The EuroThe Euroby Carlos Riosby Carlos Rios

HistoryHistory ImplementationImplementation

– criteriacriteria– phasesphases

RegulationRegulation– ECBECB

Advantages/RisksAdvantages/Risks

EU-EU-11 11 akaaka Euroland Euroland AustriaAustria BelgiumBelgium FinlandFinland FranceFrance GermanyGermany IrelandIreland ItalyItaly LuxembourgLuxembourg NetherlandsNetherlands PortugalPortugal SpainSpain

HistoryHistory

Post WWII Post WWII tensionstensions

Political unity Political unity through economic through economic mediummedium

Try to advance Try to advance European sluggish European sluggish economic economic movementmovement

Criteria GDP <3% Budget Deficit GDP <3% Budget Deficit GDP <60% Government Debt GDP <60% Government Debt Inflation <1.5% three lowest inflation Inflation <1.5% three lowest inflation

countriescountries Bond yield <2% of 3 lowest countriesBond yield <2% of 3 lowest countries Exchange rate must remain in normal Exchange rate must remain in normal

fluctuation bands for the two previous fluctuation bands for the two previous yearsyears

Two Non- EU-11 Two Non- EU-11

GreeceGreece– Gov’t deficit 4.0% Gov’t deficit 4.0%

GDPGDP– Gov’t debt 108.7%Gov’t debt 108.7%– Inflation rate 5.2%Inflation rate 5.2%

avg low 3: 1.17% avg low 3: 1.17%

– Long term bond Long term bond yield 9.8%yield 9.8%

avg low 3: 5.57%avg low 3: 5.57%

United KingdomUnited Kingdom– Gov’t deficit 1.9% Gov’t deficit 1.9%

GDPGDP– Gov’t debt 53.4%Gov’t debt 53.4%– Inflation rate 1.8%Inflation rate 1.8%

avg low 3: 1.17% avg low 3: 1.17%

– Long term bond Long term bond yield 7%yield 7%

avg low 3: 5.57%avg low 3: 5.57%

Why not UKWhy not UK

Loses power to Loses power to set interest ratesset interest rates

It will be unable It will be unable to change to change exchange rateexchange rate

Long term Long term interest rates in interest rates in EU-11 will be EU-11 will be similarsimilar

Phase APhase A

Conform which Conform which member states member states fulfill necessary fulfill necessary criteriacriteria

appoint exec appoint exec board of ECBboard of ECB

begin planning for begin planning for monetary policy monetary policy to begin 1/1/99to begin 1/1/99

Phase BPhase B Beginning of Beginning of

monetary unionmonetary union– $ exists on book, not $ exists on book, not

paperpaper national central national central

banks are no longer banks are no longer independentindependent– national banks are national banks are

agents of ECBagents of ECB

monetary obligations monetary obligations paid for in Eurospaid for in Euros

fix exchange rates fix exchange rates for stabilityfor stability– stability is a muststability is a must

Phase CPhase C Part I Part I

– 1/1/02 Circulation 1/1/02 Circulation of notes and coins of notes and coins beginsbegins

Part IIPart II– By 7/1/02 Old By 7/1/02 Old

National National Currencies lose Currencies lose legal tender statuslegal tender status

AdvantagesAdvantages

Contender for world’s primary Contender for world’s primary currencycurrency

simpler and quicker pricing of simpler and quicker pricing of securities belonging to blocsecurities belonging to bloc

new generic money standardnew generic money standard decreased unemploymentdecreased unemployment increased economic growthincreased economic growth

RisksRisks Displacements of Displacements of

the local or the local or perceived key perceived key industriesindustries

One liquidity One liquidity adjustment adjustment affects allaffects all

SpeculationSpeculation Political pressure Political pressure

S---L---O---W ProgressS---L---O---W Progress

EU-11 must EU-11 must cooperate more cooperate more for economic for economic advancementadvancement

more difficult for more difficult for a country to a country to flourish flourish economicallyeconomically

DisplacementsDisplacements

% of EU-11 “GDP”% of EU-11 “GDP” Ger: 33.53%Ger: 33.53% Fra: 22.22%Fra: 22.22% Ita: 18.10%Ita: 18.10%

Top 3 GDP’s of EU-Top 3 GDP’s of EU-1111

Ger: $2.12 trillionGer: $2.12 trillion Fra: $1.405 trillionFra: $1.405 trillion Ita: $1.144 trillionIta: $1.144 trillion

SpeculationSpeculation Today Euro = Today Euro =

$1.05$1.05 1/1/02 big rush to 1/1/02 big rush to

change $$$change $$$ 6/30/02 big rush 6/30/02 big rush

to change $$$to change $$$ people more people more

interested in interested in getting Eurogetting Euro

RegulationRegulation

European Central BankEuropean Central Bank– as of 1/1/99 national banks become as of 1/1/99 national banks become

agents of ECBagents of ECB ECB controls short term interest ECB controls short term interest

rates and locks in exchange ratesrates and locks in exchange rates

ECB FormatECB Format

ECSBECSB– European System European System

of Central Banksof Central Banks ECBECB

– European Central European Central BankBank

NCBNCB– National Central National Central

BanksBanks

CommitteesCommittees– Governing Council Governing Council – Executive BoardExecutive Board– General CouncilGeneral Council

Executive Board Executive Board

President--William DuisenbergPresident--William Duisenberg Vice President--Christian NoyenVice President--Christian Noyen 4 appointed members of the ECB4 appointed members of the ECB

– Implement monetary policies laid Implement monetary policies laid down by Governing Council and gives down by Governing Council and gives instructions to NCB’sinstructions to NCB’s

Governing CouncilGoverning Council

Executive Board and governors of Executive Board and governors of NCB’s participating in monetary NCB’s participating in monetary unionunion– adopts guidelines to ensure adopts guidelines to ensure

performance of tasks of ESCBperformance of tasks of ESCB– makes monetary policy of makes monetary policy of

community, key interest rates and community, key interest rates and supplies of reserves in ESCBsupplies of reserves in ESCB

General CouncilGeneral Council

President and Vice President of President and Vice President of ECB and governors of all NCB’sECB and governors of all NCB’s– prepare ECB finance reports and prepare ECB finance reports and

statementsstatements– prepare exchange rates for states prepare exchange rates for states

with derogation currency (currencies with derogation currency (currencies against Euro, i.e. British Pound) against Euro, i.e. British Pound)

ConclusionConclusion

Advanced Advanced ConceptConcept

Cooperation a Cooperation a must must

Very RiskyVery Risky