The Euro: Its History & Future

1. The Euro: Its History & Future Ben Bullock & Lacey Rushton

2. Outline What is the euro? How did it come to be? Who sets the monetary policy? What are the pros of the euro? What are the cons? What’s happening currently with the euro? What does the future of the euro look like?

3. WHAT IS THE EURO? • Official currency of 16/27 European Union nations • Eurozone: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain • Formal agreements • Vatican City, Monaco, San Marino, Saint Pierre and Miquelon, Mayotte • De-facto currency • Andorra, Kosovo, Montenegro

4. WHAT IS THE EURO? • Used daily by 327 million Europeans • 175 million worldwide have currencies pegged to it • Surpassed $US Nov. 2008, as the highest combined value in cash currency, totaling €751 billion • Second largest reserve currency to the $ • Second most traded currency to the $

5. REQUIREMTENTS OF ADOPTION Requirements to adopt euro Each member must have a budget deficit less then 3% their GDP They must have a debt ratio less then 60% their GDP Low inflation Interest rates must be similar to the rest of the Eurozone

6. CURRENCY INTRODUCTION • Euro introduced in January 1, 1999 • Invisible currency – used for only accounting purposes and electric payment only • Old currencies still used for cash transactions • January 2, 1999 – Euro currency introduced • Cash and coins replaced older currencies at fixed conversion rate (based on European Currency Unit) • Old currencies accepted for transitional period along with euro • Typically 2 months, extended a few years to forever in some cases (Austria, Germany, Ireland, Spain)

7. EXCHANGE RATES • Introduced: 1999, $1.18/€  depreciated to all time low Oct. 2000 to $.8228/€ • After physical currency introduced, appreciated dramatically (Currently $1.4098/€) • Since December 2002, never dipped below parity with $

8. HOW DID THE EURO COME TO BE? • Maastricht Treaty, December 1991 • Goals: • Coordinate economic policy-making b/w member states • Coordinate fiscal policy through limited govt. debt and deficits • Create a central bank that independently sets monetary policy • Establish single currency within the euro area • Implemented in three stages • Diagram

9. EURO IMPLEMENTATION

10. MONETARY POLICY & EURO GOVERNANCE • Eurosystem • Centralized policy-making/decentralized implementation • European Central Bank (ECB) – solely responsible for monetary policy (aim for price stability) • National Central Banks (NCB) – print, distribute currency in particular nation • Governing Bodies • Governing Council (like Fed. Res., 15 NCB governors) • Executive Board (President, VP, 4 NCB notables) • Policy committees (Working Group on Forecasting, Econometric Modelling, Public Finance)

11. MONETARY POLICY & EURO GOVERNANCE • Goals: Low inflation/price stability • ECB modeled after German Bundesbank (large centralized banks have had success keeping prices stable) • Similar to Federal Reserve, without burden of supporting economic growth or high levels of employment • Targets interest rates rather than exchange rates (floating exchange regime), ECB does not intervene in foreign exchange market

12. BENEFITS OF THE EURO • Price Transparency • Consumers can compare prices across member borders much more easily • Leads to more increased competition, keeps downward pressures on prices • Low Inflation • Lower prices have led to steady, low levels of inflation • 70’s & 80’s inflation was as high as 20% on average • Since introduction of euro, inflation has remained steady around 2% across the Eurozone

13. INFLATION

14. BENEFITS OF THE EURO • Businesses and households can borrow more cheaply • Low inflation has led to lower interest rates across the board • 1980’s home mortgages were b/w 8-14%, rates have converged around 5% today • Cross-border trade has increased • Estimated 4-10% increase since euro’s introduction • Reduction/Elimination of foreign exchange risk • Without currency fluctuations, businesses no longer incur losses due to cross-border purchases (€20-25 billion/yr)

15. BENEFITS OF THE EURO • Reduction of costs • increased available capital • Government debt reduced • With lower rates, reduce debt and reinvest in job-creation • Fully integrated financial sector • Invite foreign direct investment • Increased asset liquidity • Reduction of long-term interest rate risk

16. 10 yr. BOND INTEREST RATES

17. CONS OF THE EURO • Continued euro strengthening against $ and Yen • Makes Eurozone exports more expensive, less attractive to foreign markets • Leading to trade deficits and imbalances in BOP • Lack of ability to set monetary policy for own nation • ECB controls money supply • ECB not influenced by any nation or political body • One fits-all policies don’t always work • Controlling country specific inflation through raising interest rates, could help some nations and hurt others • Lose tools of economic management like currency devaluation

18. CURRENT ECONOMIC STATE • European Commission on Economics & Financial Afffairs • Predicts 4% contraction of Eurozone economy in 2009 (0.9% 2008 growth) • 2010, predicted growth of 0.1% as a result of economic stimulus • Inflation has remained low, expected to drop ½% in 2009, and increase by 1.25% in 2010 • Labor market hit hardest • 8.5 million jobs lost (8.9% unemployment) for 2009-2010 (compared to 9.5 million new jobs created b/w 2006-2008) • Euro predicted to appreciate relative to $ • Economic stimulus packages take effect • As US debt grows and € appears to be more stable to investors

19. CURRENT ECONOMIC STATE - GRAPHS

20. Conclusion • Economic & Monetary Union has accomplished its goals • Price stability, low inflation • Member states enjoy significant economic advantages • Euro is highly competitive globally • Despite current economic downturn • Euro value has remained strong against $ • Eurozone economy expected to rebound in near future • More member nations expected to adopt euro • World Currency… • Larger scale of the euro • Increased integration of markets, increased liquidity