Description
introduction & importance,european union – formation, economic and monetary union (EMU) of europe, formation of european economic community, introduction of the european monetary system, eurozone and introduction of the euro,current account and capital account convertibility, euro Convergence criteria, european exchange rate mechanism, spanish and greek Crisis.
Presentation Flow
European Union – Introduction & Importance ? European Union – Formation 1. Economic and Monetary Union (EMU) of Europe 2. Formation of European Economic Community 3. Introduction of the European Monetary System 4. Eurozone and Introduction of the Euro 5. Current account and capital account convertibility ? Euro Convergence Criteria ? European Exchange Rate Mechanism ? Spanish and Greek Crisis
?
EU - Introduction
Economic and political union of 27 member states ? Established by the Treaty of Maastricht on 1 November 1993 ? Main reason for formation was regional integration ? Traces its origins from the European Coal and Steel Community ? Important institutions include: European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank.
?
Timeline
? ? ?
1945: End of World War II 1946: Churchill calls for “a kind of United States of Europe” 1951: Treaty of Paris: European Coal and Steel Community
?
? ? ? ? ? ? ? ? ? ?
1954: European Defense Community fails
1957: Treaty of Rome: European Economic Community and Euratom 1963: France blocks entry of UK 1972: The UK, along with Ireland and the Denmark, joins the European Communities 1987: Single European Act 1991: Treaty of Maastricht: The European Communities become European Union 1995: Schengen Agreement 2002: The EURO is introduced 2002-2003: European Convention for Constitution 2004: 10 new countries join the European Union 2007: Two more countries (Romani, Bulgaria) join EU
European Coal & Steel Community
?
? ? ? ?
Schuman Declaration: A decision was taken (post-WWII) to move towards the integration of Europe into a single entity Served to unify Western Europe during the Cold War Only aimed at centralizing control of the national coal and steel industries of its members Tried to create a common market for coal and steel Was seen as one of "the first steps in the unification of Europe"
Formation of European Monetary Union
? ?
Need to create a currency which could effectively compete with the US Dollar Achieved in three stages: - European Economic Community (EEC) - Introduction of the European Monetary System (EMS) - Eurozone and Introduction of the Euro
European Economic Community (EEC)
?
?
Goal – to achieve trade integration via a common market
Treaty of Rome, 1957: West Germany, France, Italy, Belgium, Holland & Luxembourg Goal of a common market was achieved by 1968
?
European Economic Community (EEC)
Major features: Zero-tariff levels by progressive elimination of quantitative and qualitative restrictions ? Common schedule of duties, tariffs and quotas for nonmembers ? Integration of transportation and agricultural systems ? Movement restrictions on factors of production removed ? Realignment of sectors based on comparative advantage ? Fund for retraining and redeployment of workers
?
Introduction of the European Monetary System (EMS)
IMF introduced the flexible exchange rate system in 1978 ? All nations free to adopt any exchange rate system ? Exchange rate mechanism based on the BWS ? Key elements: 1. Establishment of parity grid 2. Policy on parity changes 3. Wider variation zones 4. Creation of European Currency Unit (ECU)
?
Introduction of the European Monetary System (EMS)
?
Establishment of parity grid Under BWS, currency valued only against USD Under EMS, each member valued against each other Interlocking grid of parities Provided greater internal stability
1.
2.
3. 4.
Introduction of the European Monetary System (EMS)
?
Policy on parity changes Under BWS, countries changed parities in consultation with the IMF But most changes were unilateral Under EMS approval of all members required Provided consistency in the system and maintained stability
1. 2. 3. 4.
Introduction of the European Monetary System (EMS)
?
Wider variation zones BWS allowed exchange rates to move in a range of +/-1% EMS provided for variation upto +/-2.25% Provision to increase upto +/-6% Allowed more flexibility
1.
2.
3. 4.
Introduction of the European Monetary System (EMS)
?
Creation of the ECU
1. 2. 3. 4.
5.
European Currency Unit was created on 13 March 1979 The ECU was a basket of currencies of the EEC members Used as the unit of account of the European Community Main purpose: Provided investors with the opportunity for foreign diversification Replaced by the Euro on January 1, 1999
Valuation of ECU
1.
