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The Euro: It’s History & Future

Eric Johnson. The Euro: It’s History & Future. Agenda. The Euro: A Summary History Lesson Sovereign Debt Crisis Future of the Euro Q & A. The Euro: What is It?. Born from the Maastricht Treaty Second most traded currency in the world. 23 countries use the currency

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The Euro: It’s History & Future

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  1. Eric Johnson The Euro: It’s History & Future

  2. Agenda • The Euro: A Summary • History Lesson • Sovereign Debt Crisis • Future of the Euro • Q & A

  3. The Euro: What is It? • Born from the Maastricht Treaty • Second most traded currency in the world. • 23 countries use the currency • 17 Economic Monetary Union (EMU or “Eurozone”) member states • 6 non-EU states unofficially • The most successful monetary union of modern history (so far)

  4. Early Thoughts: 1929 • Gustav Stresemann • Chancellor of Germany • League of Nations • Proposed an initiative for economic and monetary union • Common currency • Idea fell on deaf ears • Aftermath of WWI • Recent failure of the Latin Monetary Union

  5. 1969: Barre Report • European Commission initiative for greater coordination of economic and monetary policy • Pierre Werner • Prime Minister of Luxembourg • Tasked with creating a solution • Report published in October 1970: currency band between EEC members • “snake in the tunnel” • Collapse of the Bretton Woods System in 1971

  6. March 1979 • European Monetary System (EMS) • Creation of the European Currency Unit (ECU) • An accounting currency for EMS member countries • ECU factors in weight of countries’ economic trade and financial sector on the European Economic Community (EEC) • For members, exchange rates float within a narrow margin • For non members, exchange rates float freely • Setting the stage for the Euro

  7. 1986: Single European Act • Passed by the EEC • Creation of a single market by 1992 • Man in charge: EC President Jacques Delors • Delors Report in 1989 • Established a three stage program towards achieving this goal • First stage: Abolishment of exchange controls • Allow free flow of capital • Second stage: Creation of the European Monetary Institute • Later the European Central Bank (ECB) • Third stage: Launch

  8. Treaty on European Union • The Maastricht Treaty • February 7, 1992 • Created the European Union (EU) • Goal: Establish a common currency by January 1999

  9. Maastricht Treaty • Four key requirements • Inflation rates be no more than 1.5 times the weighted average of the three best performing nations in the EU. • Government Finance: ratio of annual government deficit to GDP must not exceed 3 percent at the end of the preceding fiscal year. Ratio of government debt must not exceed 60 percent from previous fiscal year. • Country must adhere to exchange rate mechanism of EMS for two years and not devalue its currency • Nominal long-term interest rate must not be more than two percent above the three lowest inflation member countries

  10. Launch • Officially: January 1, 1999 • Legacy currencies still accepted • Not minted until January 1, 2002 • 7.4 billion notes • 38.2 billion coins • Euro starter kits • Massive marketing campaigns • Educating banks, retailers, and the public

  11. Initial Growth • Early 2000s • Slow start • Euro value against the dollar • Peak at $1.59 • Growth in the EMU (Eurozone) • Initially: 11 countries and 3 micro-states • Today: 17 countries (officially), 6 countries (unofficially)

  12. Global Recession • 2009: founding of the Euro Group • Formalized by Lisbon Treaty • Finance Ministers from EMU member states • Discuss issues pertaining the Euro • Current President • Jean-Claude Juncker, Prime Minister of Luxembourg

  13. Sovereign Debt Crisis (PIGS) • Greece Bailout • Received 110 billion Euros from IMF • Caused by: • Large deficit • Poor economy • Political corruption • Misreporting of economic statistics to EU • Ireland • 85 billion Euro loan • Portugal • 78 billion Euro loan • Spain & Italy • Difficulty controlling deficits • Economies big enough to damage the Euro

  14. Future of the Euro • Possible scenarios • Germany opts-out • Chancellor Merkel fed up with bailouts • Undisputed powerhouse economy of EU • Weaker nation opts-out • Greece, Ireland, or Portugal • Political and economic costs too great • Soldier on • Euro currently trading at $1.41 • Economies of bailed-out countries account for less than 5% of EU • Rock and a hard spot

  15. Questions?

  16. Sources • <http://moneymorning.com/2011/05/11/future-of-euro-why-europes-key-currency-doomed/>. • <http://ec.europa.eu/economy_finance/emu_history/documentation/chapter2/19690212en015coordineconpoli.pdf>. • <http://www.guardian.co.uk/world/2002/dec/20/worlddispatch.euro>. • <http://europa.eu/legislation_summaries/economic_and_monetary_affairs/institutional_and_economic_framework/treaties_maastricht_en.htm>. • <http://www.xe.com/ucc/convert/?Amount=1&From=EUR&To=USD>. • <http://www.ena.lu/>. • <http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html>. • <http://news.bbc.co.uk/2/hi/europe/8678073.stm>. • <http://www.eurotreaties.com/maastrichtec.pdf>. • <http://www.historiasiglo20.org/europe/acta.htm>. • <http://www.bbc.co.uk/news/business-13408497>. • <http://www.economist.com/node/17629661>. • <http://www.bloomberg.com/news/2010-05-02/greece-faces-unprecedented-cuts-as-159b-rescue-nears.html>. • <http://www.guardian.co.uk/business/2010/nov/24/ireland-loan-bailout-nationalise-banks>. • <http://euobserver.com/9/29294>.

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