will euro survive

7/30/2019 Will Euro Survive

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Will Euro Survive ??

Presented BySaroj Kumar Kamde

Rohit SinghSoumyadipMistry

Krishan Mishra


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Euro A Brief History

The euro was launched in 11 countries on January 1,1999, and administered by a newly created centralbank, the European Central Bank (ECB).

An initial purpose of establishing the Euro was to adopt

a common currency that would provide unifiedresource for businesses and governments to facilitatethe trade, thus, lowering vulnerability to potentialexchange rate fluctuations and economic crises in themember countries.

To qualify in the Eurozone, the countries has to matchthe convergence criteria which is to adhere theStability and Growth Pact (SGP).


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Criteria to join the Eurozone

C

Five criteria are required for countries to qualify for Eurozone :

Inflation rate below 2%

Long-Term Interest rates

Exchange rate Fluctuation

Budget Deficit, below 3% of GDP

Public Debt < 60% of GDP


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Cause of Setting up the Eurozone

Majority of international trade with other EU members

Removed exchange rate risks

Cut the cost of transactions

Encouraged firms to trade across national borders

Monetary Stability in Europe

Forced EU states to adopt responsible economic policies

Operation of Euro zone payment systems


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Advantage & Disadvantage for Euro

Advantages To restrict the Exchange Rate

fluctuations

Price Transparency

Transaction Cost Financial & Macroeconomic

Stability

Lower Interest rate

Structural reforms with in

European Economy Increased Cross border Trade

Expanding Markets forbusiness

Disadvantages Cost of transitioning 12

countries to a single currency

Restricted Govt.Spending

Countries cant adjust theirexchange rate

Countries cant adjust theirInterest rate

Loss of Identity

Very tough to handle all

monetary policies by ECB Political Instability and

financial crisis


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Debt Crisis

Subprime Crisis & High Govt. Spending

Large Govt. Debt & Increasing fiscal deficit

Downgrading of sovereign debts & lowering Euro Valuation


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Causes of Sovereign Debt Crisis

From late 2009, fears of a sovereign debt crisis developed amonginvestors as a result of the rising private and government debtlevels around the world together with a wave of downgrading ofgovernment debt in some European states. Causes of the crisisvaried by country.

In several countries, private debts arising from a property bubblewere transferred to sovereign debt as a result of banking systembailouts and government responses to slowing economies post-bubble.

Greece, unsustainable public sector wage and pensioncommitments drove the debt increase.

Different Taxes and Pension rules in some European countriesplayed vital role for the crisis.

Different Tax Structure, different budget deficit and differentborrowing needs in some countries also played the spoilsport.

Absence is common fiscal policy and a Monetary Union without

Political Union


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Budget Deficit (As a % of GDP)

0

2

4

6

8

10

12

14

16

Ireland Greece Spain Portugal UK Italy

Budget Deficit

Budget Deficit


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Debt to GDP Ratio(As a % of GDP)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Ireland Greece Spain Portugal UK Italy

Debt to GDP Ratio

Debt to GDP Ratio


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Summary Recommendation forGreece,Ireland,Portugal,Spain &Italy

Implementation of Fiscal Consolidation Policy tostabilize Debt- to-GDP ration within three years

Structural Reforms designed to rebalance the economyto tradable sectors and increase competiveness

Reduction of labour cost and wages cut Restructuring of debts in a proper way

Implement a systematic approach to correctdeficiencies in business climate, specially a fair taxation

policies Implement the main requirement on

reliable,compararable data and same MacroeconomicIndicaticators.


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Recommendation for Germany

Expand Domestic demand of the EuroArea in order to offset deflationaryimpact of fiscal adjustment.

Accept slightly higher inflation to the

aggregate European rate at the 2percent range.

Rely on more domestic demand


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Recommendation for coping up with the Crisis

ECB should lower the Interest rate to provide cheap loan

to the bail out countries.

Countries should set up an economic recovery program

in return of financial loans. A proper bail out program should be implemented for all

Eurozone countries depending upon their priorities.

Infusion of adequate funds by ECB & IMF for

recapitalization of Banks.

Countries should adopt proper austerity measures and

fiscal consolidation.


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Will Euro Survive the Crisis ?

This is a political more thanan

economic issue.

The difficulty for surplus

countries is that they must

finance those in deficit.

The difficulty for deficit

countries is that the cost of

leaving the eurozone is to face

debt crises.


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Euro Plus Pact

More specifically, building on the legislative package just adopted, the

European Union has adopted Euro Plus Pact, which commit to implement

the following additional measures at the national level.

Adoption by each euro area Member State of rules on balanced budget instructural terms translating the Stability and Growth Pact into national

legislation, preferably at constitutional level or equivalent, by the end of

2012.

Reinforcement of national fiscal frameworks In particular, national budgetsshould be based on independent growth forecasts.


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Euro Plus Pact

Invitation to national parliaments to take into accountrecommendations adopted at the EU level on the conductof economic and budgetary policies.

Consultation of the Commission and other euro areaMember States before the adoption of any major fiscal oreconomic policy reform plans with potential spillovereffects, so as to give the possibility for an assessment ofpossible impact for the euro area as a whole.

Commitment to stick to the recommendations of theCommission and the relevant Commissioner regarding theimplementation of the Stability and Growth Pact


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Conclusion

More countries are lining up to join the Eurozone. Even if there arecosts in the short run, the argument goes, in the long run thebenefits will become clear and Euro will survive.

The euro will create more trade in the Eurozone. It may also createmore labor and capital mobility.

Cross-border asset trade and FDI flows in the Eurozone also haveincreased.

The ECB will prove to be a strong, credible, independent centralbank.

At a global level, the euro is increasingly becoming a reservecurrency for foreign central banks, and is now the dominantcurrency used in international bond markets


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Conslusion

The Eurozone may be a workable albeit economically costlycurrency union.

On the downside, EU enlargement undercuts the in the short runand could make the ECBs governance more difficult. There is asignificant risk of a clash between the fiscal goals of the

governments and monetary goals of the ECB.

The results of successive Eurobarometer polls indicate that onlyabout 50% to60% of the citizens of the Eurozone think that theeuro has been beneficial.

The euro remains an experimentits arrival did not mark the endpoint of European monetary history, and its long-run fate is notentirely certain though we are hopeful


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will euro survive

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