Success of a Common Currency - Euro

8/3/2019 Success of a Common Currency - Euro

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Success of A Common Currency URO

PREPARED BY:-

Adviteeya Agarwal (16063)

Dhruv Bahl (16005)

Priya Goel (16023)

Shikhar Madan (16020)

Suseem Jain (16016)


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The need for a single common currency is a topic which has been debated uponin great depth. There are numerous viewpoints and opinions which all suggest the

various pros and cons of adopting a single currency. However, the never ending debate

that this is, no conclusive decision can be reached. The success of a common currency

or its failure for that matter, is very much subjective to a number of elements and

factors in existence.

In more than one instance in the past, groups of countries have been known to adopt a

single common currency. Examples of such arrangement are countries belonging to the

West African Economic and Monetary Union (WAEMU) such as Niger, Mali, Senegal

and those belonging to the Central African Economic and Monetary Community

(CAEMU) such as Chad, Cameroon, Republic of Congo (in all, 14 nations) that share acommon currency called CFA Franc. Countries belonging to the Eastern Caribbean

currency union (ECCU) such as Antigua and Barbuda, Grenada also have a common

currency called East Caribbean Dollar.


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The Euro (sign: ; code: EUR) is the official currency of the Euro zone: 16 of the27 Member States of the European Union (EU). It was introduced on 1st Jan. 1999 as a

result of the Maastricht Treaty (signed in 1992 in Maastricht, the Netherlands) It is also

the currency used by the EU institutions. The Eurozone consists of Austria,

Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta,

The Netherlands, Portugal, Slovakia, Slovenia and Spain. Estonia is due to join the euro

zone on 1 January 2011. The currency is also used in a further five European countries,

with and without formal agreements, and is consequently used daily by some

327 million Europeans. Over 175 million people worldwide use currencies whichare pegged to the euro, including more than 150 million people in Africa. ( Examples of

such currencies are CFA Franc, Moroccan dirham and Cape Verdean Escudo)


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The Euro is the worlds second largest reserve currency (a status it inherited from

the German mark) - world Euro reserves acc. to IMF as on 30th Sept were 1.249 Bill. $, US

dollars world reserves as on the same date were 2.931 Bill $. The reserves of Pound are

199.235 Mill. $ and that of Japanese Yen are 156.373 Mill. $.

Euro is also the second most traded currency in the world after the US dollar. As per the

data available from The Bank of International Settlements (2010 triennial survey, April

10) The market share of Euro was 39 % (USD having the largest share of 85%). The

market shares for Japanese yen was 19% (third largest) and that of Pound Sterling was

around 13%.

As of August 2010, with more than 835 billion in circulation, the Euro is the currency

with the highest combined value of banknotes and coins in circulation in the world, having

surpassed the US dollar in 2009. the value of USD in circulation was $862.42 billion as of

Aug 10.


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1969

Heads of member states of EEC agree to establish an Economic and Monetary Union

(EMU) by 1980.

1989

European Commission heads of state meet in Madrid and agree to implement Economicand Monetary Union (EMU) in the three steps proposed by the head of the commission,

Jacques Delors.

1990

EMU stage one begins with the liberalisation of capital transactions and increased

cooperation between national banks.

1992February

The Maastricht Treaty, negotiated in the last months of 1991, is signed, setting out a path

to the single currency with 1st January 1999 as the last allowable date for its introduction.

Britain secures an opt-out from this final stage and the Denmark rejects it in a referendum.


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The Euro, as the timeline shows was established by the provisions of the 1992 MaastrichtTreaty. The treaty required fulfillment of certain criteria called The euro convergence

criteria (also known as the Maastricht criteria) for European Union member states to

enter the third stage of European Economic and Monetary Union (EMU) and adopt

the euro as their currency. The purpose of setting the criteria was to maintain the price

stability within the Eurozone even with the inclusion of new member states.

These criteria are given in following slides.


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1. Inflation rates: The inflation in the member nations should not be more than 1.5

percentage points higher than the average of the three best performing (lowest

inflation) member states of the EU.

2. Government finance:

Annual government deficit:

The ratio of the annual government deficit to gross domestic product (GDP) must not

exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a

level close to 3%.

Government debt:The ratio of gross government debt to GDP must not exceed 60% at the end of the

preceding fiscal year. Even if the target cannot be achieved due to the specific conditions,

the ratio must have sufficiently diminished and must be approaching the reference value

at a satisfactory pace.


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3) Exchange Rate: Applicant countries should have joined the exchange-rate

mechanism (ERM II) under the European Monetary System (EMS) for two consecutive

years and should not have devalued its currency during the period.

4. Interest rates : The nominal interest rate must not be more than 2 percentage points

higher than in the three lowest inflation member states.

The purpose of setting the criteria is to maintain the price stability within theEuro zone even with the inclusion of new member states.


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The effect of introduction of Euro on the volatility of important Real and nominal

economic Indicators has been examined for a sample of 25 nations (including 12 of the

most industrialised members of eurozone) and other industrialised nations of the world.

The purpose is to evaluate the quality and success of economic and monetary policies for

the Euro, which the 16 Euro nations have agreed to formulate in coordination. Following

are the Indicators studied:

GDP Growth Real Consumption Growth

Real Return to Capital (represented by Stock Market Returns)

Interest Rates

Inflation


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SOURCE: European commission Economic Paper, March 2008 byStefan Gerlach and Mathias Hoffman


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Since the inception of the euro, Industrialised economies (Eurozone and others) have

seen a considerable improvement in stability of both key nominal and to a some-whatsmaller extent - real macroeconomic indicators, including inflation, interest rates, GDP,

stock markets and, consumption.

