Eric Johnson. The Euro: A Summary History Lesson Sovereign Debt Crisis Future of the Euro Q & A.

The Euro: It’s History & Future

Eric Johnson

Agenda

The Euro: A Summary History Lesson Sovereign Debt Crisis Future of the Euro Q & A

The Euro: What is It?

Born from the Maastricht Treaty

Second most traded currency in the world.

23 countries use the currency 17 Economic Monetary

Union (EMU or “Eurozone”) member states

6 non-EU states unofficially The most successful

monetary union of modern history (so far)

Early Thoughts: 1929

Gustav Stresemann Chancellor of Germany League of Nations

Proposed an initiative for economic and monetary union Common currency

Idea fell on deaf ears Aftermath of WWI Recent failure of the

Latin Monetary Union

1969: Barre Report

European Commission initiative for greater coordination of economic and monetary policy

Pierre Werner Prime Minister of

Luxembourg Tasked with creating a

solution Report published in October

1970: currency band between EEC members

“snake in the tunnel” Collapse of the Bretton

Woods System in 1971

March 1979

European Monetary System (EMS) Creation of the European Currency Unit (ECU)

An accounting currency for EMS member countries ECU factors in weight of countries’ economic trade

and financial sector on the European Economic Community (EEC)

For members, exchange rates float within a narrow margin

For non members, exchange rates float freely Setting the stage for the Euro

1986: Single European Act Passed by the EEC

Creation of a single market by 1992

Man in charge: EC President Jacques Delors

Delors Report in 1989 Established a three stage

program towards achieving this goal

First stage: Abolishment of exchange controls▪ Allow free flow of capital

Second stage: Creation of the European Monetary Institute▪ Later the European Central Bank

(ECB) Third stage: Launch

Treaty on European Union

The Maastricht Treaty February 7, 1992 Created the European Union (EU) Goal: Establish a common currency

by January 1999

Maastricht Treaty

Four key requirements Inflation rates be no more than 1.5 times the weighted

average of the three best performing nations in the EU. Government Finance: ratio of annual government

deficit to GDP must not exceed 3 percent at the end of the preceding fiscal year. Ratio of government debt must not exceed 60 percent from previous fiscal year.

Country must adhere to exchange rate mechanism of EMS for two years and not devalue its currency

Nominal long-term interest rate must not be more than two percent above the three lowest inflation member countries

Launch

Officially: January 1, 1999 Legacy currencies still

accepted Not minted until

January 1, 2002 7.4 billion notes 38.2 billion coins

Euro starter kits Massive marketing

campaigns Educating banks,

retailers, and the public

Initial Growth

Early 2000s Slow start Euro value against

the dollar▪ Peak at $1.59

Growth in the EMU (Eurozone)▪ Initially: 11 countries

and 3 micro-states▪ Today: 17 countries

(officially), 6 countries (unofficially)

Global Recession

2009: founding of the Euro Group Formalized by Lisbon

Treaty Finance Ministers

from EMU member states

Discuss issues pertaining the Euro

Current President▪ Jean-Claude Juncker,

Prime Minister of Luxembourg

Sovereign Debt Crisis (PIGS)

Greece Bailout Received 110 billion Euros

from IMF Caused by:

▪ Large deficit▪ Poor economy▪ Political corruption▪ Misreporting of economic

statistics to EU Ireland

85 billion Euro loan Portugal

78 billion Euro loan Spain & Italy

Difficulty controlling deficits Economies big enough to

damage the Euro

Future of the Euro

Possible scenarios Germany opts-out▪ Chancellor Merkel fed up with

bailouts▪ Undisputed powerhouse

economy of EU Weaker nation opts-out▪ Greece, Ireland, or Portugal▪ Political and economic costs

too great Soldier on▪ Euro currently trading at

$1.41▪ Economies of bailed-out

countries account for less than 5% of EU

Rock and a hard spot

Questions?

Sources

<http://moneymorning.com/2011/05/11/future-of-euro-why-europes-key-currency-doomed/>.

<http://ec.europa.eu/economy_finance/emu_history/documentation/chapter2/19690212en015coordineconpoli.pdf>.

<http://www.guardian.co.uk/world/2002/dec/20/worlddispatch.euro>. <http://europa.eu/legislation_summaries/economic_and_monetary_affairs/

institutional_and_economic_framework/treaties_maastricht_en.htm>. <http://www.xe.com/ucc/convert/?Amount=1&From=EUR&To=USD>. <http://www.ena.lu/>. <http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html>. <http://news.bbc.co.uk/2/hi/europe/8678073.stm>. <http://www.eurotreaties.com/maastrichtec.pdf>. <http://www.historiasiglo20.org/europe/acta.htm>. <http://www.bbc.co.uk/news/business-13408497>. <http://www.economist.com/node/17629661>. <http://www.bloomberg.com/news/2010-05-02/greece-faces-unprecedented-cuts-

as-159b-rescue-nears.html>. <http://www.guardian.co.uk/business/2010/nov/24/ireland-loan-bailout-

nationalise-banks>. <http://euobserver.com/9/29294>.