Macro economics group project


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  • Increases trade – why? 1 slideelimination of currency risks – peace of mind. Don’t need to worry about fluctuating exchange rates. Will it be cheaper to buy X or Y now or in a few months? If I buy this house will it still be worth what I paid for it in a few years time if the currency falls through the floor?1 slide Eliminates fluctuation of currency value due to speculation by traders trying to make a profit by buying and selling on the rise and fall of a currencies value. 1 slide Can’t under value currency in order to increase trade – a more level playing field. 1 slideRemoves transaction costs due to the buying and selling of currencies, makes it cheaper to trade. 1 slideForces good economic policies - Increases competition
  • elimination of currency risks – peace of mind. Don’t need to worry about fluctuating exchange rates. Will it be cheaper to buy X or Y now or in a few months? If I buy this house will it still be worth what I paid for it in a few years time if the currency falls through the floor?
  • Eliminates fluctuation of currency value due to speculation by traders trying to make a profit by buying and selling on the rise and fall of a currencies value.
  • Can’t devalue currency in order to increase trade – a more level playing field. Countries sometimes weaken their currency in order to gain interest From foreign MNC’s. Weaker currency = cheaper cost.
  • Facilitate trade among member states by minimising exchange-rate fluctuations. 17 countries in the euroExchange Rate Mechanism comprised of European nations cooperating to maintain their currency values within a specified range in relation to each other (ERMestablishment of full Economic & Monetary Union = + or -2.25%). (UK and Portugal = + or - 6%). Zone of Fixed but Flexible exchange rates
  • the International Bank for Reconstruction and Development now known as the World Bank
  • European Coal and Steel Community
  • Could have a recession in one country and boom in another
  • Macro economics group project

    1. 1. Macro - Economics Group Project 2011 Zachary Dutton Hanney / Dan Neary 1
    2. 2. Part one• Explain key advantages of a single currency area• discuss why the Euro Single currency area emerged. Zachary Dutton Hanney 2
    3. 3. Part two• explain the meaning of an optimum single currency area• why “Euroland” was deemed non-optimal Zachary Dutton Hanney 3
    4. 4. Part three• Discuss disadvantages of a single currency area• discuss these with reference to what is happening in the Euro area in the current banking crisis and recession Zachary Dutton Hanney 4
    5. 5. Advantages of a single currency area Increases trade Promotes growth Why? Zachary Dutton Hanney 5
    6. 6. Advantages of a single currency area• elimination of currency risks• peace of mind – no need to worry about fluctuation of exchange rates.• increased price transparency across national borders. Why pay a higher price at home when you can obtain the same products much more cheaply in a neighbouring market? Zachary Dutton Hanney 6
    7. 7. Advantages of a single currency area• More stable currency value. Traders can no longer speculate about currency values – confusing the market. With a single currency - no longer can traders bet on the price of a currency rising and falling to try and make a profit.• reduced barriers for cross-border trade. Encourages companies which have traditionally been active only in the domestic market to enter the markets of the neighbouring countries. Zachary Dutton Hanney 7
    8. 8. Advantages of a single currency area• Stops countries from unfairly devaluating their currency to promote trade.• Leads to a more level playing field for all. Zachary Dutton Hanney 8
    9. 9. Why the Euro emergedOn 9 September 1929 a German politician GustavStresemann asked the League of Nations :"Where are the European currency and theEuropean stamp that we need?” Zachary Dutton Hanney 9
    10. 10. Why the Euro emerged• In the 1930’s countries had only their national currency. Transfers of money and transnational investment were difficult and costly.• Trade developed rapidly and successfully between regions with the same currency (British Empires sterling area). Today, a fundamental principle of the EU is the free movement of capital, which is made easier by the existence of the euro. Zachary Dutton Hanney 10
    11. 11. Bretton Woods Agreement July ‘44• Over 40 countries signed.• laid down rules and procedures governing the worlds economy.• led to the establishment of the “World Bank” and the International Monetary Fund.• The system envisaged stable exchange rates, with gold becoming the reference standard.• The US dollar was the only currency that was convertible into gold. Zachary Dutton Hanney 11
    12. 12. Crisis!• At the end of the 50’s the Bretton Woods treaty began to show signs of weakness.• The falling value of the French franc and the rising value of the German mark threatened the stability of the other currencies Zachary Dutton Hanney 12
