The Euro by Carlos Rios n History n Implementation –criteria –phases n Regulation –ECB n Advantages/Risks

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

History n Post WWII tensions n Political unity through economic medium n Try to advance European sluggish economic movement

Criteria n GDP <3% Budget Deficit n GDP <60% Government Debt n Inflation <1.5% three lowest inflation countries n Bond yield <2% of 3 lowest countries n Exchange rate must remain in normal fluctuation bands for the two previous years

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

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

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

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

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

Advantages n Contender for world’s primary currency n simpler and quicker pricing of securities belonging to bloc n new generic money standard n decreased unemployment n increased economic growth

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

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

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

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

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

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

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

Governing Council n 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

General Council n 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)

Conclusion n Advanced Concept n Cooperation a must n Very Risky