international monetary system part ii

8/3/2019 International Monetary System Part II

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The International

Monetary System

PART II



Introduction

The agreement reached at Bretton Woods

established two multinational institutions

— the World Bank and the International

Monetary Fund (IMF)

Since WWII, both institutions have played

an important role in the world economy



The International Monetary Fund(IMF)

The International Monetary Fund (IMF) is an

organization of 187 countries, working to foster :

Global monetary cooperation

Secure financial stability

Facilitate international trade

Promote high employment andsustainable economic growth and

Reduce poverty around the world



Role of the IMF

The role of the IMF is to maintain order in the

international monetary system

(1) To avoid a repetition of the competitive

devaluations of the 1930s, and

(2) To control price inflation by imposingmonetary discipline on countries



The Special Drawing Right(SDR)

The Special Drawing Right (SDR) is an

international reserve asset, created by the

IMF in 1969 to supplement the existing

official reserves of member countries




The SDR is neither a currency, nor a claim

on the IMF

Rather, it is a potential claim on the freely

usable currencies of IMF members

Holders of SDRs can obtain these

currencies in exchange for their SDRs




The value of the SDR is based on a basket

of key international currencies—the euro,Japanese yen, pound sterling, and U.S.

dollar

The U.S. dollar-value of the SDR is posted

daily on the IMF’s website

http://www.imf.org/external/np/fin/data/rms_sdrv.aspx






The World Bank

The World Bank is a vital source of

financial and technical assistance todeveloping countries around the world

The World Bank, established in 1944, is

headquartered in Washington, D.C.



The World Bank

It is not a bank in the common sense; It is

made up of two unique development

institutions owned by 187 member countries:

1. The International Bank for Reconstructionand Development (IBRD) and

2. The International DevelopmentAssociation (IDA)



EUROPEAN

MONETARY

SYSTEM



Introduction

On 9 May 1950, the Schuman Declaration proposed the establishment of a EuropeanCoal and Steel Community (ECSC)-

( Treaty of Paris of 18 April 1951)This put in place a common market in coal

and steel between the six foundingcountries (Belgium, the Federal Republic ofGermany, France, Italy, Luxembourg andthe Netherlands)

So 9 May is celebrated as the EU's birthday

http://europa.eu/abc/symbols/9-may/index_en.htm

http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_ecsc_en.htm




http://europa.eu/abc/symbols/9-may/index_en.htm



Introduction

The Six then decided, on 25 March 1957with the Treaty of Rome, to build aEuropean Economic Community (EEC) based on a wider common marketcovering a whole range of goods andservices

Customs duties between the six countrieswere completely abolished on 1 July 1968and common policies, notably on tradeand agriculture, were also put in placeduring the 1960s

http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_eec_en.htm

http://europa.eu/legislation_summaries/institutional_affairs/treaties/treaties_eec_en.htm



Introduction

In 1971, the United States decided toabolish the fixed link between the dollar and

the official price of gold, which had ensuredglobal monetary stability after World WarTwo

This put an end to the system of fixedexchange rates



European Monetary System (EMS)

After the collapse of Bretton Woods

system in 1971, most of the EEC countriesagreed in 1972 to maintain stableexchange rates by preventing exchangefluctuations of more than 2.25% (the

European "currency snake")

http://en.wikipedia.org/wiki/Bretton_Woods_system


http://en.wikipedia.org/wiki/Exchange_rate

http://en.wikipedia.org/wiki/Snake_in_the_tunnel

http://en.wikipedia.org/wiki/Snake_in_the_tunnel

http://en.wikipedia.org/wiki/Exchange_rate






In March 1979, this system began operatingunder the Jenkins European Commissionwhere most nations of the EuropeanEconomic Community (EEC) linked theircurrencies to prevent large fluctuationsrelative to one another by holding exchangerates within specified limits

The goal was to foster monetary stability inthe European Community



European monetary system (EMS)

It had three main features:

1. Reference currency called the ECU: this wasa ‘basket’ made up of the currencies of all

the member states;2. An exchange rate mechanism: each

currency had an exchange rate linked to theECU; bilateral exchange rates were allowedto fluctuate within a band of 2.25 %;

3. A credit mechanism: each countrytransferred 20 % of its currency and gold

reserves to a joint fund



European Currency Unit (ECU)

The quantity of each country's currency inthe ECU reflected the country’s relative

economic strength in the EuropeanCommunity

The ECU functioned as a unit of account, ameans of settlement and a reserve assetfor the members of the EMS



European Union (EU)

By 1986, nine countries joined the EMS – Denmark, Ireland, UK, Greece, Portugal,Spain, Austria, Finland and Sweden

7th Feb. 1992, it was renamed as EuropeanUnion (EU)

The EU currently has 25 member states




Periodic adjustments raised the values of

strong currencies and lowered those ofweaker ones, but after 1986 changes innational interest rates were used to keepthe currencies within a narrow range

http://en.wikipedia.org/wiki/Interest_rate

http://en.wikipedia.org/wiki/Interest_rate




• In the early 1990s, the European Monetary

System was strained by the differingeconomic policies and conditions of itsmembers, especially the newly reunifiedGermany, and Britain (which had initially

declined to join and only did so in 1990)permanently withdrew from the system inSeptember 1992




