above the agreed lower limit
The Crisis: France
? France
? Rising political pressure for a cut in the French
interest rates ? Speculations that France would have to devaluate the franc or withdraw from the ERM ? France and Germany tried to defend the franc
? Central banks of France and Germany intervened aggressively
? Attacks against the Franc became impossible to
beat, the German and French governments gave up ? The ERM was discontinued ? EU finance ministers and central bankers decided to allow widening of the currency trading bands
Italy, Spain and Portugal
? Italy
? Italy too was forced to pull the Italian Lira out of
the European ERM
? Spain and Portugal
? Spain and Portugal also had to devalue their
currencies against the German Mark
The European Monetary Union
? The Signing of the Maastricht Treaty ? The formation of the European
Economic and Monetary Union (EMU) ? The creation of the Euro
Stage 1 (Jul 1,1990 – Dec 31,1993)
? Maastricht Treaty (Treaty on European Union – TEU) ? Signed on February 7, 1992 in Maastricht, Netherlands ? Convergence criteria for a country to qualify for
participation in EMU
? Inflation within 1.5% of the best 3 of the EU for at least a year
? Long-term interest rates required to be within 2% points of
the best 3 in the European Union for at least a year ? Being in the narrow band of the ERM ‘without tension’ and without initiating a depreciation, for at least two years ? A budget deficit/GDP ratio of no more than 3% and a government debt/GDP ratio of no more than 60%
? The treaty came into force on November 1, 1993
Stage 2 (Jan 1,1994 –Dec 31,1998)
? The European Monetary Institute was established as the
forerunner of the European Central Bank, with the task of strengthening monetary cooperation between the member states and their national banks, as well as supervising ECU banknotes. ? On December 16, 1995, the new currency, the Euro €, as well as the duration of the transition periods were established.
Stage 2 (contd…)
? The European Council adopted the Stability and Growth
pact to ensure budgetary discipline, and also established a new Exchange Rate Mechanism (ERM II) to provide stability with the Euro and other national currencies. ? On June 1, 1998, the European Central Bank (ECB) was created, and on December 31, 1998, the conversion rates between the 11 participating national currencies and the Euro were established.
Stage 3 (Jan 1,1999 – present)
? As of January 1, 1999, the Euro now became a real
currency, and a single monetary policy was introduced under the authority of the ECB ? A three-year transition period began before the introduction of actual euro notes and coins, but legally the national currencies have already ceased to exist ? On January 1 of 2001, 2007 and 2008, Greece, Slovenia and Cyprus respectively, join the third stage of the EMU, ? Slovakia joined the EMU on the first day of 2009.
Current Scenario
? The Euro is the second largest reserve currency
and the second most traded currency in the world after the U.S. dollar ? The Eurozone is now the 2nd largest economy in the world ? Several countries like Hungary, Bulgaria, and Romania are considering joining the new ERM II and possibly the Eurozone ? Over 175 million people worldwide use currencies which are pegged to the Euro, including more than 150 million people in Africa
Conclusion
? With more than €751 billion in circulation, the Euro
is the currency with the highest combined value of cash in circulation in the world ? The Euro produces a greater degree of European market integration than fixed exchange rates ? Although Germany was the catalyst in the crisis, much of the fault can be attributed to all those involved, including the member countries and speculators.
Thank You
doc_285843180.pptx