EURO

Presented By: Vandana Rathore Salil Wadhawan

Kanishk Arora
Talha Ahsan Tanya Arora Gaurav Wadehra

INTRODUCTION


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Established by the provisions in the 1992 Maastricht treaty in order to participate in the currency. Euro area has the highest share of world trade-total world exports of 19.5%. The name euro was officially adopted on 16 Dec 1995. Introduced to world financial markets as an accounting currency on 11 Jan 1999 OBJECTIVES • • • • Stabilizing exchange rate Reducing inflation Monetary integration Convergence into a single market


The official currency of 16 of the 27 member states of the European union (EU) Managed and administered by the Frankfurt-based European central bank (ECB) Freely used in any nation which has adopted the euro.

NAMING THE CURRENCY AND CREATING THE € SYMBOL
 At the meeting of the European Council in Madrid in December 1995,

Europe’s leaders decided on the currency’s new name: the euro.  Other suggestions were rejected because of their national connotations. These included the “ducat”, “ecu”, “florin”, “Franken”, or using the euro as a prefix to existing currency names – “Euro mark”,  They agreed that the name should be the same in all official languages of the European Union (EU), taking account of different alphabets, and easy to pronounce and representative of Europe.  The official abbreviation of the euro, EUR, has been registered with the International Organization for Standardization (ISO).

EURO SYMBOL

EARLIER NOTES

EURO NOTES

CRITERIA OF EU
 Inflation: not to exceed 1.5% points of the average of the best three performing countries

 Interest rates: not to exceed 2%points of the average of the best three performing countries
 Fiscal deficit /GDP ratio: not to exceed 3%  Public debt/GDP ratio: not to exceed 60%

Criteria-1
 Applicant countries must have stable institutions than guarantee democracy, the rule of law, human rights and protection of minorities the political criteria)

Criteria-II
 Applicant countries must have a functioning marketing economy and the capacity to cope with competitive pressures (the economic criteria)

Criteria-iii
 Applicant countries must have the ability to take all the obligations of membership

EUROZONE

US$ TO EURO EXCHANGE RATE

The graph below shows historical exchange rates between the Euro (EUR) and the US Dollar (USD) between 8/15/2010 and 9/13/2010

US$ TO EURO EXCHANGE RATE

EURO IMPLICATIONS
Positive impact
Increase in trade
Controlled monetary policy Price transparency Exchange rate fluctuations nullified. Economizing on foreign currency reserves.

Negative impact
High costs of replacing currency.
Asymmetric shocks Loss of Autonomy over economic and fiscal policy It will replace unstable exchange rates for unstable interest rates. Industries are distributed in different proportions.

CHARACTERISTIC OF EURO MARKETS
 This market is made up of borrowing and lending of      

currencies outside the country of issue It is unregulated, uninsured and unsecured Small number of operators dealing in large volumes Highly competitive market Investors prefer short term deposits and borrowers want long term loans Loans are indexed against the LIBOR with a mark up for profit It is made up of four components: Euro Currency deposit market, Euro currency credit market, Euro currency bond market, Euro currency notes market.

TYPES OF NOTES
 Euro Commercial Papers (ECPs)  Note Issuance Facilities (NIFs)

 Euro Medium Term Notes (EMTNs)

IMPLEMENTATION OF EURO CURRENCY CONCEPT IN INDIA
 Increases efficiency of the local forex market  Provides an alternate source of finance to importers and 

 

exporters Provides Indian banks access to foreign currency resources at competitive rates Provides NRI’s with alternate investment avenues Provides the country with additional revenue and forex reserves Gives Indian banking exposure to complex and sophisticated international

EFFECT OF EURO
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Trade Investment Inflation Exchange risk Financial integration Effect on interest rate Price convergence Tourism

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INFLATION RATE Mid 1999: 1.0% Mid 2000: 2.0% Mid 2001: 2.8% Mid 2002: 1.9% Mid 2003: 1.9% May 2004: 2.5% May 2005: 2.0% May 2006: 2.5% May 2007: 1.9% May 2008: 3.7% • May 2009: 0.0%

EURO CRISIS

GREECE’S TROUBLES
 Greece's debt crisis 2009 when a new government took office and revealed that the country had been overspending.  It was also under-reporting its debt, which had ballooned to 12.7 % of the GDP. Four times the limit allowed by

the European.  Several credit ratings agencies have downgraded Greece’s credit rating. These actions has fostered potential fear among investors in Greek Bonds, making it very difficult for the country to borrow money to fund its debts.
 If Greece were to default on its debt, banks in Greece as well as other countries holding Greek bonds would suffer very badly.

GOVERNMENT MEASURES
•Return of special tax (LAFKA) on high pensions. •10% rise in taxes on alcohol, cigarettes, and fuels. •10% increase in luxury taxes. •Equalization of men's and women's pension age limits. •Public-owned companies to diminish from 6,000 to 2,000. •Freeze on increases in public sector wages for three years

PORTUGAL CRISIS
 The country faced cheap lending
 Years of unrestrained spending  Failure to implement financial reforms  Portugal’s deficit is on track to exceed 8% this year with

public debt hitting 75% of gross domestic product  Struggling government position  They have been downgraded to the lowest in the euro zone

OTHER COUNTRIES
 Italy
 Exchange rate wrt. Germany increased to < 20%  One of Unit of Labour cost 9% more than Germany  Devaluation not an option; budget deficit higher than 3% of GDP consistently  Reverting back to Lira not possible  Germany  10% depreciation in real exchange rates  Strong exports; Stagnating domestic demand  Economic Growth of .6% since 2001 till 2005  budget deficit higher than 3% of GDP consistently

 France  Fear of Delocalization  budget deficit higher than 3% of

GDP consistently; Blames recession
 Spain  Benefited by low interest rate;

Economic growth was 3.1% in 2004 and 2.4% in 2005  Had lower wage rate; reduce inflation rate  But had high unemployment

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EFFECT ON EURO
 Greece’s debts effects pulls down the value of euro and

stock markets .  The Euro crisis is also impacting the value of the US dollar  The accounting impact of this sovereign crisis is the impact it is having on determining the fair value of all securities denominated in Euro. This also impacts trade based earnings statements and the value of securities of all companies which trade with the EURO area in some manner or other  Currency value of the entire European Continent is now linked to the fortunes of one single country

CONCLUSION
 New rules to enforce transparency & corporate governance

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for all. Political unity for enforcing stricter monetary policies. Even though Euro is facing difficult times as a single currency among different nations, it can be stabilized through a new Euro-Dollar exchange rate EU depends on Euro’s stability to be politically united 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.

PREDICTION
 Rising tensions within the Euro zone 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.

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