Speculative attacks on the French Francduring the following year led to the so-called

Brussels Compromise in August 1993 whichestablished a new fluctuation band of +15%

To prevent wide currency fluctuations

among EU currencies and to eliminatecompetitive devaluations, EU governmentshad decided to relaunch the drive to fullmonetary union and to introduce a single

currency



From the EMS to EMU

At the European Council in Madrid in June1989, EU leaders adopted a three-stage

plan for economic and monetary union

This plan became part of the MaastrichtTreaty on European Union adopted by the

European Council in December 1991

http://europa.eu/pol/emu/overview_en.htm

http://europa.eu/pol/emu/overview_en.htm



From the EMS to EMU

The first stage (1 July 1990) :

• Completely free movement of capital within

the EU (abolition of exchange controls);• Increasing the amount of resources devoted

to removing inequalities between Europeanregions (Structural Funds);

• Economic convergence, through multilateralsurveillance of member states’ economic

policies



From the EMS to EMU

The second stage (1 January 1994):

It provided for:

Establishing the European MonetaryInstitute (EMI) in Frankfurt; the EMI wasmade up of the governors of the centralbanks of the EU countries;

Independence of national central banks;

Rules to curb national budget deficits



From the EMS to EMU

The third stage (1 January 1999):

The EMS was no longer a functionalarrangement in May 1998

In June 1998, the European Central Bankwas established

From this point onwards, the EuropeanCentral Bank took over from the EMI andbecame responsible for monetary policy,which is defined and implemented in euro

http://europa.eu/institutions/financial/ecb/index_en.htm






The European Central Bank

The key responsibilities of the ECB are:

To formulate monetary policy,

To conduct foreign exchange,

To hold currency reserves andauthorize the issuance of bank notes



Birth of Euro

On 1 January 1999, the ECU basket wasdiscarded and in January 1999, a unifiedcurrency, the euro, was born and came tobe used by most EU member countries

Participation is voluntary and the

fluctuation bands remain the same as in theoriginal i.e. +15 percent, once again with thepossibility of individually setting a narrowerband with respect to the euro



Birth of Euro

11 countries adoptedthe euro, Austria,Belgium, Finland,France, Germany,Ireland, Italy,Luxembourg, the

Netherlands,Portugal and Spain.(Greece joined themon 1 January 2001)



The Euro

The euro is the single currency of theEuropean Union. Twelve of the then 15countries adopted it for non-cash

transactions from 1999 and for all paymentsin 2002 when euro notes and coins wereissued

Three countries (Denmark, Sweden and theUnited Kingdom) did not participate in thismonetary union



Eurozone

Euros are printed and managed by theEuropean System of Central Banks (ESCB)

Together, these countries create what iscalled the Eurozone, a region where the euroserves as a common national currency for allof the separate nations

The euro (sign: €; code: EUR) is the officialcurrency of the Eurozone

http://en.wikipedia.org/wiki/Currency_sign

http://en.wikipedia.org/wiki/Euro_sign

http://en.wikipedia.org/wiki/ISO_4217

http://en.wikipedia.org/wiki/ISO_4217

http://en.wikipedia.org/wiki/Euro_sign

http://en.wikipedia.org/wiki/Currency_sign



The Eurozone

The eurozone is one of the largesteconomic regions in the world and itscurrency, the euro, is considered one of the

most liquid when compared to others

This region's currency continues to develop

over time and is taking a more prominentposition in the reserves of many centralbanks



The Eurozone

Estonia joined the eurozone on 1 January2011

The currency is also used in a further fiveEuropean countries, with and without formalagreements, and is consequently used dailyby some 327 million Europeans

Over 175 million people worldwide usecurrencies which are pegged to the euro,including more than 150 million people inAfrica



The Euro

As of June 2010, with more than €800 billion in circulation, the euro is thecurrency with the highest combined value

of banknotes and coins in circulation in theworld, having surpassed the U.S. dollar

Based on IMF estimates of 2008 GDP andpurchasing power parity among the variouscurrencies, the eurozone is the secondlargest economy in the world



The Euro

The euro is the second largest reservecurrency (a status it inherited from theGerman mark) as well as the second most

traded currency in the world after the USdollar

The share of the euro as a reserve currency

has increased from 17.9% in 1999 to 26.5%in 2008, at the expense of the U.S. dollar (itsshare fell from 70.9% to 64.0% in the sametimeframe) and the Yen (it fell from 6.4% to

3.3)

http://en.wikipedia.org/wiki/German_mark

http://en.wikipedia.org/wiki/German_mark



The Euro

The total of euros held as a reserve in theworld at the end of 2008 was equal to USD

1.1 trillion

Outside the eurozone, a total of 23 countriesand territories that do not belong to the EU

have currencies that are directly pegged tothe euro



The Euro

17 Member States of the European Unionuse the euro as their currency

●

Belgium● Germany

● Ireland

● Greece

● Spain● France

● Italy

● Cyprus

● Estonia

●

Luxembourg● Malta● The Netherlands

● Austria

● Portugal● Slovenia

● Slovakia

● Finland



The Euro

Non-participants

●

Bulgaria● Czech Republic

● Denmark

● Latvia

● Lithuania

●

Hungary● Poland● Romania

● Sweden

● United Kingdom



GOOD LUCK TO YOU

international monetary system part ii

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