Group 12

Sandeep
Kinshoo
Prashanth
Tahavar Khan
Anncie
 Contents

 Introduction
 Implications of EURO
 Difficulties for Greece, Portugal
 Future of EURO
 Conclusion – To do
Formation and political implication of
EURO
• Treaty of Maastricht - created what is
commonly referred to as the pillar structure of
the European Union
• Boost the relations between the governments
of the European countries and strengthen
the trade and commerce ties between the
countries of Europe
• It created a political union – where policy
decision became a concern
• Achievement of full integration in the monetary
field.
 Implications
Issue Positive Negative
Convergence
increase 
Proportion of trade will Industries are
distributed in different
proportions.
Tight monetary policies
Flexibility Exchange rate It will replace unstable
fluctuations nullified. exchange rates for
unstable interest rates.
Price transparency High costs of replacing
currency.
Transaction costs Loss of Autonomy over
reduced. economic and fiscal
policy
Economizing on Asymmetric shocks
foreign currency
reserves.

Source : http://www.fpma.scot.nhs.uk/euro_pros_cons.pdf
 International implication
• Euro area has the highest share of world trade-total
world exports of 19.5%
• second most widely used currency at the international
level
• main objective of Euro internationally –
 a market-driven process and adopts a neutral stance
 maintaining price stability –boost investors confidence
• however the drawback is that Money has indeed been
the most typical expression of state sovereignty
• helps international company in portfolio diversification
• Improves international cooperation
 Greece
• 1997 – 2007 Greece average GDP was 4%

• After the global recession in mid of 2009 the

GDP growth has recorded as (-) 2%.

• Greece serious credit issue led to the

economic failure
 Why cant Greece step out?
• Any devaluation of the new currency would
increase the cost of imports, raising inflation
• The costs of converting currencies with the
remaining members of the eurozone would be
re-introduced, inhibiting trade and investment
• Existing euro-denominated debt would become
foreign-currency debt. Any devaluation of the
new domestic currency against the euro would
increase the debt burden.
• prolonged slump with high unemployment
Source :http://www.riskoverreward.com/2010/01/debt-and-debtors-why-greece-matters-for.htm
 Actual problem in portugal?

Their cheap lending

Years of unrestrained spending
Failure to implement financial reforms

Their depth?
Portugal’s deficit is on track to exceed 8% this year with public debt hitting 75% of
gross domestic product

Effect on government?
They are struggling now.
They have been downgraded to the lowest in the euro zone
 The other side (i.e) The Positive impact
Improve long term GDP per capita.

The most likely scenario places the gains at just under 10.0 per cent. This
corresponds to an increase in the annual GDP growth rate of approximately 0.4
percentage points, say from a long-term trend of 3.1 per cent to 3.5 percent.

What should the government do?

Allowing for the growth of public investment in the context of the Stability
and Growth Pact constraints would give rise to a 14.8 per cent increase of
GDP per head in the long-run.

Source:http://www.bportugal.pt/en-US/BdP%20Publications%20Research/AB199904_e.pdf
Why is it working in US

 One country with unified culture
 No restriction on Monetary policy
 Central government.

Adapted from Hofstede frame work.


Source: http://forecasts.org/euro.htm
•The Euro’s credibility has taken a major
hit.
•Integrity of EMU is diminished when
fiscal constraints are ignored.
•Even if Euro won’t fail, its value will
respond to the traumas of the users.

Source: http://www.marketoracle.co.uk/Article17385.html
 Maastricht treaty torn..

 Bail out clause is no longer existing.
 European Central Bank has become a fiscal agent for the
weaker countries.
 Alarming state of the Euro Currency union has cooled
would-be member’s enthusiasm like Serbia.
 Speculations over killing the old Euro & creating a new
one in the long term, if stricter economic discipline is not
applied rigorously.

Source: www.euronews.net/2010/05/10
 Predicting Future….
 It was coming…..

 Rising tensions within the Eurozone would portend
for a weaker currency.
 Euro is still overvalued relative to rest of world.
 Valuation models based on PPP put Value of Euro
between 10-15 % lower than today.
 No immunity from fallout from trading system.

Source:
http://www.fool.com/investing/international/2010/04/14/what-
is-the-future-of-the-euro.aspx
 
New rules to enforce transparency &
corporate governance for all.
Revised criteria for traded weight of
each currency.
Political unity for enforcing stricter
monetary policies.
