Written before the Euro Crisis set in, this paper explains how Euro evolved from 1990s till now and the threats it is facing because of countries like Greece being a part of Eurozone. However unfortunate, the bright part of the paper is that the predictions done in the paper are coming true now with S&P rating Greece as Junk and IMF coming out to bail it. Please email me at ankurdineshsharma@gmail.com for any further information and/or details on this.
1. Evolution of Euro
&
Threats it is Facing
*Prepared for an International Finance Project of Indian Institute of
Management, Calcutta (IIM-C)
For more information, please contact:
Ankur Sharma
ankurdineshsharma@gmail.com
+91 9886403253
Follow me @ankurdinesh
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2. Evolution of Euro
• In 1999, the euro area was established as a currency in
eleven of the then fifteen EU Member States
• Of the 27 EU Member States today, sixteen have adopted
the euro
• Outside EU too, direct usage of euro affects over 3 million
people
• Its introduction - January 1, 1999, marked the final phase
of Economic and Monetary Union (EMU), a three-stage
process that was launched in 1990 as EU member states
prepared for the 1992 single market
3. Euro Sign
• The symbol for the euro is a rounded "E" with one or two
cross lines - €.
• Euros are divided into eurocents, each eurocent being one
one-hundredth of a euro.
4. The EURO :1990’s
• 1990: Aimed at boosting cross-border business activity, the
first stage of EMU lifted restrictions on movements of
capital across internal EU borders
• 1994: The European Monetary Institute was established in
Frankfurt to pave the way for the European Central Bank
• 1999: the Euro was introduced as the single currency for
eleven EU member states: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain
5. The EURO:1999-Present
• 1999-2002: The Euro and the previous national currencies
were concurrently used in participating states.
• 2002: The participating countries had their previous
national currencies withdrawn permanently as legal tender.
• EU member states not yet using the Euro as currency:
Denmark, Sweden, United Kingdom
• All nations that have joined the EU since 1993 have pledged
to adopt the euro in due course.
9. Administration
• Euro is managed and administered by the Frankfurt-based
European Central Bank (ECB) and the EuroSystem
(composed of the central banks of the Eurozone countries)
• As an independent central bank, the ECB has sole authority
to set monetary policy
• The Eurosystem participates in the printing, minting and
distribution of notes and coins in all Member States, and
the operation of the Eurozone payment systems
10. Why was Euro Introduced?
• Since for most EU countries today, majority of international
trade is with other EU members, a common currency has:
• Removed exchange rate risks from the internal market
• Cut the costs of transactions
• Encouraged firms to trade across national borders
• The common currency has made the eurozone into an area
of monetary stability in Europe
• It has also forced EU states to adopt responsible economic
policies that contain inflation and increase real living
standards.
11. Criteria to join EMU
• EMU was agreed at Maastricht, the Netherlands in Dec 1991
• Five Criteria for countries to qualify for EMU
– Countries should have an inflation rate within 1.5% of the
three EU countries with the lowest rate.
– Long-term interest rates must be within 2% of the three
lowest interest rates in EU
– Exchange rates must be kept within "normal" fluctuation
margins of Europe's exchange-rate mechanism.
– The amount of money owed by a government for 1997, known
as the budget deficit, has to be below 3% of Gross Domestic
Product
– The total amount of money owed by a government, known as
the public debt, has to be less than 60% of GDP
12. Criteria to join EMU
• Of the 12 countries wanting to join EMU, initially only
Luxembourg and Finland fully met the currency criteria
• The convergence criteria were somewhat flexible so that
Austria, Belgium, France, Germany, Ireland, Italy, the
Netherlands, Portugal and Spain were able to join
• Only Greece failed to qualify
• The United Kingdom technically qualified for EMU, but
decided not to join with the first wave of countries
• Denmark and Sweden met the Maastricht criteria, but have
not joined the European exchange-rate mechanism yet
13. EuroZone
• Officially the Euro Area
• Is and Economic and Monetary Union of 16 EU member
states which have adopted the Euro currency
• Monetary policy of the zone is the responsibility of the
European Central Bank
14. Countries that come under Euro Zone
• Austria • Netherlands
• Belgium • Portugal
• Cyprus • Slovak Republic
• Finland • Slovenia
• France • Spain
• Germany
• Greece
• Ireland
• Italy
• Luxembourg
• Malta
15.
