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Introduction of Euro As Common Currency
Introduction of Euro As Common Currency
INDEX
INTRODUCTION EURO V/S DOLLAR EFFECTS OF EURO EURO CRISIS EURO AS COMMON CURRENCY IN EURO ZONE
INTRODUCTION TO EURO
The euro (sign: ; code: EUR) is the official currency of the euro zone: 17 of the 27 member states of the European Union.
Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands , Portugal, Slovakia, Slovenia, and Spain. It is consequently used daily by some 332 million Europeans. Additionally, over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.
EURO ZONE
Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies, the euro zone is the second largest economy in the world. 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 July 2011, with nearly 890 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the U.S. dollar
This chart shows the value of the euro (before 1999 as a basket of the 11 legacy currencies) against the US dollar.
Evolution of EURO
Birth of the European Monetary System The economic crisis of the 1970s that led to the first plans for a single currency. The system of fixed exchange rates pegged to the US dollar was abandoned. The system immediately came under pressure from the strong dollar, causing problems for some of the weaker European economies.
Plaza Accord In the 1980s the dollar strengthened dramatically. US interest rates were very high. In 1986 the world's leading industrial countries agreed to act and lower the value of the dollar. The deal was struck at New York's Plaza hotel.
Contd..
Recently euro is appreciating in the value against dollar Interest rates for euro prescribed by european central bank is 1% Euro is used for maintaining reserves of banks in euro zone Vice-versa Interest rates for dollar prescribed by federal reserve bank is 0% But dollars are used by world bank for maintaining reserves
Effects Of EURO On Business IN EURO ZONE The single currency benefits business in many ways, in addition to
cutting costs and risk. It encourages investments and brings more certainty to business planning thus allowing businesses to be more effective overall.
More Cross-Border Trade A direct benefit of the euro is that, within the euro area, there is no need for businesses to work in different currencies. A company can buy and sell throughout this area, paying and being paid in euro.
Previously, when doing business in another EU Member State, a company would need to take account of the risk of fluctuating exchange rates
This meant either export prices were higher, or companies were discouraged from exporting within the single market. This risk has now gone, as have the costs associated with exchanging different currencies. Before the euro, these exchange costs were estimated at 20 to 25 billion per year in the EU much of it incurred as companies transferred goods, people and capital around Europe. With the euro, these costs have disappeared in the euro area, and this money is now available for more productive investment. With no exchange risks and costs, cross-border trade within the euro area is encouraged. Not only can companies sell into a much larger home market, but they can also find new suppliers offering better services or lower costs a development that is helped by the growth of e-commerce over the internet. Trade within the euro area is estimated to have increased between 4% and 10% since the introduction of the single currency.
Energy and Environment(Facts) The EU depends on imports for more than 50% of its energy needs.
Net dependence on energy imports as a percentage of total consumption, EU-27 (2007) was 53.1 %
To reduce this dependence and protect the environment, the EU is striving to use energy more efficiently and use more renewable sources. The EU has set a target of generating 20% of its electricity from renewable sources such as wind, the sun, water, geothermal plants and biomass by 2010.
Trade (Facts) With just 7% of the worlds population, the EU's trade with the rest of the world accounts for around 20% of global exports and imports. The EU is the worlds biggest exporter and the second-biggest importer.
Around two thirds of EU countries total trade is done with other EU countries. The United States is the EUs most important trading partner, followed by China. In 2005, the EU accounted for 18.1% of world exports and 18.9% of imports.
There are multiple opportunities for EU citizens and consumers to benefit from the euro. These arise because the euro and its political framework, the Economic and Monetary Union, offer lower costs, stable prices, more transparency and economic stability.
Some of these consumer benefits are direct, such as easier-tocompare prices while shopping; others are indirect, such as the long-term benefits economic stability brings to interest repayments on a bank loan for a new car. In both cases, the opportunities the single currency offers are wide ranging, covering not only everyday transactions, but also employment opportunities and European citizens quality of life.
