Description
introduction of euro, its rise as dominant currency, comparison with dollar.
Keywords: Introduction of Euro, Euro currency, currency challengers, Euro growth indicator, Dollar crisis, collapse of bretton woods,
THE EURO Introduction, Growth, Comparison and Scope
Isha Aditi Dhar (110), Pallavee Kumar (131), Deepak Mahajan (133), Mehul Mohta (136), Mandira Popat (141), Kavitha Rajan (162)
Introduction
January 1, 1999: 11 EU member countries acquire a single currency ? January 1, 2002: Circulation of Euro bank notes and coins ? Currently 15 member states ? ECB objectives - To maintain price stability - Low inflation: close to 2% - Compilation of financial statistics - Management of foreign exchange reserves
?
Evolution
The Euro
? ? ?
Individual European currencies were never as widely used as the U.S. dollar prior to 1999 Euro is emerging as a more prevalent international currency Central banks reserve holdings constitute of a significant portion of Euros- first time in the world history is such a role played by a currency other than the dollar
Switzerland: Composition of Foreign Exchange Reserves, January 1997–June 2004
The Euro a dominant world currency?
The Dollar Crisis
U.S. Deficits (USD trillion)
Global current account imbalances (USD bn)
Current Account Balances (% of world GDP)
American Dollars to 1 EURO
The U.S. Dollar
?
? ? ?
The strength of the dollar affects world trade balances, capital flows, growth rates, profits, share prices, inflation rates, interest rates and even the relative size of economies. U.S.A’s large economic size prevented the Mark or the Yen to pose a threat. Euro area's GDP was only 60% the size of America's in 2001. Dollar dominance: Only because it had no competition
Dollar dominated even when…
?
?
?
Slow economic growth for two full decades, from the early 1970s through the early 1990s, with productivity growth that was especially mediocre (at 1.5 percent or less per year). It experienced high inflation for almost a decade, from 1973 through 1981, including three years of double-digit price increases. It has run large external deficits for most of the past 30 years, including two periods when those deficits were rising at clearly unsustainable rates (1982–87 and 1998 to the present), and had become a debtor country by the late 1980s.
Collapse of Bretton Woods
The United States refused to abide by the rules of Bretton Woods by suspending the convertibility of dollars into gold. ? The adjustment mechanism that had previously prevented persistent imbalances ceased to function. ? USA was no longer required to pay for its imports with gold or even dollars backed by gold. ? The amount of the U.S. dollars in circulation began to explode. ? During the three decades since the collapse of Bretton Woods, the U.S. has incurred a cumulative current account deficit of more than US$3 trillion.
?
Paper currency
? ?
?
?
At present, the U.S. current account deficit is approximately US$50 million an hour. Its net international investment position is now approximately US$23 million in the red, an amount equivalent to 23% of its GDP (Bureau of Economic Analysis). That creation of credit backed only by paper reserves has generated a worldwide credit bubble characterized by overheating of the economy and severe asset price inflation. The economic house of cards built with paper dollars has begun to wobble with the onset of the sub-prime crisis and the steady de-valuation of the dollar.
The downfall…
?
? ?
Unlike Bretton Woods, the current international monetary system lacks any kind of adjustment mechanism. ROW shall eventually stop accepting debt instruments from the U.S. in exchange for real goods and services. The dollar has begun depreciating against other currencies and gold, and soon enough the era of export led growth shall come to an end.
? ?
Over the period 1980-2001, the U.S. debt increased at 510% while the GDP grew by only 246%. GDP growth itself was in a large part fueled by the expansion of debt-the foreign inflows would not have existed had they not been created by the U.S. current account deficit).
Dollar woes
Lower interest rates weakened the Dollar ? US needs $2bn per day to finance its BOP, this will start drying ? A weak dollar will increase the cost of imports, especially oil. ? As the Dollar weakens, the Euro strengthens…
?