2.
3.
A weighted average of the currencies of member countries. The weights reflected the relative size of the national economies Divide each of the twelve amounts of national currency in the ECU basket by the corresponding exchange rates of that country vis-à-vis the target currency (Eg: DEM/USD, FRF/USD, GBP/USD, etc.) Then add these twelve numbers together to obtain the USD/XEU exchange rate
Introduction of the Euro
Treaty of Maastricht, 1992 ? Steps taken towards the introduction: 1. All capital controls abolished 2. European Monetary Institute established (later European Central Bank) 3. Economic convergence between participants to freeze exchange rates on 31st Dec. 1998 4. Introduced on 1st Jan. 1999 5. Initial value equals 1 ECU 6. New coins and notes introduced on 1st Jan 2002 7. All other currencies withdrawn by 30th June 2002
?
Eurozone
? ?
?
? ?
Officially known as the ?euro area? An economic and monetary union of 16 nations belonging to the European Union (EU) who have mutually decided to adopt the Euro currency as their sole legal tender Euro is the second largest reserve currency and the second most traded currency in the world after the U.S. dollar The monetary policy of the Eurozone is set by the European Central Bank, headquartered in Frankfurt 9 nations yet to adopt Euro as currency as per Treaty of Maastricht norms
Source: http://europa.eu/ (Official website of the European Union)
Members of Eurozone
? Austria ? Italy
? Belgium
? Cyprus ? Finland ? France ? Germany
? Luxembourg
? Malta ? Netherlands ? Portugal ? Slovakia,
? Greece
? Ireland
? Slovenia
? Spain
Capital Account Convertibility
? ? ? ? ? ?
Low priority to liberalisation of capital movements Only to the extent required for the functioning of the Common Market Early 80’s – Only 5 members had abolished all controls Hence – Single European Act of 1987 Specifically required all restrictions on capital movement to be abolished Explicitly recognised the importance of full liberalisation as necessary condition for success of Common Market
Source: Europa – Official Website of the EU
Capital/Current Account Convertibility
Three broad categories were identified: A> Direct Investments and other capital B> Financial Markets & Securities C> Money Market Instruments ? All restrictions/barriers w.r.t to the above three categories are to be removed ? All transactions segregated into 4 lists – A, B, C,D ? List C – Possibility of reintroduction on restrictions ? No undertaking regarding liberalisation towards transactions in the fourth list
?
Source: RBI Report - http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/14031.pdf
Stages of Convertibility
? ?
? ? ?
Proceeded in two stages First stage: Liberalisation of transactions which most directly necessary for proper functioning of Common Market Transitional periods for compliance allowed to some countries Stage two: Safeguard clause has been provided Protective and corrective measures
Source: RBI Report - http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/14031.pdf
Euro convergence criteria
?
Also known as the ?Maastricht Criteria? Price stability: The average rate of consumer price inflation over the previous 12 months must not exceed by more than 1.5 percentage points that of, at most, the three best performing member states and this performance should be sustainable Public finance. The financial position of the member country's government must be sustainable, as evidenced by the country not being subject to an excessive deficit. The general government deficit should not exceed 3% of GDP. The gross debt total of the general government should not exceed 60%of GDP
?
?
?
Interest rates. Long-term government bond yields averaged over the previous 12 months should not exceed by more than 2 percentage points those of, at most, the three member countries with the lowest inflation
Exchange rates. A country should have respected the normal fluctuation margins of the ERM for at least two years without severe tensions and without devaluing its currency against any other member's currency on its own initiative. In 2009 the IMF floated a suggestion that countries should be allowed to "partially adopt" the euro - adopting the currency but not qualifying for a seat on the European Central Bank. Ex:Monaco, San Marino and the Vatican City State - they have adopted the euro and mint their own coins, but they don't have ECB seats
?
?
Impact of Euro
? ? ? ? ?