Reduced volatility in some Indicators is attributable to the very formation of the

Maastricht Treaty where the criteria for entering the third round of EMU and

consequently adoption of euro were given.

European Commission Bank (ECB) has largely been successful in implementation of its

monetary policy with special focus on the Harmonised Inflation and Interest Rates in the

Euro area.


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The following few slides are aimed at evaluating important Macro-economic Indicators for

the Euro area and ascertaining the impact on them - whether favorable or not, by the

introduction of the common currency Euro.


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The cross-country variation in the

inflation rates of Member States has

not fallen quickly.

Steady-state inflation and inflation

uncertainty have both declined

steadily since the inception of EMU.

Changeover effects have led to

increased inflation perception and

widened the gap between inflation

perception & expectations.


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A reduction in bilateral trade costs

among Eurozone nations.Newly-trade goods channel. euro

induced firms to export a wider range of

their products to the Eurozone.

Euros pro-FDI effects.


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Apart from factors earlier discussed, following factors have also proven beneficial:

Government bond markets

Corporate bond markets

Derivatives market

Equity markets

Increased Mergers in the zone.


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Founded in 1985.

Member Countries

SAARC Preferential Trading Arrangement (SAPTA)

South Asian Free Trade Area (SAFTA)


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The motivation for greater integration in the South Asian region follows fromthree distinct factors:

I. Pure Economic Gains

II. Strategic Gains

III. Developmental and Environmental Gains


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The degree of economic integration is categorized into 6 categories:

Preferential trading area

Free trade area, Monetary union

Customs union, Common market

Economic union, Customs and Monetary union

Economic and Monetary union

Fiscal union

Complete economic integration


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The degree of economic integration is categorized into 6 categories:

Preferential trading area

Free trade area, Monetary union

Customs union, Common market

Economic union, Customs and Monetary union

Economic and Monetary union

Fiscal union

Complete economic integration


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The main objective of the agreement is to promote and enhance mutual trade and

economic cooperation among the SAARC Member states.

There are five key instruments of implementation

Tariff Liberalization


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Tariff Reductions under SAFTA

CountriesExisting

Tariffrates

ProposedSAFTA

reduction

TimeLine

Phase One

India, Pakistan, Sri Lanka >20% Reduce to20%

2 years

30% Reduce to30%

2Years


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The main objective of the agreement is to promote and enhance mutual trade and

economic cooperation among the SAARC Member states.

There are five key instruments of implementation of SAFTA

Tariff Liberalization

Rules of Origin

Sensitive List

Mechanism for Compensation for Revenue Loss (MCRL)

Safeguard Measures.


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Not an ambitious free trade agreement

Political Hurdles

Low levels of Intra-regional trade


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Year Value of intra- regional trade Value of total trade with the

world

% share of intra-regional trade

in total trade

1991 1991.71 64071.20 3.11

1992 2607.31 72719.13 3.59

1993 2562.82 73898.11 3.47

1994 3028.86 82315.56 3.68

1995 4364.03 104434.77 4.18

1996 5057.40 111749.30 4.53

1997 5158.42 119510.09 4.32

1998 5533.12 118769.41 4.66

1999 5131.37 129167.55 3.97

2000 5761.15 142259.05 4.05

2001 6390.36 151486.11 4.22

2002 7450.41 157710.60 4.72

2003 10635.93 192430.64 5.53

2004 12982.06 244438.80 5.31

2005 16925.88 318285.68 5.32

2006 19657.72 410834.30 4.78

Intra-Regional and Total Trade of South Asian Countries (in

US$ mn. and percentage share), 1991-2006


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Reporting Country Trade with SAARC members (US$ million) Total trade with world (US$ million) Share of intra-regional trade to total

trade (%)

Afghanistan 1,451.93 3,240.88 44.8

Bangladesh 2,309.22 22,345.30 10.33

India 6,570.25 232,608.10 2.82

Maldives 146.5 843.62 17.37

Nepal 1,265.27 2,544.95 49.72

Pakistan 2,562.74 41,456.00 6.18

Sri Lanka 2,636.71 15,246.83 17.29

Region Total 16925.88 31.8285.68 5.32


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Political Hurdles


Informal Trade


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Political Hurdles


Informal Trade

Infrastructural Bottlenecks

Inclusion of the Sensitive List

Non-Tariff Barriers


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Political Hurdles


Informal Trade

Infrastructural Bottlenecks

Inclusion of the Sensitive List

Non-Tariff Barriers

Similar Production Structure


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Firstly, India must increase its role as a big brother.

Services should be included in the agreement due to their importance to the GDPs of

the member countries. SAFTA should therefore consider the ways and means to regularize

and regulate trade in services.

With ease of tariffs and proper infrastructure it would lead to economies of scale and

specialization as production would shift to efficient parts and the countries could source

raw materials at a cheaper cost.

The infrastructure problems have to be resolved to allow trade facilitation and to

increase intra-regional trade.


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48

Tirupura

Kolkata


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South Asia has emerged as one of the least integrated regions in the world due to acombination of political, institutional and economic factors

Procedural delays stemming from institutional requirements have inhibited trade andbusiness across borders.

Economic factors have also been as important.

Therefore, SAFTA may be the right steps towards trade liberalization, economic growthand economic integration of the South Asian region. Whether it will realize those goalseffectively and efficiently is debatable.

One of the main task would be to create a politically harmonious subcontinent, which may

be a formidable task, but not impossible. If successful, SAFTA will not only prove to be apanacea for the economic ills plaguing the region but will also foster close people-to-people contact.

It will also create dependencies amongst the nations that will go a long way to bridge thecontentious political divide that has prevented the region from pursuing its optimaleconomic potential.

Documents

Success of a Common Currency - Euro