The government debt has been on a steady rise since the 1990’s and is US$9.4 trillion (as on March 16, 2008) with an increase on average of $1.70 billion per day.
Europe as an OCA?
? ? ?
?
Following the idea of Mundell’s original work, focus was on labour mobility Labour mobility was higher within the United States than among European countries Researchers criticized this methodology, arguing that the United States was not a good benchmark. Switzerland was taken as a new benchmark, both because it was considered an optimal currency area and because the unemployment differentials between the German and French parts were 3 to 4 percentage points. Europe emerged as an OCA.
Performance
?
?
? ?
The performance and value of a currency must fundamentally be judged in terms of its purchasing power. European Central Bank maintains price stability in the euro area – maintaining inflation at close to but below 2% over the medium term. 1999-2004, average annual inflation equaled 2% 1989-1999, average annual inflation of the individual countries amounted to 8%
Performance
? ?
?
Financial markets are confident that price stability will be maintained in the euro area over the long run. The stability-oriented monetary policy has acquired credibility and both short-term interest rates and longterm bond yields are at historically low levels in nominal and real terms. The prevailing favourable financing conditions, the low level of inflation and diminished inflation uncertainty continue to lend support to investment and have established an environment conducive to sustainable growth of the Euro.
Insufficiency
?
?
However, price stability and low interest rates define necessary but not sufficient conditions for faster growth. 1999-2004, the average rate of growth was 1.9% in the euro area and 3.0% in the United States.
Currency challengers
?
Contrary to popular speculation in the 1990s the yen and the mark never had the potential to challenge the dollar as premier international currency.
? Their home economies were smaller than the US ? Their financial markets less well developed and liquid than New York
?
Euroland is roughly as big as the United States, and the euro has shown itself a better store of value than the dollar.
Currency markets
?
? ?
However, rankings of international currencies change only very slowly., currency markets are usually in a state of deep inertia US surpassed the UK in economic size in 1872, in exports in 1915, and as a net creditor in 1917 However, the dollar did not surpass the pound as number one international currency until 1945
Requisites to Rise
Euroland will need to further integrate its money and capital markets to realize the full international potential of the new currency. ? Europe needs to get its act together instituionally: Europe still speaks with multiplicities, national rivalries. ? Convincing price stability achieved, look at expansionist macro-economic (mainly monetary) policies. Overcome structural impediments, improve economic performance. ? A major foul up by the United States.
?
Euro vs. Dollar in international reserve shares Simulation of central banks reserve holdings
With the dollar losing ground steadily, the tipping point could come within the ten-year horizon: the euro could overtake the dollar even as early as 2015.
?
The dollar is the main private currency for investment purposes, for transactions purposes, as a vehicle currency as it's called. However, the Euro is fast becoming a reserve currency and the day is not far off when China shall dump all its dollar reserves back into U.S.
Robert Mundell prophecy on the eve on Euro creation
?
It would be a mistake to ignore [the fact that] in the last 15 years US current account deficits have turned the US from the world’s biggest creditor to its biggest debtor.…The low-saving high-debt problems will one day come home to roost.…There will come a time when the pileup of international indebtedness makes reliance on the dollar as the world’s only main currency untenable.…The fact that the bulk of international reserves is held in dollars makes the currency a sitting duck in a currency crisis.…Sole reliance on the dollar as the main reserve, invoice and intervention currency presents risks that are no longer necessary.
References
?
?
?
?
?
?
?
The Dollar Crisis ? Book, Richard Duncan Investments in a globalized world economy ? Article, Robert Mundell The Euro and the World Economy ? European Central Bank, Frankfurt am Main, Germany, April 27, 2005 The Economist The Euro’s Challenge to the Dollar: Different Views from Economists ? IMF working paper Price Impacts of Non-Adoption of the Euro for Small European Countries ? IMF working paper Real Exchange Rates and Fundamentals: A Cross-Country Perspective ? IMF working paper
A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation.