Increased trade within the euro area between 9 and 14% Physical investment have increased by 5% in the Eurozone Intra-Eurozone FDI stocks have increased by about 20% during the first four years of the EMU Positive effect on tourism flows within the EMU with an increase of 6.5% Euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the Eurozone
Advantages of Euro
Currency stability ? A single currency should end currency instability in the participating countries (by irrevocably fixing exchange rates) and reduce it outside them. ? Because the euro would have the enhanced credibility of being used in a large currency zone, it would be more stable against speculation than individual currencies are now. ? An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This could unleash great potential for growth Prevention of competitive devaluations A competitive devaluation is when one country devalues its currency in order to export more goods. In response, the trading partners of that country would do the same thing, resulting in a downward spiral regarding currency value, as well as an increase in inflation
Business benefits ? Likewise, businesses would no longer have to pay hedging costs which they do today in order to insure themselves against the threat of currency fluctuations. ? Businesses, involved in commercial transactions in different member states, would no longer have to face the costs of accounting in different currencies. ? Surprisingly, small firms stand the most to gain. Experts estimate that currently the currency cost of exports is ten times higher for small companies than for multi-nationals, who can offset sales against purchases and command the best rates.
Cheaper mortgages, lower interest rates ? A single currency should also result in lower interest rates as all member countries if the new European Central bank takes on the monetary credibility of Germany's Bundesbank. ? The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the euro's international credibility. ? This should lead to more investment, more jobs, lower interest rates and for home owners to lower mortgages.
Disadvantages of Euro
?
The biggest cost of switching to a common currency was that each member nation relinquished its right to change monetary and economic policies in order to respond to economic problems at home Exchange rates between countries were no longer adjusted by the individual countries to help regional economic slumps get moving Countries can’t change their monetary policies.
?
?
Exchange Rate Mechanism
?
?
? ? ?
ERM is based on the concept of fixed currency exchange rate margins, but with exchange rates variable within those margins A grid (known as the Parity Grid) of bilateral rates was calculated on the basis of these central rates expressed in ECUs, and currency fluctuations had to be contained within a margin of 2.25% ERM II replaced the original ERM A currency in ERM II is allowed to float within a range of ±15% with respect to a central rate against the euro EU countries that have not adopted the euro are expected to participate for at least two years in the ERM II before joining the Eurozone
Exchange Rate Mechanism
? ?
The euro is the sole currency of 16 EU Member States Outside the EU, the euro is also the sole currency of Montenegro and Kosovo and several European micro states (Andorra, Monaco, San Marino and Vatican City) as well as in three overseas territories of EU states that are not themselves part of the EU (Mayotte, Saint Pierre and Miquelon and Akrotiri and Dhekelia) Total of 23 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro including 14 countries in mainland Africa (CFA franc and Moroccan dirham), two African island countries (Comorian franc and Cape Verdean escudo), three French Pacific territories (CFP franc) and another Balkan country, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark). On 28 July 2009, São Tomé and Príncipe signed an agreement with Portugal which will eventually tie its currency to the euro
?
Crisis In Spain
In the month of December in 2008, Spain’s industrial output declined by 19.6% ? Last quarter of 2008 1,082 companies filed for bankruptcy ? Unemployment in Spain has reached 17.4 percent, according to figures released April 24 by the National Statistics Institute ? Twice the European Union average, ? Loss of tax revenue, growing unemployment benefit costs and economic stimulus packages have boosted the budget deficit to 11.4 per cent of GDP, one of the highest in the EU ? Overheated housing market; with the recession, it is also suffering from a banking crisis and an industrial slump.
?
Causes:
?
?
?
Backed by the strong and stable German economy, the euro interest rate allowed consumers in countries such as Italy, Spain and Ireland — normally at pains to afford credit due to high interest rates — to spend like never before This fueled an unprecedented demand for consumer goods (such as cars, kitchen appliances, etc.) and houses bought on credit that propelled the Spanish housing boom, which led to booms in the construction and mortgage lending industries. Excesses of the Spanish housing boom put the U.S. subprime debacle to shame.
?
?
?
The budget deficit of 2008 has been compounded by the government’s efforts to spur economic activity through roughly 50 billion euro ($66 billion) in stimulus 8 billion euro has been distributed directly to local authorities for public works projects meant to create 200,000 jobs. Completing the recipe for economic agony is the fact that Spain is the first European country to face possible deflationary pressures in the current recession.
Crisis in Greece
Greece in the last decade
?