Consumer Benefits(Facts) Percentage of EU citizens who believe that their country has benefited or not from being a member of the EU, autumn 1996 to autumn 2009 Year Benefited Not benefited 1996 42 36 1997 44 35 1998 49 31 2006 54 34 2007 58 29 2008 56 31 2009 57 31
Stable Prices The euro has brought inflation down to a low and stable level. In the 1970s and 80s many EU countries had very high inflation rates, some of 20% and more. Inflation fell as they started preparing for the euro and, since its introduction, has remained around 2% in the euro area. Price stability means that ordinary citizens purchasing power and the value of their savings are better protected, which helps make the future more certain.
Easier, Safer, and Cheaper Borrowing Low inflation and stable prices are a key aim of the management of the euro-area economy. Because the European Central Bank acts to keep inflation low, interest rates are also lower. This means consumer loans are cheaper and future repayments are more predictable, so ordinary citizens can borrow more easily and cheaply, for example to pay for holidays or to buy a house. Mortgage rates have fallen from around 8%-14% in the early 1980s to an average of 5% now in the euro area, saving a borrower with a 100 000 outstanding loan between 170 and 750 a month on interest payments.
More Growth and Jobs In a single market with a single currency, doing business across borders is cheaper for companies as they no longer need to include the risk of currency fluctuations into their prices nor to pay exchange costs. Previously, these costs amounted to around 20 to 25 billion annually within the European Union. Today, they have disappeared in the euro area. This helps release capital to invest in expanding and growing business and employing more workers, thereby benefiting jobseekers and their families. Since the euro was introduced in 1999, more than 10 million new jobs have been created in the euro area, compared with only 1.5 million in the previous seven years.
Employment(Facts) Over the past 50 years, employment in agriculture and industry has fallen, while more and more people now have a job in the service sector.
Percentage of workforce employed in agriculture, industry and services, EU-27 (1998 and 2009) 1998 2009 Services 64.7 66.7 Industry 27.5 27.7 Agriculture 7.8 5.6
More Public Investment It is not only citizens and business which benefit from cheaper loans: government borrowing is also less expensive, as interest payments on national debt are lower. The money saved can therefore either be used for investment in new infrastructure, or to boost research spending for jobs and growth, or for improving welfare and pension systems, or to reduce the tax burden depending on a Member States priorities.
Use As Reserve Currency(Facts) Since its introduction, the euro has been the second most widely held international reserve currency after the U.S. dollar. The share of the euro as a reserve currency has increased from 17.9% in 1999 to 26.5% in 2008, at the expense of the U.S. dollar (its share fell from 70.9% to 64.0% in the same timeframe) and the Yen (it fell from 6.4% to 3.3%) The euro remains underweight as a reserve currency in advanced economies while overweight in emerging and developing economies: according to the International Monetary Fund the total of euro held as a reserve in the world at the end of 2008 was equal to USD 1.1 trillion or 850 billion, with a share of 22% of all currency reserves in advanced economies, but a total of 31% of all currency reserves in emerging and developing economies.
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The costs of financial intermediation, such as bank charges, are lower. In the euro area there are more banks and investment funds and thus there is more competition between them. Lower costs encourage more capital flows.
More capital is available to borrowers at a lower cost because there are more sources of capital. This makes the money they borrow cheaper and better tailored to the needs of the borrower. Because borrowing is cheaper this makes more capital available for further lending. This encourages citizens and companies to borrow more to invest which creates more economic growth and more employment, and benefits the EU economy as a whole.
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Building The Single Financial Market The single currency was a key step towards the creation of the single financial market. Its introduction immediately removed some obstacles to free capital flows namely the costs associated with exchanging different currencies. Previously, these costs were a barrier to cross-border investments today they no longer exist in the euro area.