16. States refusing to join Eurozone
• Greece and Sweden were originally excluded from the zone
because they did not meet the entry criteria in full.
• Greece was subsequently admitted in 2001, but the people
of Denmark and the government of the UK decided to
remain outside the zone during the first wave.
• No economic justification exists for these two states to
remain outside the zone.
17. How does Eurozone Operate?
• Achieved through EMU. All countries in the European Union
are part of the EMU.
• Each country in the Euro area runs its own economy, while
keeping to certain rules to make sure that the euro remains
strong and the euro-area economy does well.
• These rules put limits on how much money a country can
borrow.
• The rules of EMU ensure that a country has a sustainable
economy - it can pay its debts, and its pensions, in the
future.
• ECB, based in Frankfurt in Germany, makes a large
contribution to the economic stability of the euro area and
has the sole right of issuing banknotes and is in charge of
the Monetary Policy
18. Effects of Single Currency on EU
Member States Outside the Zone
• The 12 EU member governments outside the Eurozone
cannot take part in the 'Euro-15 Council' that deals with
economic and fiscal policies within the common currency
area.
• Member states not in the first two waves must nevertheless
avoid excessive government deficits and continue to regard
their exchange rate policies as a matter of common
interest.
• No representatives on the ECB board
• No voice in decisions regarding Eurozone interest rate –
although it directly affects the value of their currency.
19. Direct and Indirect Usage of Euro
• 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
as well as in three overseas territories of EU states that are
not themselves part of the EU
• Gaining increasing international usage as a trading
currency, in Cuba, North Korea and Syria
• Since introduction, euro has been the second most widely-
held international reserve currency after US dollar
• Share of the euro as a reserve currency has increased from
17.9% in 1999 to 26.5% in 2008
20. Euro as 1st International Reserve Currency
• Widely debated among economists
• Former Federal Reserve Chairman Alan Greenspan gave his
opinion in September 2007 that it is "absolutely conceivable
that the euro will replace the dollar as reserve currency, or
will be traded as an equally important reserve currency."
• In contrast, the Greenspan's 2007 assessment shows the
euro's increase in the share of the worldwide currency
reserve basket has slowed considerably since the year 2007
and since the beginning of the worldwide credit crunch
related recession.
21. Euro Advantages
• Elimination of exchange-rate fluctuations
• Price transparency
• Transaction costs
• Increased trade across borders
• Increased cross-border employment
• Simplified billing
• Expanding markets for business
• Financial market stability
• Macroeconomic stability
• Lower interest rate
• Structural reform for European economies
• Unites Europe
22. Euro Disadvantages
• Cost of transitioning 12 countries currencies over to a single
currency
• Including accounting systems, software, printed materials, signs,
vending machines, parking meters, phone booths and every other type
of machine that accepts currency
• Training for employees, managers, and consumers
• Countries cannot adjust interest rates
• Countries cannot adjust their exchange rate
• Restricted government spending
• Political shock
• Loss of cultural identity
23. Threats facing the Euro
• The differences among Eurozone countries
jeopardize confidence in the euro and
threatens cohesiveness of the euro area
• Bond markets are indicating that investors
are increasingly shunning offerings from
Portugal, Spain and Ireland
• After the Greek Debt Crisis, UBS advised
investors to sell Euros, noting that the
currency was likely to lose value
24. Threats facing the Euro
• Strong fourth-quarter growth in the US
coupled with a rather tepid recovery in
Europe has led euro lose 9% from Dec ‘09 –
Jan ’10
• Euro would go down even further, because
foreign central banks are assessing the risk
of a possible collapse of the Eurozone
• Struggling euro zone countries would be
tempted to abandon Euro to gain back
control over interest & exchange rates,
thereby leading to collapse