European Monetary

System and birth of euro

Yuti chandan 37
Prachi Bhimani 38
Rachita revankar 39
Sarashwati Soni 40
Shazia Usmani 41
European monetary system (EMS
)
 July 1978- European council laid the
groundwork for the introduction of an
improved monetary system
 EMS exchange rate mechanism introduced
- an obligation to limit fluctuations
between the latter to certain fluctuation
margins
 Initial advantages
 Preventing movements above 2.25% (6%
for Italy) around parity in bilateral
exchange rates with other member
countries
 European Exchange Rate Mechanism
 An extension of European credit facilities
 Monetary cooperation fund
 1992 crisis
 Problem with lira, sterling and then rest of
others.
 Italy raised its interest rates
 The Bundesbank did not cut its interest
rates enough
 Foreign exchange markets remained
disturbed
 Abandonment of Sweden
 1992 crisis contd….
 Abandonment of Norway
 Ireland witnessed pressure and its
devaluation
 Germany reduced interest rates
 Franc fort policy of France
 The Factors Behind the Crisis
 Competitiveness Problems
1. Italy-signs of deteriorating
competitiveness and rise of labor cost
2. Spain and the UK- Unstable cost of labor
3. France, Denmark- rise of economic
power
 German Unification
 Options for the EMS

 A Reconstructed ERM
 Monetary Union
 A Federation of Central
Banks
 Floating Exchange Rates
 Birth of EURO
 31 December 1998
 Abolish of all existing currencies
 1st used for monetary transfer only due
lack of notes and currencies
 ECB took over the roles of the national
central banks
 ECB carries out monetary policies
 Coins And Notes
 Each euro divided into 100 cents
 coins - €2, €1, 50c, 20c, 10c, 5c, 2c, and
1c
 Notes- €500, €200, €100, €50, €20, €10,
€5
 €500 are not issued in all countries
 Economic effects

 Optimal currency area-

1. Maximize economic efficiency
2. The stationary expectations model
3. The international risk sharing model
 Transaction costs and risks
1. Remove the cost of exchanging currency
2. Removes exchange rate risks
3. Financial markets more liquid and flexible
 Economic effects

 Price parity
1. Prevent arbitrage
 Macroeconomic stability
1. Low levels of inflation
2. national and corporate bonds – more
liquid and lower interest rates
 Trade – 9-14% increase in trade
 Economic effects
 Investment
1. Physical investment increased by 5%
2. FDI stocks increased by about 20%
3. In countries with weak currencies the
nos are even better
 Inflation
 Exchange rate risk
 Economic effects
 Exchange rate risk
 Financial integration
 Effect on interest rates
 Price convergence
 Tourism
 Flexible exchange rates
 Against other major currencies
 The future
 Recent turmoil in Greece
 Each country has its own fiscal policy
 Fiscal and monetary policy donot match
 Sharing of risks lead to collapse of all for
collapse of one
 High debt levels
 Regional Divergences
 Conclusion
Our proposal
1. Unification of fiscal policies
 Sharing of debt
 Trying to recover as a whole
 Unification of democracies
2. Separation of EURO
 Each following its own independent
policy
 Bibliography
 http://www.iea.org.uk/record.jsp?type=news&ID=121
 http:// news.bbc.co.uk/1/hi/in_depth/europe/euro-
glossary/12168
 http://www.referenceforbusiness.com/encyclopedia/En
t-Fac/European-Monetary-System.html#ixzz0pVlFvkeC
 http://uk.reuters.com/article/iduktre64u0tm20100531
 http://library.thinkquest.org/19110/english/index.html
 http:// www.wikipedia.com