EUROZONE

Group 1
Kevin Jacob, 01 Gayatri Murralidharan, 03 Namrata Rani, 05 Nidhi Garg, 07 Debashish Paul, 09

WHAT IS THE EUROZONE?

Officially called the Euro Area. It is an EMU (Economic and Monetary Union). Consists of 17 EU (European Union) member states. The Euro () is the common currency and sole legal tender (mode of payment allowed by law) of EU member states.

ABOUT THE EURO ()

Worlds largest reserve currency (currency held by Govt. institutions as part of foreign exchange reserves) and the most traded currency, after the US Dollar. Has the highest combined value of banknotes and coins in circulation in the world as of 2011. Official currency of Eurozone and the 7 Institutions of the EU. Managed and administered by ECB (European Central Bank) and Eurosystem (consisting of central banks of eurozone). Concept of a common currency came due to the failure of Bretton Woods floating exchange rates system. Envisioned at the Maastricht Treaty (called the Treaty on European Union).

THE MAASTRICHT CRITERIA

1. 2. 3. In order to maintain price stability within the Eurozone, EU member states could adopt the Euro only if they met the below Convergence criteria: Budget deficit of less than 3% of GDP. National debt of less than 60% of GDP. At least 2 years without devaluation within the ERM (Exchange Rate Mechanism). Inflation of less than 1.5% of the average of the 3 economies with the lowest inflation rates. Nominal long term interest rates of less than 2% of the average of the 3 economies with the lowest inflation rates.

4.
5.

Note: The UK and Denmark negotiated provisions to remain permanently outside the Eurozone.

EFFECTS OF THE EURO AS A COMMON CURRENCY

Elimination of cross-border transaction costs. Reduction of exchange rate risks. Price parity (convergence of prices). Increase in trade within the Eurozone. Increase in investment and ease of financing. Financial integration of Europe. Positive impact on travel and tourism within the EU.

THE EURO AREA

EUROZONE STATISTICS
PARAMETER Population GDP Members IN NUMBERS 331,962,860 (as of 2011) 9.2 trillion (as of 2010) 17

Interest Rate Inflation

Unemployment Trade balance

1.00 % 1.6%
10% 0.9 billion surplus

PARAMETER Political control Euro Group President Issuing authority Euro Group

WHO Jean-Claude Juncker ECB (European Central Bank)

ECB President

Mario Draghi

EU MEMBER STATES THAT USE THE EURO

17 EU member states.
Austria Estonia Germany Italy Spain Luxembourg Belgium Finland Greece Slovenia Portugal Netherlands Cyprus France Ireland Malta Slovakia

EU MEMBER STATES THAT DO NOT USE THE EURO

10 EU member states.
Bulgaria Denmark Latvia Poland Sweden Czech Republic Hungary Lithuania Romania UK

NON-EU MEMBER STATES THAT USE THE EURO

States with issuing rights (i.e.; the right to mint Euro): Monaco, San Marino, Vatican City.
Other users: Andorra, Kosovo, Montenegro. (They adopted the Euro in order to stabilize their economies).

EUROZONE SOVEREIGN DEBT CRISIS

Crisis developed in late 2009 from the fear of governments defaulting on their debt repayment. Mainly affected PIGS (Portugal, Ireland, Greece, Spain) with possibility of spreading to other EU member states. Causes include: 1. Globalization of finance. 2. Easy credit conditions during the 2002-2008 period that encouraged high-risk lending and borrowing practices. 3. International trade imbalances. 4. Bursting of the real-estate bubble in US. 5. Slow growth economic conditions from 2008 and the ensuing fiscal policies of various governments.

RECENT IMPACT OF THE CRISIS

Credit rating agency, S&P, downgraded 15 EU member states citing 5 interrelated factors: 1. Tightening credit conditions across the Eurozone. 2. Higher risk premiums on a growing number of Eurozone sovereigns. 3. Disagreements among European policy makers on how to tackle crisis. 4. High levels of government and household debt across the Eurozone. 5. Rising risk of economic recession in the Eurozone as a whole in 2012.

MEASURES TO TACKLE THE CRISIS

Creation of a temporary EFSF (European Financial Stability Facility) to preserve financial stability in Europe by providing financial assistance to Eurozone states. Creation of a temporary EFSM (European Financial Stabilization Mechanism) to raise funds using the EU budget as collateral. Interventions by the ECB to reduce volatility and improve liquidity of financial markets. Adopting the Euro-Plus Pact as an improvement of the Stability and Growth Pact. Issuing Eurobonds (European Government Stability Bonds) jointly by the 17 EU member states. Creation of ESM (European Stability Mechanism) as a permanent rescue funding program to succeed EFSF and EFSM.