Success of A Common Currency URO

PREPARED BY:Adviteeya Agarwal (16063) Dhruv Bahl (16005) Priya Goel (16023) Shikhar Madan (16020) Suseem Jain (16016)

he need for a single common currency is a topic which has been debated upon

in great depth. There are numerous viewpoints and opinions which all suggest the various pro s and cons of adopting a single currency. However, the never ending debate that this is, no conclusive decision can be reached. The success of a common currency or its failure for that matter, is very much subjective to a number of elements and factors in existence. In more than one instance in the past, groups of countries have been known to adopt a single common currency. Examples of such arrangement are countries belonging to the West African Economic and Monetary Union (WAEMU) such as Niger, Mali, Senegal and those belonging to the Central African Economic and Monetary Community (CAEMU) such as Chad, Cameroon, Republic of Congo (in all, 14 nations) that share a common currency called CFA Franc. Countries belonging to the Eastern Caribbean currency union (ECCU) such as Antigua and Barbuda, Grenada also have a common currency called East Caribbean Dollar.

The Euro (sign: ; code: EUR) is the official currency of the Euro zone: 16 of the 27 Member States of the European Union (EU). It was introduced on 1st Jan. 1999 as a result of the Maastricht Treaty (signed in 1992 in Maastricht, the Netherlands) It is also the currency used by the EU institutions. The Eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, The Netherlands, Portugal, Slovakia, Slovenia and Spain. Estonia is due to join the euro zone on 1 January 2011. The currency is also used in a further five European countries, with and without formal agreements, and is consequently used daily by some 327 million Europeans. Over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa. ( Examples of such currencies are CFA Franc, Moroccan dirham and Cape Verdean Escudo)

 The Euro is the world s second largest reserve currency (a status it inherited from the German mark) - world Euro reserves acc. to IMF as on 30th Sept were 1.249 Bill. $, US dollar s world reserves as on the same date were 2.931 Bill $. The reserves of Pound are 199.235 Mill. $ and that of Japanese Yen are 156.373 Mill. $. Euro is also the second most traded currency in the world after the US dollar. As per the data available from The Bank of International Settlements (2010 triennial survey, April 10) The market share of Euro was 39 % (USD having the largest share of 85%). The market shares for Japanese yen was 19% (third largest) and that of Pound Sterling was around 13%. As of August 2010, with more than 835 billion in circulation, the Euro is the currency with the highest combined value of banknotes and coins in circulation in the world, having surpassed the US dollar in 2009. the value of USD in circulation was $862.42 billion as of Aug 10.

1969 Heads of member states of EEC agree to establish an Economic and Monetary Union (EMU) by 1980. 1989 European Commission heads of state meet in Madrid and agree to implement Economic and Monetary Union (EMU) in the three steps proposed by the head of the commission, Jacques Delors. 1990 EMU stage one begins with the liberalisation of capital transactions and increased cooperation between national banks. 1992 February The Maastricht Treaty, negotiated in the last months of 1991, is signed, setting out a path to the single currency with 1st January 1999 as the last allowable date for its introduction. Britain secures an opt-out from this final stage and the Denmark rejects it in a referendum.

1994 January EMU stage two begins with the establishment of the European monetary institute (EMI) as a forerunner to the European central bank (ECB). Member states commit themselves to working towards currency convergence criteria. 1995 Heads of state and government decide on "euro" as the name for the new currency. 1998 The European Commission recommends 11 countries to participate in the first wave of monetary union: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. The ECB is set up in Frankfurt and the exchange rates between the euro and national currencies are fixed on December 31. 1999 January 1 The third and final stage of EMU comes into force with irrevocable fixing of exchange rates of 11 member nations. The euro comes into effect and the ECB takes over responsibility for monetary policy from central banks of member countries.

