The Euro by Carlos Rios

1. The Euroby Carlos Rios • History • Implementation • criteria • phases • Regulation • ECB • Advantages/Risks

2. EU-11 aka Euroland • Austria • Belgium • Finland • France • Germany • Ireland • Italy • Luxembourg • Netherlands • Portugal • Spain

3. History • Post WWII tensions • Political unity through economic medium • Try to advance European sluggish economic movement

4. Criteria • 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

5. Greece Gov’t deficit 4.0% GDP Gov’t debt 108.7% Inflation rate 5.2% avg low 3: 1.17% Long term bond yield 9.8% avg low 3: 5.57% United Kingdom Gov’t deficit 1.9% GDP Gov’t debt 53.4% Inflation rate 1.8% avg low 3: 1.17% Long term bond yield 7% avg low 3: 5.57% Two Non- EU-11

6. Why not UK • Loses power to set interest rates • It will be unable to change exchange rate • Long term interest rates in EU-11 will be similar

7. Phase A • Conform which member states fulfill necessary criteria • appoint exec board of ECB • begin planning for monetary policy to begin 1/1/99

8. Beginning of monetary union $ exists on book, not paper national central banks are no longer independent national banks are agents of ECB monetary obligations paid for in Euros fix exchange rates for stability stability is a must Phase B

9. Phase C • Part I • 1/1/02 Circulation of notes and coins begins • Part II • By 7/1/02 Old National Currencies lose legal tender status

10. 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

11. Risks • Displacements of the local or perceived key industries • One liquidity adjustment affects all • Speculation • Political pressure

12. S---L---O---W Progress • EU-11 must cooperate more for economic advancement • more difficult for a country to flourish economically

13. % of EU-11 “GDP” Ger: 33.53% Fra: 22.22% Ita: 18.10% Top 3 GDP’s of EU-11 Ger: $2.12 trillion Fra: $1.405 trillion Ita: $1.144 trillion Displacements

14. Speculation • Today Euro = $1.05 • 1/1/02 big rush to change $$$ • 6/30/02 big rush to change $$$ • people more interested in getting Euro

15. Regulation • European Central Bank • as of 1/1/99 national banks become agents of ECB • ECB controls short term interest rates and locks in exchange rates

16. ECSB European System of Central Banks ECB European Central Bank NCB National Central Banks Committees Governing Council Executive Board General Council ECB Format

17. Executive Board • President--William Duisenberg • Vice President--Christian Noyen • 4 appointed members of the ECB • Implement monetary policies laid down by Governing Council and gives instructions to NCB’s

18. Governing Council • 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

19. General Council • 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)

20. Conclusion • Advanced Concept • Cooperation a must • Very Risky