Budget deficit rose to 5 per cent of GDP in 2008, which activated the European Commission’s excessive deficit procedure Greek public debt-to-GDP ratio at 97.6 % in 2008 second highest in the EU and rising Governments failed to take advantage of the good times to put the public finances in order Reducing debt-to-GDP ratio to 60 % Maastricht reference level within the next decade means primary surpluses of 4-5 % of GDP
?
?
?
Causes
?
The euro appeared to be very strong, with the value of the U.S. dollar, the British pound, and other currencies
dramatically falling in comparison to it – one of the
causes of Greece’s problems
?
Tourism is a major economic sector in Greece, affected adversely due to economic slowdown
?
Greek economy collapsed and the Greek government
was no longer able to pay the country’s public debts.
Source: The Brussels Journal ,2010-01-28
?
?
Germany and the Netherlands have refused to help
Also for some years Greece seems to have covered up its bad economic performance by officially presenting better economic figures than was the case
?
Credit Rating of Greece dropped to A minus The ECB adopted the (self-imposed) rule: It will not accept as collateral in repos and at the marginal lending facility (its discount window) sovereign debt rated lower than A minus. If the ECB/Euro system stick to this rule, the next downgrade of Greek sovereign debt could have a major impact on the Greek government’s marginal funding costs.
Source: Financial Times, January 14,2009
?
?
A eurozone member state faced with the prospect of sovereign default, or just having suffered the indignity of sovereign default, would be immensely relieved to be a member of the eurozone. The last thing it would want to do is give up the financial shelter provided by membership in the eurozone On the other hand to avoid civil unrest in Greece - drop the euro and re-establish their own national currency This will allow the Greek government to devalue the currency in order to stimulate exports and economic growth – a political-monetary tool which Athens lacks if it remains in the eurozone.
?
?
Implications
?
Fears about Greece’s financial situation has led to a drop in value for the euro All the 27 member states of the EU, not just the 16 member states of the euro zone, are obliged to help the Greeks if the EU decides to bail them out.
?
THANK YOU
doc_323825056.pptx
introduction & importance,european union – formation, economic and monetary union (EMU) of europe, formation of european economic community, introduction of the european monetary system, eurozone and introduction of the euro,current account and capital account convertibility, euro Convergence criteria, european exchange rate mechanism, spanish and greek Crisis.
Presentation Flow
European Union – Introduction & Importance ? European Union – Formation 1. Economic and Monetary Union (EMU) of Europe 2. Formation of European Economic Community 3. Introduction of the European Monetary System 4. Eurozone and Introduction of the Euro 5. Current account and capital account convertibility ? Euro Convergence Criteria ? European Exchange Rate Mechanism ? Spanish and Greek Crisis
?
EU - Introduction
Economic and political union of 27 member states ? Established by the Treaty of Maastricht on 1 November 1993 ? Main reason for formation was regional integration ? Traces its origins from the European Coal and Steel Community ? Important institutions include: European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank.
?
Timeline
? ? ?
1945: End of World War II 1946: Churchill calls for “a kind of United States of Europe” 1951: Treaty of Paris: European Coal and Steel Community
?
? ? ? ? ? ? ? ? ? ?
1954: European Defense Community fails
1957: Treaty of Rome: European Economic Community and Euratom 1963: France blocks entry of UK 1972: The UK, along with Ireland and the Denmark, joins the European Communities 1987: Single European Act 1991: Treaty of Maastricht: The European Communities become European Union 1995: Schengen Agreement 2002: The EURO is introduced 2002-2003: European Convention for Constitution 2004: 10 new countries join the European Union 2007: Two more countries (Romani, Bulgaria) join EU
European Coal & Steel Community
?
? ? ? ?
Schuman Declaration: A decision was taken (post-WWII) to move towards the integration of Europe into a single entity Served to unify Western Europe during the Cold War Only aimed at centralizing control of the national coal and steel industries of its members Tried to create a common market for coal and steel Was seen as one of "the first steps in the unification of Europe"
Formation of European Monetary Union
? ?
Need to create a currency which could effectively compete with the US Dollar Achieved in three stages: - European Economic Community (EEC) - Introduction of the European Monetary System (EMS) - Eurozone and Introduction of the Euro
European Economic Community (EEC)
?