The Euro, as the timeline shows was established by the provisions of the 1992 Maastricht Treaty. The treaty required fulfillment of certain criteria called The euro convergence criteria (also known as the Maastricht criteria) for European Union member states to enter the third stage of European Economic and Monetary Union (EMU) and adopt the euro as their currency. The purpose of setting the criteria was to maintain the price stability within the Eurozone even with the inclusion of new member states. These criteria are given in following slides.

1. Inflation rates: The inflation in the member nations should not be more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU. 2. Government finance: Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

3) Exchange Rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period. 4. Interest rates : The nominal interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.

The purpose of setting the criteria is to maintain the price stability within the Euro zone even with the inclusion of new member states.

The effect of introduction of Euro on the volatility of important Real and nominal economic Indicators has been examined for a sample of 25 nations (including 12 of the most industrialised members of eurozone) and other industrialised nations of the world. The purpose is to evaluate the quality and success of economic and monetary policies for the Euro, which the 16 Euro nations have agreed to formulate in coordination. Following are the Indicators studied: GDP Growth Real Consumption Growth Real Return to Capital (represented by Stock Market Returns) Interest Rates Inflation

SOURCE : European commission Economic Paper, March 2008 by Stefan Gerlach and Mathias Hoffman

SOURCE : European commission Economic Paper, March 2008 by Stefan Gerlach and Mathias Hoffman

SOURCE : European commission Economic Paper, March 2008 by Stefan Gerlach and Mathias Hoffman

SOURCE : European commission Economic Paper, March 2008 by Stefan Gerlach and Mathias Hoffman

SOURCE : European commission Economic Paper, March 2008 by Stefan Gerlach and Mathias Hoffman

SOURCE : European commission Economic Paper, March 2008 by Stefan Gerlach and Mathias Hoffman

 Since the inception of the euro, Industrialised economies (Eurozone and others) have seen a considerable improvement in stability of both key nominal and to a some-what smaller extent - real macroeconomic indicators, including inflation, interest rates, GDP, stock markets and, consumption. Reduced volatility in some Indicators is attributable to the very formation of the Maastricht Treaty where the criteria for entering the third round of EMU and consequently adoption of euro were given. European Commission Bank (ECB) has largely been successful in implementation of its monetary policy with special focus on the Harmonised Inflation and Interest Rates in the Euro area.

The following few slides are aimed at evaluating important Macro-economic Indicators for the Euro area and ascertaining the impact on them - whether favorable or not, by the introduction of the common currency Euro.

The cross-country variation in the inflation rates of Member States has not fallen quickly. Steady-state inflation and inflation uncertainty have both declined steadily since the inception of EMU. Changeover effects have led to increased inflation perception and widened the gap between inflation perception & expectations.

A reduction in bilateral trade costs among Eurozone nations. Newly-trade goods channel. euro induced firms to export a wider range of their products to the Eurozone. Euro s pro-FDI effects.

Apart from factors earlier discussed, following factors have also proven beneficial: Government bond markets Corporate bond markets Derivatives market Equity markets Increased Mergers in the zone.

 Founded in 1985.  Member Countries  SAARC Preferential Trading Arrangement (SAPTA)  South Asian Free Trade Area (SAFTA)

The motivation for greater integration in the South Asian region follows from three distinct factors: I. Pure Economic Gains II. Strategic Gains III. Developmental and Environmental Gains

The degree of economic integration is categorized into 6 categories: Preferential trading area Free trade area, Monetary union Customs union, Common market Economic union, Customs and Monetary union Economic and Monetary union Fiscal union Complete economic integration

The degree of economic integration is categorized into 6 categories: Preferential trading area Free trade area, Monetary union Customs union, Common market Economic union, Customs and Monetary union Economic and Monetary union Fiscal union Complete economic integration

 The main objective of the agreement is to promote and enhance mutual trade and economic cooperation among the SAARC Member states. There are five key instruments of implementation Tariff Liberalization