    13. 13. The United Nations• The United Nations 1945 -Community of Pacific Interests• West Germany, Belgium, France, Italy, Luxembourg and the Netherlands signed the Treaty establishing the ECSC.• Shortly after the Rome Treaties were signed establishing the EEC. Zachary Dutton Hanney 13
    14. 14. What next?• The Heads of state and government decided to make (EMU) an official goal of European integration.• full economic and monetary union within ten years.• greater coordination of economic policies and closer monetary cooperation. Guidelines for national budgetary policies drawn up. Zachary Dutton Hanney 14
    15. 15. The EMU• In 1971 Six countries gave their approval to the introduction of EMU.• Came to an abrupt halt as America decided to float the dollar with cased widespread instability of exchange rates.• Threatened future of EMU Zachary Dutton Hanney 15
    16. 16. The Snake EMU VS Dollar• snake in the tunnel. managed floating of currencies (snake) within narrow margins of fluctuation against the dollar (tunnel).• Also failed due to the oil crises which weakened the dollar.• differences in economic policy, the "snake" lost members and reduced to a "mark" area comprising Germany, the Benelux countries and Denmark. Zachary Dutton Hanney 16
    17. 17. The EMS• based on the concept of fixed, but adjustable exchange rates. (exchange-rate mechanism)• exchange rates were based on central rates against the “ECU” (weighted average of member currencies). A grid of bilateral rates was calculated on the basis of these central rates.• currency fluctuations had to be contained within a margin of 2.25% either side of the bilateral rates Lira 6%. Zachary Dutton Hanney 17
    18. 18. The Ems• What did it achieve?• reduced exchange-rate variability.• Limitations - Potential could not be fully exploited due to high transaction costs - currency conversion - and the uncertainties linked to exchange-rate fluctuations.• “The impossible triangle” - free movement of capital, exchange-rate stability and independent monetary policies were incompatible in the long term. Zachary Dutton Hanney 18
    19. 19. The ECB• need for greater coordination of economic policies.• rules on the size and financing of national budget deficits.• completely independent institution which would be responsible for the Unions monetary policy. Zachary Dutton Hanney 19
    20. 20. The new EMU• In December 1989 the Strasbourg European Council called for an intergovernmental conference that would identify what amendments needed to be made to the Treaty in order to attain an economic and monetary union.• The Treaty provides for economic and monetary union to be introduced by the end of the century in three successive stages Zachary Dutton Hanney 20
    21. 21. Emu• Stage 1 asses progress with economic and monetary convergence, to adopt appropriate measures to comply with certain prohibitions laid down by the Treaty and prohibition on the granting by central banks of overdraft facilities to public authorities and public undertakings. Zachary Dutton Hanney 21
    22. 22. EMU• Stage 2 - economic policy convergence: precise but non-binding rules on public financing were adopted and a new type of monitoring, the coordination of monetary policies was institutionalised and strengthen cooperation between the national central banks and to carry out the necessary preparations for the introduction of the single currency. Zachary Dutton Hanney 22
    23. 23. EMU• A single monetary policy was introduced and entrusted to the European System of Central Banks (ESCB), made up of the national central banks and the European Central Bank, which took over from the EMI. Zachary Dutton Hanney 23
    24. 24. The Euro• 27 members in the EU. 17 in the Euro. Zachary Dutton Hanney 24
    25. 25. Optimal Single Currency Area• An optimal single currency area a geographical region in which it would maximize economic efficiency to have the entire region share a single currency• The USA is a prime example of an OSC. Zachary Dutton Hanney 25
    26. 26. Europe Deemed Not Optimal• Vast Cultural differnces between strong currency northern countrys and weak currency southern country (Spain Greece Portugal)• Labour cannot move freely in response to shocks. Linguistic barriers limit the movement of labour. Zachary Dutton Hanney 26
    27. 27. Central Fiscal Policy• No fiscsal policy for income stabiling.• No pot of money to money derived from taxtation to help lower income countrys in times of recession. Zachary Dutton Hanney 27
    28. 28. Disadvantages To Euro• One size does not fit all. Same interest rates in all member states. In recession good to have independent control over interest rates.• An incorrect interest rate can put un necessary pressure on an economy.• Loss of independent exchange rate policy. No long devaluate currency to promote trade. Zachary Dutton Hanney 28
    29. 29. Disadvantages To Euro• Extremely diverse economies. ECB’s response may not be region specific.• No clear budgetary and fiscal policy despite a unified monetary policy ?• The ECB has no central budget to compensate for economic shock. Zachary Dutton Hanney 29
    30. 30. Bibliography1. Ms Sirkka Hämäläinen, Towards a single currency: a brief history of EMU spects/l25007_en.htm3. Irish Times Financial Section Zachary Dutton Hanney 30