?
Goal – to achieve trade integration via a common market
Treaty of Rome, 1957: West Germany, France, Italy, Belgium, Holland & Luxembourg Goal of a common market was achieved by 1968
?
European Economic Community (EEC)
Major features: Zero-tariff levels by progressive elimination of quantitative and qualitative restrictions ? Common schedule of duties, tariffs and quotas for nonmembers ? Integration of transportation and agricultural systems ? Movement restrictions on factors of production removed ? Realignment of sectors based on comparative advantage ? Fund for retraining and redeployment of workers
?
Introduction of the European Monetary System (EMS)
IMF introduced the flexible exchange rate system in 1978 ? All nations free to adopt any exchange rate system ? Exchange rate mechanism based on the BWS ? Key elements: 1. Establishment of parity grid 2. Policy on parity changes 3. Wider variation zones 4. Creation of European Currency Unit (ECU)
?
Introduction of the European Monetary System (EMS)
?
Establishment of parity grid Under BWS, currency valued only against USD Under EMS, each member valued against each other Interlocking grid of parities Provided greater internal stability
1.
2.
3. 4.
Introduction of the European Monetary System (EMS)
?
Policy on parity changes Under BWS, countries changed parities in consultation with the IMF But most changes were unilateral Under EMS approval of all members required Provided consistency in the system and maintained stability
1. 2. 3. 4.
Introduction of the European Monetary System (EMS)
?
Wider variation zones BWS allowed exchange rates to move in a range of +/-1% EMS provided for variation upto +/-2.25% Provision to increase upto +/-6% Allowed more flexibility
1.
2.
3. 4.
Introduction of the European Monetary System (EMS)
?
Creation of the ECU
1. 2. 3. 4.
5.
European Currency Unit was created on 13 March 1979 The ECU was a basket of currencies of the EEC members Used as the unit of account of the European Community Main purpose: Provided investors with the opportunity for foreign diversification Replaced by the Euro on January 1, 1999
Valuation of ECU
1.
2.
3.
A weighted average of the currencies of member countries. The weights reflected the relative size of the national economies Divide each of the twelve amounts of national currency in the ECU basket by the corresponding exchange rates of that country vis-à-vis the target currency (Eg: DEM/USD, FRF/USD, GBP/USD, etc.) Then add these twelve numbers together to obtain the USD/XEU exchange rate
Introduction of the Euro
Treaty of Maastricht, 1992 ? Steps taken towards the introduction: 1. All capital controls abolished 2. European Monetary Institute established (later European Central Bank) 3. Economic convergence between participants to freeze exchange rates on 31st Dec. 1998 4. Introduced on 1st Jan. 1999 5. Initial value equals 1 ECU 6. New coins and notes introduced on 1st Jan 2002 7. All other currencies withdrawn by 30th June 2002
?
Eurozone
? ?
?
? ?
Officially known as the ?euro area? An economic and monetary union of 16 nations belonging to the European Union (EU) who have mutually decided to adopt the Euro currency as their sole legal tender Euro is the second largest reserve currency and the second most traded currency in the world after the U.S. dollar The monetary policy of the Eurozone is set by the European Central Bank, headquartered in Frankfurt 9 nations yet to adopt Euro as currency as per Treaty of Maastricht norms
Source: http://europa.eu/ (Official website of the European Union)
Members of Eurozone
? Austria ? Italy
? Belgium
? Cyprus ? Finland ? France ? Germany
? Luxembourg
? Malta ? Netherlands ? Portugal ? Slovakia,
? Greece
? Ireland
? Slovenia
? Spain
Capital Account Convertibility
? ? ? ? ? ?
Low priority to liberalisation of capital movements Only to the extent required for the functioning of the Common Market Early 80’s – Only 5 members had abolished all controls Hence – Single European Act of 1987 Specifically required all restrictions on capital movement to be abolished Explicitly recognised the importance of full liberalisation as necessary condition for success of Common Market
Source: Europa – Official Website of the EU
Capital/Current Account Convertibility
Three broad categories were identified: A> Direct Investments and other capital B> Financial Markets & Securities C> Money Market Instruments ? All restrictions/barriers w.r.t to the above three categories are to be removed ? All transactions segregated into 4 lists – A, B, C,D ? List C – Possibility of reintroduction on restrictions ? No undertaking regarding liberalisation towards transactions in the fourth list
?
