Will Euro Survive ??

Presented By
Saroj Kumar Kamde Rohit Singh SoumyadipMistry Krishan Mishra

Euro A Brief History

The euro was launched in 11 countries on January 1, 1999, and administered by a newly created central bank, the European Central Bank (ECB). An initial purpose of establishing the Euro was to adopt a common currency that would provide unified resource for businesses and governments to facilitate the trade, thus, lowering vulnerability to potential exchange rate fluctuations and economic crises in the member countries. To qualify in the Eurozone, the countries has to match the convergence criteria which is to adhere the Stability and Growth Pact (SGP).

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

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

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 for business

Disadvantages
Cost of transitioning 12 countries to a single currency Restricted Govt.Spending Countries cant adjust their exchange rate Countries cant adjust their Interest rate Loss of Identity Very tough to handle all monetary policies by ECB Political Instability and financial crisis

Debt Crisis
Subprime Crisis & High Govt. Spending

Large Govt. Debt & Increasing fiscal deficit

Downgrading of sovereign debts & lowering Euro Valuation

Causes of Sovereign Debt Crisis

From late 2009, fears of a sovereign debt crisis developed among investors as a result of the rising private and government debt levels around the world together with a wave of downgrading of government debt in some European states. Causes of the crisis varied by country. In several countries, private debts arising from a property bubble were transferred to sovereign debt as a result of banking system bailouts and government responses to slowing economies postbubble. Greece, unsustainable public sector wage and pension commitments drove the debt increase. Different Taxes and Pension rules in some European countries played vital role for the crisis. Different Tax Structure, different budget deficit and different borrowing needs in some countries also played the spoilsport. Absence is common fiscal policy and a Monetary Union without Political Union

Budget Deficit (As a % of GDP)

Budget Deficit
16 14 12 10

8
6 4 2 0

Budget Deficit

Ireland

Greece

Spain

Portugal

UK

Italy

Debt to GDP Ratio(As a % of GDP)

Debt to GDP Ratio
140.00

120.00
100.00 80.00 60.00 40.00 20.00 0.00 Debt to GDP Ratio

Ireland Greece

Spain Portugal

UK

Italy

Summary Recommendation for Greece,Ireland,Portugal,Spain &Italy

Implementation of Fiscal Consolidation Policy to stabilize Debt- to-GDP ration within three years Structural Reforms designed to rebalance the economy to tradable sectors and increase competiveness Reduction of labour cost and wages cut Restructuring of debts in a proper way Implement a systematic approach to correct deficiencies in business climate, specially a fair taxation policies Implement the main requirement on reliable,compararable data and same Macroeconomic Indicaticators.

Recommendation for Germany

Expand Domestic demand of the Euro Area in order to offset deflationary impact of fiscal adjustment. Accept slightly higher inflation to the aggregate European rate at the 2 percent range. Rely on more domestic demand

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.

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.

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 in structural 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 budgets should be based on independent growth forecasts.

Euro Plus Pact

Invitation to national parliaments to take into account recommendations adopted at the EU level on the conduct of economic and budgetary policies. Consultation of the Commission and other euro area Member States before the adoption of any major fiscal or economic policy reform plans with potential spillover effects, so as to give the possibility for an assessment of possible impact for the euro area as a whole.

Commitment to stick to the recommendations of the Commission and the relevant Commissioner regarding the implementation of the Stability and Growth Pact

Conclusion
More countries are lining up to join the Eurozone. Even if there are costs in the short run, the argument goes, in the long run the benefits will become clear and Euro will survive. The euro will create more trade in the Eurozone. It may also create more labor and capital mobility.

Cross-border asset trade and FDI flows in the Eurozone also have increased.
The ECB will prove to be a strong, credible, independent central bank.

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

Conslusion
The Eurozone may be a workable albeit economically costly currency union. On the downside, EU enlargement undercuts the in the short run and could make the ECBs governance more difficult. There is a significant 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 only about 50% to60% of the citizens of the Eurozone think that the euro has been beneficial. The euro remains an experimentits arrival did not mark the end point of European monetary history, and its long-run fate is not entirely certain though we are hopeful