Transcript File
F585 Stimulus material Introduction A B C D E Main aspects of introduction • There to introduce main aspects of extracts • Questions have come from the introduction material in the past • Questions are most likely to be level 1 and 2 questions (basic knowledge and understanding) Activity Read through the introduction and underline/highlight where you can see any key concepts or theory. 5 mins Main concepts •The Euro The euro is the currency used by the Institutions of the European Union and is the official currency of the eurozone, which consists of 17 of the 27 member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The currency is also used in a further five European countries and consequently used daily by some 332 million Europeans. Additionally, more than 175 million people worldwide—including 150 million people in Africa—use currencies pegged to the euro. The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. As of September 2012, with more than €915 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the US dollar. Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world. Main concepts •Default Default on Debt is not to repay a loan on time. Example: Greece needs money to loan to fishermen to buy boats and factories to process fish. the fish are not sold or even caught yet but they need the money now like a farmer needs seed to grow a crop. Greece borrows the money but if the fishermen have a bad season or other disasters strike, Greece cannot pay that debt on time so they borrow more. With more loans the INTEREST rates will rise since the risk is higher--Now the country with several bad investments or poor seasons or natural disasters runs into trouble even paying the INTEREST of that debt. The International Monetary Fund and World Bank were created to help in situations such as this but the fund is running into trouble with several Economic and Political crises that have inflamed the issues at stake. If any of the Eurozone countries is allowed to not repay its debt, others will feel free not to repay their own. Main concepts •Convergence The euro convergence criteria (also known as the Maastricht criteria) are the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their currency. •Benefits of membership of Eurozone 1. Transaction Costs: There will be no longer a cost involved in changing currencies; this will benefit tourists and firms who trade within the EURO area. It has been estimated that this benefit will be equal to 1% of GDP so will be quite significant. (this is sometimes known as frictional costs) 2. Price Transparency: With a common currency it will be easier to compare prices in different European countries because they would all be in Euros. This enables firms to source cheaper raw material and consumers to but cheaper goods For example, new car prices are much higher in the UK than elsewhere, a single currency could help reduce these price differentials. 3. Eliminating Exchange Rate uncertainty. Volatile swings in the exchange rate can destroy the profitability of exports. This undermines business confidence in investing. Therefore with a single currency business confidence should improve leading to greater trade and economic growth. 4. Improvement in Inflation Performance. The ECB which sets interest rates for the whole Eurozone area will be committed to keeping inflation low; countries with traditionally high inflation will benefit from this. However this point is debatable as countries outside the Euro have maintained low inflation. 5. Euro as a global trading currency 6. Inward investment Inward investment may increase from outside the EU as firms take advantage of lower transaction costs within the EU area. Recently the Chairman of Nissan said the UK would lose inward investment if it stayed out of the Euro 7. The financial sector could benefit. It would be easier to conduct banking and insurance with a single currency. It would be easier to trade German shares on the London stock market Main concepts •Foreign Direct Investment (FDI) An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. Main concepts •Sustainable development Sustainable development is development that meets the needs of the present, without compromising the ability of future generations to meet their own needs Unsustainable development is driven by one particular need, without fully considering the wider or future impacts. We are already seeing the damage this kind of approach can cause, from large-scale financial crises caused by irresponsible banking, to changes in global climate resulting from our dependence on fossil fuel-based energy sources.