A study on Euro on the

verge of (dis)integeration`

By
Pratik Meshram [ Roll
no. : 1]
Adithya [ Roll no. : 21]
Saranyan N [ Roll no. :
38]

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 What does this study
talk about

• Concept of Euro
• Evolution of Euro
• Its Political and Economical
implications on the member
nations

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 Concept Of Euro
• Created on 1st Jan 1999 under Franco-German initiative
• Objectives
– Stabilizing exchange rate
– Reducing inflation
– Monetary integration
– Convergence into a single market
• European Central Bank (ECB) took the responsibility of
formulating monetary policy and interest rate of Euro
on 1st January 2002
• ECB ensured that the transition to Euro was smooth

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 Euro The Currency
Official Holding of Foreign exchange, End
of year
Currency\ Year 1999 2000 2001 2002 2003

US Dollar 67.9 67.5 67.5 64.5 63.8

Euro 12.7 15.9 16.4 18.7 19.7

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• Since the launch, several countries linked
their currency through agreements like ERM
II
• Gradually its strength increased due to Euro
denominated assets as official reserves and
Foreign exchange
• Some policymakers forecasted Euro would
compete against Dollar and beat it
• Based on statistics skeptics opinioned that it
would be difficult for Euro to break the
inertia of Dollar
• Euro does not have a convincing Govt. backing
it
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• 12 different countries with different fiscal policies
each pose a challenge to Euro
• Euro also faced a challenge of one country’s over
expenditure would affect other member nations
• Stability and Growth Pact (SGP) was drawn by
ECB
• Objective of SGP was to enforce Fiscal Discipline
across member nations
• The Situation after 2005 France and Netherland
did not want Euro
• EU looks to be diverged

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 Economic Implications
• Initially value of Euro fell, later began
to recover against Dollar and went on
to overpower it
• Since Asian countries are pegged to
dollar the exports were affected
• Annual growth in the Euro zone has
been 1.2% since the birth of Euro
• Unemployment in the 12 nations was
almost 10%
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 Italy
• Exchange rate wrt. Germany increased to < 20%
• One of Unit of Labour cost 9% more than Germany
• Devaluation not an option; budget deficit higher than 3% of
GDP consistently
• Reverting back to Lira not possible
 Germany
• 10% depreciation in real exchange rates
• Strong exports; Stagnating domestic demand
• Economic Growth of .6% since 2001 till 2005
• budget deficit higher than 3% of GDP consistently

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 France
• Fear of Delocalization
• budget deficit higher than 3% of GDP
consistently; Blames recession
 Spain
• Benefited by low interest rate; Economic
growth was 3.1% in 2004 and 2.4% in 2005
• Had lower wage rate; reduce inflation rate
• But had high unemployment

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 Key Economic Indicators in Selected
European Countries, (March 2005)
GDP Growth Unemployment Rate Inflation (%)
(%) (%)

Belgium 2.6 A2.7 2.6

France 2.1 10.0 1.6

Germany 1.5 11.7 1.8

Italy 1.0 7.7 1.9

Netherland 1.3 7.7 1.5

Spain 2.7 10.4 3.1

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 Suggestion by
Economists
• Cut in interest rate to stimulate
economy of the Euro
• Taking a lesson from USA, targeting
the supply money would be an
effective way to control inflation

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 Political Entanglement
• In June 2004 all the EU countries reached a
consensus to consider a common constitution
• In May 2005 France and Netherlands reject
the consensus,
• There were fear of losing sound currency and
liberal social policies among member nations
• There were also budgetary problems

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 Conclusion
• Even though Euro is facing difficult
times as a single currency among
different nations, it can be stabilized
through a new Euro-Dollar exchange
rate
• EU depends on Euro’s stability to be
politically united

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