Transcript The Euro by Carlos Rios

The Euro
by Carlos Rios
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History
Implementation
– criteria
– phases
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Regulation
– ECB
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Advantages/Risks
EU-11 aka Euroland
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Austria
Belgium
Finland
France
Germany
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
History
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Post WWII tensions
Political unity
through economic
medium
Try to advance
European sluggish
economic movement
Criteria
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GDP <3% Budget Deficit
GDP <60% Government Debt
Inflation <1.5% three lowest inflation
countries
Bond yield <2% of 3 lowest countries
Exchange rate must remain in normal
fluctuation bands for the two previous years
Two Non- EU-11
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Greece
– Gov’t deficit 4.0%
GDP
– Gov’t debt 108.7%
– Inflation rate 5.2%
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avg low 3: 1.17%
– Long term bond yield
9.8%
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avg low 3: 5.57%
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United Kingdom
– Gov’t deficit 1.9%
GDP
– Gov’t debt 53.4%
– Inflation rate 1.8%
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avg low 3: 1.17%
– Long term bond yield
7%
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avg low 3: 5.57%
Why not UK
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Loses power to set
interest rates
It will be unable to
change exchange
rate
Long term interest
rates in EU-11 will
be similar
Phase A
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Conform which
member states fulfill
necessary criteria
appoint exec board
of ECB
begin planning for
monetary policy to
begin 1/1/99
Phase B
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monetary obligations
paid for in Euros
fix exchange rates for
stability
– stability is a must
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Beginning of monetary
union
– $ exists on book, not
paper
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national central banks
are no longer
independent
– national banks are
agents of ECB
Phase C
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Part I
– 1/1/02 Circulation of
notes and coins
begins
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Part II
– By 7/1/02 Old
National Currencies
lose legal tender
status
Advantages
Contender for world’s primary currency
 simpler and quicker pricing of securities
belonging to bloc
 new generic money standard
 decreased unemployment
 increased economic growth
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Risks
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Displacements of
the local or
perceived key
industries
One liquidity
adjustment affects
all
Speculation
Political pressure
S---L---O---W Progress
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EU-11 must
cooperate more for
economic
advancement
more difficult for a
country to flourish
economically
Displacements
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Top 3 GDP’s of EU-11
Ger: $2.12 trillion
Fra: $1.405 trillion
Ita: $1.144 trillion
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% of EU-11 “GDP”
Ger: 33.53%
Fra: 22.22%
Ita: 18.10%
Speculation
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Today Euro = $1.05
1/1/02 big rush to
change $$$
6/30/02 big rush to
change $$$
people more
interested in getting
Euro
Regulation
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European Central Bank
– as of 1/1/99 national banks become agents
of ECB
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ECB controls short term interest rates
and locks in exchange rates
ECB Format
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ECSB
– European System of
Central Banks
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ECB
– European Central
Bank
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NCB
– National Central
Banks
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Committees
– Governing Council
– Executive Board
– General Council
Executive Board
President--William Duisenberg
 Vice President--Christian Noyen
 4 appointed members of the ECB
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– Implement monetary policies laid down by
Governing Council and gives instructions to
NCB’s
Governing Council
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Executive Board and governors of NCB’s
participating in monetary union
– adopts guidelines to ensure performance of
tasks of ESCB
– makes monetary policy of community, key
interest rates and supplies of reserves in
ESCB
General Council
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President and Vice President of ECB and
governors of all NCB’s
– prepare ECB finance reports and
statements
– prepare exchange rates for states with
derogation currency (currencies against
Euro, i.e. British Pound)
Conclusion
 Advanced
Concept
 Cooperation a
must
 Very Risky