THANK YOU
doc_675482134.pptx
introduction of euro, its rise as dominant currency, comparison with dollar.
Keywords: Introduction of Euro, Euro currency, currency challengers, Euro growth indicator, Dollar crisis, collapse of bretton woods,
THE EURO Introduction, Growth, Comparison and Scope
Isha Aditi Dhar (110), Pallavee Kumar (131), Deepak Mahajan (133), Mehul Mohta (136), Mandira Popat (141), Kavitha Rajan (162)
Introduction
January 1, 1999: 11 EU member countries acquire a single currency ? January 1, 2002: Circulation of Euro bank notes and coins ? Currently 15 member states ? ECB objectives - To maintain price stability - Low inflation: close to 2% - Compilation of financial statistics - Management of foreign exchange reserves
?
Evolution
The Euro
? ? ?
Individual European currencies were never as widely used as the U.S. dollar prior to 1999 Euro is emerging as a more prevalent international currency Central banks reserve holdings constitute of a significant portion of Euros- first time in the world history is such a role played by a currency other than the dollar
Switzerland: Composition of Foreign Exchange Reserves, January 1997–June 2004
The Euro a dominant world currency?
The Dollar Crisis
U.S. Deficits (USD trillion)
Global current account imbalances (USD bn)
Current Account Balances (% of world GDP)
American Dollars to 1 EURO
The U.S. Dollar
?
? ? ?
The strength of the dollar affects world trade balances, capital flows, growth rates, profits, share prices, inflation rates, interest rates and even the relative size of economies. U.S.A’s large economic size prevented the Mark or the Yen to pose a threat. Euro area's GDP was only 60% the size of America's in 2001. Dollar dominance: Only because it had no competition
Dollar dominated even when…
?
?
?
Slow economic growth for two full decades, from the early 1970s through the early 1990s, with productivity growth that was especially mediocre (at 1.5 percent or less per year). It experienced high inflation for almost a decade, from 1973 through 1981, including three years of double-digit price increases. It has run large external deficits for most of the past 30 years, including two periods when those deficits were rising at clearly unsustainable rates (1982–87 and 1998 to the present), and had become a debtor country by the late 1980s.
Collapse of Bretton Woods
The United States refused to abide by the rules of Bretton Woods by suspending the convertibility of dollars into gold. ? The adjustment mechanism that had previously prevented persistent imbalances ceased to function. ? USA was no longer required to pay for its imports with gold or even dollars backed by gold. ? The amount of the U.S. dollars in circulation began to explode. ? During the three decades since the collapse of Bretton Woods, the U.S. has incurred a cumulative current account deficit of more than US$3 trillion.
?
Paper currency
? ?
?
?
At present, the U.S. current account deficit is approximately US$50 million an hour. Its net international investment position is now approximately US$23 million in the red, an amount equivalent to 23% of its GDP (Bureau of Economic Analysis). That creation of credit backed only by paper reserves has generated a worldwide credit bubble characterized by overheating of the economy and severe asset price inflation. The economic house of cards built with paper dollars has begun to wobble with the onset of the sub-prime crisis and the steady de-valuation of the dollar.
The downfall…
?
? ?
Unlike Bretton Woods, the current international monetary system lacks any kind of adjustment mechanism. ROW shall eventually stop accepting debt instruments from the U.S. in exchange for real goods and services. The dollar has begun depreciating against other currencies and gold, and soon enough the era of export led growth shall come to an end.
? ?
Over the period 1980-2001, the U.S. debt increased at 510% while the GDP grew by only 246%. GDP growth itself was in a large part fueled by the expansion of debt-the foreign inflows would not have existed had they not been created by the U.S. current account deficit).
Dollar woes
Lower interest rates weakened the Dollar ? US needs $2bn per day to finance its BOP, this will start drying ? A weak dollar will increase the cost of imports, especially oil. ? As the Dollar weakens, the Euro strengthens…
?
