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Group 12Group 12

SandeepSandeep

KinshooKinshooPrashanthPrashanth

Tahavar KhanTahavar Khan

AnncieAnncie

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Introduction

Im

plications of EURO Difficulties for Greece, Portugal

Future of EURO

Conclusion ² To do

Contents

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Formation and political implication of 

EURO Treaty of Maastricht - created what is

commonly referred to as the pillar structure of the European Union

Boost the relations between the governmentsof the European countries and strengthenthe trade and commerce ties between thecountries of Europe

It created a political union where policydecision became a concern

Achievement of full integration in the monetaryfield.

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Issue Po

sitive Nega

tive

Convergence Proportion of trade willincrease

Industries aredistributed in differentproportions.

Tight monetary policies

Flexibility Exchange ratefluctuations nullified.I

t will replace unstableexchange rates forunstable interest rates.

Price transparency High costs of replacingcurrency.

Transaction costs

reduced.

Loss of Autonomy over

economic and fiscalpolicy

Economizing onforeign currencyreserves.

Asymmetric shocks

Implications

Source : http://www.fpma.scot.nhs.uk/euro_pros_cons.pdf 

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International implication

Euro area has the highest share of world trade-totalworld exports of 19.5%

second most widely used currency at the internationallevel

main objective of Euro internationally a market-driven process and adopts a neutral stance

maintaining price stability boost investors confidence

however the drawback is that Money has indeed beenthe most typical expression of state sovereignty

helps international company in portfolio diversification

Improves international cooperation

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Greece

1997 2007 Greece average GDP was 4%

After the global recession in mid of 2009 theGDP growth has recorded as (-) 2%.

Greece serious credit issue led to theeconomic failure

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Why cant Greece step out?

Any devaluation of the new currency wouldincrease the cost of imports, raising inflation

The costs of converting currencies with the

remaining members of the eurozone would be re-introduced, inhibiting trade and investment

Existing euro-denominated debt would becomeforeign-currency debt. Any devaluation of the

new domestic currency against the euro wouldincrease the debt burden.

prolonged slump with high unemployment

Source :http://www.riskoverreward.com/2010/01/debt-and-debtors-why-greece-matters-for.html 

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Actual problem in portugal?

Their cheap lending

Years of unrestrained spendingFailure to implement financial reforms

Their depth?

Portugal·s deficit is on track to exceed 8% this year with public debt hitting 75% ofgross domestic product

Effect on government?

They are struggling now.They have been downgraded to the lowest in the euro zone

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Allowing for the growth of public investment in the context of the Stabilityand Growth Pact constraints would give rise to a 14.8 per cent increase ofGDP per head in the long-run.

The other side (i.e) The Positive impact

Improve long term GDP per capita.

Themost likely scenario places the gains at just under 10.0 per cent. Thiscorresponds to an increase in the annual GDP growth rate of approximately 0.4percentage points, say from a long-term trend of 3.1 per cent to 3.5 percent.

 W hat should the government do?

Source:http://www.bportugal.pt/en-US/BdP%20Publications%20Research/AB199904_e.pdf 

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One country with unified culture

No restriction on Monetary policy

Central government.

Why is it working in US

Adapted from Hofstede frame work.

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Source: http://forecasts.org/euro.htm

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The EuroÙs credibility has taken a

major hit.

Integrity of EMU is diminished

when fiscal constraints are ignored.

Even if Euro wonÙt fail, its value

will respond to the traumas of the

users.

Source: http://www.marketoracle.co.uk/Article17385.html

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Maastricht treaty torn..

Bail out clause is no longer existing.

European Central Bank has become a fiscal agent for the

weaker countries. Alarming state of the Euro Currency union has cooled

would-be member·s enthusiasm like Serbia.

Speculations over killing the old Euro & creating a new

one in the long term

, if stricter econom

ic discipline is notapplied rigorously.

Source: www.euronews.net/2010/05/10

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It was coming«..

Rising tensions within the Eurozone would portend

for a weaker currency. Euro is still overvalued relative to rest of world.

Valuation models based on PPP put Value of Eurobetween 10-15 % lower than today.

No immunity from fallout from trading system.

Source:http://www.fool.com/investing/international/2010/04/14/what-is-the-future-of-the-euro.aspx

PREDICTING FUTUREu.

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New rules to enforce transparency &corporate governance for all.

Revised criteria for traded weight of 

each currency. Political unity for enforcing

stricter monetary policies.

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