Source: RBI Report - http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/14031.pdf
Stages of Convertibility
? ?
? ? ?
Proceeded in two stages First stage: Liberalisation of transactions which most directly necessary for proper functioning of Common Market Transitional periods for compliance allowed to some countries Stage two: Safeguard clause has been provided Protective and corrective measures
Source: RBI Report - http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/14031.pdf
Euro convergence criteria
?
Also known as the ?Maastricht Criteria? Price stability: The average rate of consumer price inflation over the previous 12 months must not exceed by more than 1.5 percentage points that of, at most, the three best performing member states and this performance should be sustainable Public finance. The financial position of the member country's government must be sustainable, as evidenced by the country not being subject to an excessive deficit. The general government deficit should not exceed 3% of GDP. The gross debt total of the general government should not exceed 60%of GDP
?
?
?
Interest rates. Long-term government bond yields averaged over the previous 12 months should not exceed by more than 2 percentage points those of, at most, the three member countries with the lowest inflation
Exchange rates. A country should have respected the normal fluctuation margins of the ERM for at least two years without severe tensions and without devaluing its currency against any other member's currency on its own initiative. In 2009 the IMF floated a suggestion that countries should be allowed to "partially adopt" the euro - adopting the currency but not qualifying for a seat on the European Central Bank. Ex:Monaco, San Marino and the Vatican City State - they have adopted the euro and mint their own coins, but they don't have ECB seats
?
?
Impact of Euro
? ? ? ? ?
Increased trade within the euro area between 9 and 14% Physical investment have increased by 5% in the Eurozone Intra-Eurozone FDI stocks have increased by about 20% during the first four years of the EMU Positive effect on tourism flows within the EMU with an increase of 6.5% Euro has significantly decreased the cost of trade in bonds, equity, and banking assets within the Eurozone
Advantages of Euro
Currency stability ? A single currency should end currency instability in the participating countries (by irrevocably fixing exchange rates) and reduce it outside them. ? Because the euro would have the enhanced credibility of being used in a large currency zone, it would be more stable against speculation than individual currencies are now. ? An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This could unleash great potential for growth Prevention of competitive devaluations A competitive devaluation is when one country devalues its currency in order to export more goods. In response, the trading partners of that country would do the same thing, resulting in a downward spiral regarding currency value, as well as an increase in inflation
Business benefits ? Likewise, businesses would no longer have to pay hedging costs which they do today in order to insure themselves against the threat of currency fluctuations. ? Businesses, involved in commercial transactions in different member states, would no longer have to face the costs of accounting in different currencies. ? Surprisingly, small firms stand the most to gain. Experts estimate that currently the currency cost of exports is ten times higher for small companies than for multi-nationals, who can offset sales against purchases and command the best rates.
Cheaper mortgages, lower interest rates ? A single currency should also result in lower interest rates as all member countries if the new European Central bank takes on the monetary credibility of Germany's Bundesbank. ? The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the euro's international credibility. ? This should lead to more investment, more jobs, lower interest rates and for home owners to lower mortgages.
Disadvantages of Euro
?
The biggest cost of switching to a common currency was that each member nation relinquished its right to change monetary and economic policies in order to respond to economic problems at home Exchange rates between countries were no longer adjusted by the individual countries to help regional economic slumps get moving Countries can’t change their monetary policies.
?
?
Exchange Rate Mechanism
?
?
? ? ?
ERM is based on the concept of fixed currency exchange rate margins, but with exchange rates variable within those margins A grid (known as the Parity Grid) of bilateral rates was calculated on the basis of these central rates expressed in ECUs, and currency fluctuations had to be contained within a margin of 2.25% ERM II replaced the original ERM A currency in ERM II is allowed to float within a range of ±15% with respect to a central rate against the euro EU countries that have not adopted the euro are expected to participate for at least two years in the ERM II before joining the Eurozone
Exchange Rate Mechanism
? ?
