eric johnson. the euro: a summary history lesson sovereign debt crisis future of the euro q...
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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)
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
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
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
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
Treaty on European Union
The Maastricht Treaty February 7, 1992 Created the European Union (EU) Goal: Establish a common currency
by January 1999
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
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
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)
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
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
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
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>.