THE CHRIS PARASKEVOPOULOS MEMORIAL CONFERENCE Athenian Policy Forum and York University

THE CHRIS PARASKEVOPOULOSMEMORIAL CONFERENCE

Athenian Policy Forum and York University

THE FUTURE OF THE EURO AND THE ROLE OF CHINA AND INDIA

byBala Batavia and Tassos Malliaris

Toronto, Canada, May 16, 2008

OUTLINE

1. Brief Evaluation of the Global Economy

2. Currency Markets

3. Discussion of the Dollar Weakness

4. The Role of the Euro

5. China and India

LESSONS LEARNED

1. Global Economy is Integrated

2. Fixed Exchange Rates Do Not Last

3. Who is Globally the Engine of Growth

4. The Unpredictability of Crises: From

Emerging Economies to U.S.

The Nature of Crises

1. Currency Crises

2. Banking Crises

3. Financial Crises

4. Economic Recessions

Major Trends

• Trends in Global GDP

• Trends in Global Trade

• Trends in Global Consumption

• Trends in Global Investment

Figure 1: Global Outlook (Real GDP; percent change from a year ago)

Global GDP Growth

U.S., Euro, and Japan GDP Growth

Figure 2: Global Outlook (Real GDP; percent change from a year ago)

Remarks

• Real Global Economies Appear Stable

• How are Global Currencies Performing?

: Key Statistics for 2006

Country/Location

Area(sqkm)

Population(million)

GDP(PPP)($trillion)

GDP-percapita(PPP)($)

World 510.072 million 6,525 60.71 9,500

USA 9,631,420 298 12.36 41,800

EU 3,977,487 460 11.72 25,480

NAFTA 21,588,638 430 12.89 29,942

ASEAN 4,400,000 553 2.17 4,044

UK 244,820 60.6 1.83 30,300

Canada 9,984,670 33 1.114 34,000

Mexico 1,972,550 107 1.067 10,000

China 9,596,960 1,314 8.859 6,800

Japan 377,835 127 4.018 31,500

India 3,287,590 1,095 3.611 3,300

Russia 17,075,200 143 1.589 11,100

Source: CMF World Factbook 2006

Possible Causes of Dollar Decline

• Large Balance of Payments Deficits

• Easy Monetary Policy

• Easy Fiscal Policy

• Concerns about stagflation

Balance of Current Account

Real Interest Rates

Fundamentals or Inflation?

Fundamentals or Inflation?

Price of Gold During 2 Centuries

Current Choices and Conclusions

1. The EU and Monetary Integration

2. The US and NAFTA

3. The Role of Japan, China and India: Favoring the US Dollar?

4. Mundell on an Asian Currency

5. Trend Towards Fewer Currencies

Figure 6: Euro and Partners versus U.S. and Partners (various scenarios)

Source: Frankel and Chinn (2005) and Modified by the Authors