The government debt has been on a steady rise since the 1990’s and is US$9.4 trillion (as on March 16, 2008) with an increase on average of $1.70 billion per day.
Europe as an OCA?
? ? ?
?
Following the idea of Mundell’s original work, focus was on labour mobility Labour mobility was higher within the United States than among European countries Researchers criticized this methodology, arguing that the United States was not a good benchmark. Switzerland was taken as a new benchmark, both because it was considered an optimal currency area and because the unemployment differentials between the German and French parts were 3 to 4 percentage points. Europe emerged as an OCA.
Performance
?
?
? ?
The performance and value of a currency must fundamentally be judged in terms of its purchasing power. European Central Bank maintains price stability in the euro area – maintaining inflation at close to but below 2% over the medium term. 1999-2004, average annual inflation equaled 2% 1989-1999, average annual inflation of the individual countries amounted to 8%
Performance
? ?
?
Financial markets are confident that price stability will be maintained in the euro area over the long run. The stability-oriented monetary policy has acquired credibility and both short-term interest rates and longterm bond yields are at historically low levels in nominal and real terms. The prevailing favourable financing conditions, the low level of inflation and diminished inflation uncertainty continue to lend support to investment and have established an environment conducive to sustainable growth of the Euro.
Insufficiency
?
?
However, price stability and low interest rates define necessary but not sufficient conditions for faster growth. 1999-2004, the average rate of growth was 1.9% in the euro area and 3.0% in the United States.
Currency challengers
?
Contrary to popular speculation in the 1990s the yen and the mark never had the potential to challenge the dollar as premier international currency.
? Their home economies were smaller than the US ? Their financial markets less well developed and liquid than New York
?
Euroland is roughly as big as the United States, and the euro has shown itself a better store of value than the dollar.
Currency markets
?
? ?
However, rankings of international currencies change only very slowly., currency markets are usually in a state of deep inertia US surpassed the UK in economic size in 1872, in exports in 1915, and as a net creditor in 1917 However, the dollar did not surpass the pound as number one international currency until 1945
Requisites to Rise
Euroland will need to further integrate its money and capital markets to realize the full international potential of the new currency. ? Europe needs to get its act together instituionally: Europe still speaks with multiplicities, national rivalries. ? Convincing price stability achieved, look at expansionist macro-economic (mainly monetary) policies. Overcome structural impediments, improve economic performance. ? A major foul up by the United States.
?
Euro vs. Dollar in international reserve shares Simulation of central banks reserve holdings
With the dollar losing ground steadily, the tipping point could come within the ten-year horizon: the euro could overtake the dollar even as early as 2015.
?
The dollar is the main private currency for investment purposes, for transactions purposes, as a vehicle currency as it's called. However, the Euro is fast becoming a reserve currency and the day is not far off when China shall dump all its dollar reserves back into U.S.
Robert Mundell prophecy on the eve on Euro creation
?
It would be a mistake to ignore [the fact that] in the last 15 years US current account deficits have turned the US from the world’s biggest creditor to its biggest debtor.…The low-saving high-debt problems will one day come home to roost.…There will come a time when the pileup of international indebtedness makes reliance on the dollar as the world’s only main currency untenable.…The fact that the bulk of international reserves is held in dollars makes the currency a sitting duck in a currency crisis.…Sole reliance on the dollar as the main reserve, invoice and intervention currency presents risks that are no longer necessary.
References
?
?
?
?
?
?
?
The Dollar Crisis ? Book, Richard Duncan Investments in a globalized world economy ? Article, Robert Mundell The Euro and the World Economy ? European Central Bank, Frankfurt am Main, Germany, April 27, 2005 The Economist The Euro’s Challenge to the Dollar: Different Views from Economists ? IMF working paper Price Impacts of Non-Adoption of the Euro for Small European Countries ? IMF working paper Real Exchange Rates and Fundamentals: A Cross-Country Perspective ? IMF working paper
A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation.
THANK YOU
doc_675482134.pptx