Since the introduction of the euro, cross-border bank deposits have increased, the yields on government bonds have converged, and the interest rates on retail loans, taken out by individual citizens, have also converged.
The Single Euro Payments Area An important aspect of the single financial market is payments, which daily affect cross-border transactions of citizens and business. The costs of sending money in euro to another euro-area country have already been slashed by as much as 90% since the introduction of the euro and EU rules on cross-border euro payments in 2001. The Single Euro Payments Area (SEPA), initially planned for 2010, is a further step in the same direction. An initiative of the European banking industry, it aims to further facilitate electronic payments across the euro area by making them as easy, safe and efficient as if they were done within one Member State and subject to identical charges. Citizens will benefit from faster and more secure transfers between bank accounts anywhere in the euro area, and will be able to use their bank debit card when shopping abroad as they would at home. The Commission has helped the development of SEPA by preparing the necessary legal framework in the form of a Directive on Payment Services.
Beginning of Crisis
Started in Oct 2009 in Greece Its immediate causes lie with the US crisis of 2007-09 The result in Euro Zone was Sovereign debt crisis PIIGS: Portugal, Italy, Ireland, Greece, Spain
What Happened
Greece: Sharp Budget Deficit Large Government and External Debts in PIIGS Greece credit rating downgraded
Greece
Sovereign-debt crisis boil over Financial panic in Europe Foreign banks lending was 164 billion Debt to GDP ratio has been around 140 % January February 2011, on a fiscal basis, the State Budget deficit was 55million lower than the target set in the 2011 Budget for the first two months of the year standing at 1,024 million compared to a target of 1,076 million The 2011 State Budget deficit has grown as expected by 8.5% compared to the 2010
Portugal
Budget deficit 9.3% of GDP Public debt 77% of GDP Common weaknesses with Greece:
1. Small economy 2. Competitiveness
Spain
Most at risk even now Dependence on foreign finance Public debt 53% of GDP
Reasons
For rise in External Debts
Increase in wage rates Lower exchange rate risk
Weakening export competitiveness Weakening of tourism & shipping by 15% For rise in Internal Debts: Rising Unemployment: Lower tax returns, higher budget deficits
Slovenias Economy
Europe Debt Crisis to Slow Slovenias Economic Recovery Further Slovenias economic recovery is at risk from the euro regions debt crisis because it hampers access to funding, according to the governments forecasting institute.
RECENT DEVELOPMENTS
In order to qualify for bailout funds, they adopted very strict austerity measures, which meant they were forced to cut deficits immediately. Federal reserve in United States is talking about looser monetary policy, and you have the ECB talking about tighter monetary policy. This is causing a possible further widening in the interest rate spread between these two countries. Federal Reserve currently has interest rates held at near 0%, while the European Central Bank has interest rates set at 1%, if this continues, this will increase the yield spread even further which could cause a massive depreciation of the U.S. Dollar versus the Euro over the next 6 months to 1 year.
The Euro on its own in insufficient to achieve these structural economic reforms in Europe are also required and many are taking place
Inflation:
Government Finances
Interest Rates:
Exchange Currency must have adhered to fluctuation margins of the ERM II in two previous years Rate Stability: without severe tension
By most criteria, the current Euro Zone does not come close to an optimal currency zone!
The core group of EU countries are broadly similar (Germany + France + Netherlands + Belgium) But peripheral countries have big structural differences And there are barriers to the mobility of labour Little wonder that tensions are rising in the Euro Area as recession bites
Microeconomic Disadvantages
(1) Changeover Costs from joining the Euro: Costs of changing accounting systems Menu Costs (vending machines, catalogues, franking machines, postage Installation of new payments systems Customer confusion (imperfect information)
(2) Higher prices Potential loss of consumer welfare if suppliers increase prices when converting from sterling to euro
(3) The vast majority of consumers will continue to buy locally what matters more is the effectiveness of competition policy in targeting anticompetitive behaviour
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