The euro is the sole currency of 16 EU Member States Outside the EU, the euro is also the sole currency of Montenegro and Kosovo and several European micro states (Andorra, Monaco, San Marino and Vatican City) as well as in three overseas territories of EU states that are not themselves part of the EU (Mayotte, Saint Pierre and Miquelon and Akrotiri and Dhekelia) Total of 23 countries and territories that do not belong to the EU have currencies that are directly pegged to the euro including 14 countries in mainland Africa (CFA franc and Moroccan dirham), two African island countries (Comorian franc and Cape Verdean escudo), three French Pacific territories (CFP franc) and another Balkan country, Bosnia and Herzegovina (Bosnia and Herzegovina convertible mark). On 28 July 2009, São Tomé and Príncipe signed an agreement with Portugal which will eventually tie its currency to the euro
?
Crisis In Spain
In the month of December in 2008, Spain’s industrial output declined by 19.6% ? Last quarter of 2008 1,082 companies filed for bankruptcy ? Unemployment in Spain has reached 17.4 percent, according to figures released April 24 by the National Statistics Institute ? Twice the European Union average, ? Loss of tax revenue, growing unemployment benefit costs and economic stimulus packages have boosted the budget deficit to 11.4 per cent of GDP, one of the highest in the EU ? Overheated housing market; with the recession, it is also suffering from a banking crisis and an industrial slump.
?
Causes:
?
?
?
Backed by the strong and stable German economy, the euro interest rate allowed consumers in countries such as Italy, Spain and Ireland — normally at pains to afford credit due to high interest rates — to spend like never before This fueled an unprecedented demand for consumer goods (such as cars, kitchen appliances, etc.) and houses bought on credit that propelled the Spanish housing boom, which led to booms in the construction and mortgage lending industries. Excesses of the Spanish housing boom put the U.S. subprime debacle to shame.
?
?
?
The budget deficit of 2008 has been compounded by the government’s efforts to spur economic activity through roughly 50 billion euro ($66 billion) in stimulus 8 billion euro has been distributed directly to local authorities for public works projects meant to create 200,000 jobs. Completing the recipe for economic agony is the fact that Spain is the first European country to face possible deflationary pressures in the current recession.
Crisis in Greece
Greece in the last decade
?
Budget deficit rose to 5 per cent of GDP in 2008, which activated the European Commission’s excessive deficit procedure Greek public debt-to-GDP ratio at 97.6 % in 2008 second highest in the EU and rising Governments failed to take advantage of the good times to put the public finances in order Reducing debt-to-GDP ratio to 60 % Maastricht reference level within the next decade means primary surpluses of 4-5 % of GDP
?
?
?
Causes
?
The euro appeared to be very strong, with the value of the U.S. dollar, the British pound, and other currencies
dramatically falling in comparison to it – one of the
causes of Greece’s problems
?
Tourism is a major economic sector in Greece, affected adversely due to economic slowdown
?
Greek economy collapsed and the Greek government
was no longer able to pay the country’s public debts.
Source: The Brussels Journal ,2010-01-28
?
?
Germany and the Netherlands have refused to help
Also for some years Greece seems to have covered up its bad economic performance by officially presenting better economic figures than was the case
?
Credit Rating of Greece dropped to A minus The ECB adopted the (self-imposed) rule: It will not accept as collateral in repos and at the marginal lending facility (its discount window) sovereign debt rated lower than A minus. If the ECB/Euro system stick to this rule, the next downgrade of Greek sovereign debt could have a major impact on the Greek government’s marginal funding costs.
Source: Financial Times, January 14,2009
?
?
A eurozone member state faced with the prospect of sovereign default, or just having suffered the indignity of sovereign default, would be immensely relieved to be a member of the eurozone. The last thing it would want to do is give up the financial shelter provided by membership in the eurozone On the other hand to avoid civil unrest in Greece - drop the euro and re-establish their own national currency This will allow the Greek government to devalue the currency in order to stimulate exports and economic growth – a political-monetary tool which Athens lacks if it remains in the eurozone.
?
?
Implications
?
Fears about Greece’s financial situation has led to a drop in value for the euro All the 27 member states of the EU, not just the 16 member states of the euro zone, are obliged to help the Greeks if the EU decides to bail them out.
?
THANK YOU
doc_323825056.pptx