Tariff Reductions under SAFTA Countries Existing Tariff rates Phase One India, Pakistan, Sri Lanka >20% Reduce to 20% Further annual reduction Reduce to 30% Further annual reduction 2 years Proposed SAFTA reduction Time Line

<20%

2 years

Bangladesh, Bhutan, Nepal, Maldives

>30%

2 Years 2 Years

<30%

Phase Two India, Pakistan, Sri Lanka <20% Reduce to 0-5% Reduce to 0-5% 5 years

Bangladesh, Bhutan, Nepal, Maldives

<30%

8 years

 The main objective of the agreement is to promote and enhance mutual trade and economic cooperation among the SAARC Member states. There are five key instruments of implementation of SAFTA Tariff Liberalization Rules of Origin Sensitive List Mechanism for Compensation for Revenue Loss (MCRL) Safeguard Measures.

Not an ambitious free trade agreement Political Hurdles Low levels of Intra-regional trade

Intra-Regional and Total Trade of South Asian Countries (in US$ mn. and percentage share), 1991-2006
Year Value of intra- regional trade Value of total trade with the world % share of intra-regional trade in total trade

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1991.71 2607.31 2562.82 3028.86 4364.03 5057.40 5158.42 5533.12 5131.37 5761.15 6390.36 7450.41 10635.93 12982.06 16925.88 19657.72

64071.20 72719.13 73898.11 82315.56 104434.77 111749.30 119510.09 118769.41 129167.55 142259.05 151486.11 157710.60 192430.64 244438.80 318285.68 410834.30

3.11 3.59 3.47 3.68 4.18 4.53 4.32 4.66 3.97 4.05 4.22 4.72 5.53 5.31 5.32 4.78

Reporting Country Afghanistan

Trade with SAARC members (US$ million) Total trade with world (US$ million) Share of intra-regional trade to total trade (%) 1,451.93 3,240.88 44.8

Bangladesh

2,309.22

22,345.30

10.33

India

6,570.25

232,608.10

2.82

Maldives

146.5

843.62

17.37

Nepal

1,265.27

2,544.95

49.72

Pakistan

2,562.74

41,456.00

6.18

Sri Lanka

2,636.71

15,246.83

17.29

Region Total

16925.88

31.8285.68

5.32

Not an ambitious free trade agreement Political Hurdles Low levels of Intra-regional trade Informal Trade

Not an ambitious free trade agreement Political Hurdles Low levels of Intra-regional trade Informal Trade Infrastructural Bottlenecks Inclusion of the Sensitive List Non-Tariff Barriers

Not an ambitious free trade agreement Political Hurdles Low levels of Intra-regional trade Informal Trade Infrastructural Bottlenecks Inclusion of the Sensitive List Non-Tariff Barriers Similar Production Structure

Firstly, India must increase it s role as a big brother.

Services should be included in the agreement due to their importance to the GDPs of the member countries. SAFTA should therefore consider the ways and means to regularize and regulate trade in services. With ease of tariffs and proper infrastructure it would lead to economies of scale and specialization as production would shift to efficient parts and the countries could source raw materials at a cheaper cost. The infrastructure problems have to be resolved to allow trade facilitation and to increase intra-regional trade.

Tirupura

Kolkata

48

South Asia has emerged as one of the least integrated regions in the world due to a combination of political, institutional and economic factors Procedural delays stemming from institutional requirements have inhibited trade and business across borders. Economic factors have also been as important. Therefore, SAFTA may be the right steps towards trade liberalization, economic growth and economic integration of the South Asian region. Whether it will realize those goals effectively and efficiently is debatable. One of the main task would be to create a politically harmonious subcontinent, which may be a formidable task, but not impossible. If successful, SAFTA will not only prove to be a panacea for the economic ills plaguing the region but will also foster close people-topeople contact. It will also create dependencies amongst the nations that will go a long way to bridge the contentious political divide that has prevented the region from pursuing its optimal economic potential.