EURO

Presented By:
Vandana Rathore
Salil Wadhawan
Kanishk Arora
Talha Ahsan
Tanya Arora
Gaurav Wadehra
 INTRODUCTION
• Established by the provisions in the 1992 Maastricht treaty in order to
participate in the currency.
• Euro area has the highest share of world trade-total world exports of
19.5%.
• The name euro was officially adopted on 16 Dec 1995.
• Introduced to world financial markets as an accounting currency on
11 Jan 1999
OBJECTIVES

• Stabilizing exchange rate

• Reducing inflation
• Monetary integration
• Convergence into a single market

• The official currency of 16 of the 27 member states of the European

union (EU)
• Managed and administered by the Frankfurt-based European
central bank
(ECB)
• Freely used in any nation which has adopted the euro.
 NAMING THE CURRENCY AND
CREATING THE € SYMBOL

 At the meeting of the European Council in Madrid in December 1995,

Europe’s leaders decided on the currency’s new name: the euro.
 Other suggestions were rejected because of their national
connotations. These included the “ducat”, “ecu”, “florin”, “Franken”, or
using the euro as a prefix to existing currency names – “Euro mark”,
 They agreed that the name should be the same in all official languages
of the European Union (EU), taking account of different alphabets, and
easy to pronounce and representative of Europe.
 The official abbreviation of the euro, EUR, has been registered with the
International Organization for Standardization (ISO).
EURO SYMBOL
EARLIER NOTES
EURO NOTES
 CRITERIA OF EU
 Inflation: not to exceed 1.5% points of the average of the best three performing
countries

 Interest rates: not to exceed 2%points of the average of the best three performing
countries

 Fiscal deficit /GDP ratio: not to exceed 3%

 Public debt/GDP ratio: not to exceed 60%

Criteria-1

 Applicant countries must have stable institutions than guarantee democracy, the
rule of law, human rights and protection of minorities the political criteria)

Criteria-II

 Applicant countries must have a functioning marketing economy and the capacity
to cope with competitive pressures (the economic criteria)

Criteria-iii

 Applicant countries must have the ability to take all the obligations of membership
EUROZONE
US$ TO EURO EXCHANGE RATE

The graph below shows historical exchange rates

between the Euro (EUR) and the US Dollar (USD)
between 8/15/2010 and 9/13/2010
US$ TO EURO EXCHANGE RATE
 EURO IMPLICATIONS

Positive impact Negative impact

Increase in trade High costs of replacing currency.

Controlled monetary policy Asymmetric shocks

Price transparency Loss of Autonomy over economic and

fiscal policy
Exchange rate fluctuations nullified. It will replace unstable exchange rates
for unstable interest rates.

Economizing on foreign currency Industries are distributed in different

reserves. proportions.
 CHARACTERISTIC OF EURO MARKETS

 This market is made up of borrowing and lending of

currencies outside the country of issue
 It is unregulated, uninsured and unsecured
 Small number of operators dealing in large volumes
Highly competitive market
 Investors prefer short term deposits and borrowers want
long term loans
 Loans are indexed against the LIBOR with a mark up for
profit
 It is made up of four components: Euro Currency deposit
market,
 Euro currency credit market, Euro currency bond market,
Euro currency notes market.
 TYPES OF NOTES

 Euro Commercial Papers (ECPs)

 Note Issuance Facilities (NIFs)
 Euro Medium Term Notes (EMTNs)
 IMPLEMENTATION OF EURO CURRENCY CONCEPT IN
INDIA

 Increases efficiency of the local forex market

 Provides an alternate source of finance to importers and
exporters
 Provides Indian banks access to foreign currency resources
at competitive rates
 Provides NRI’s with alternate investment avenues
 Provides the country with additional revenue and forex
reserves
 Gives Indian banking exposure to complex and
sophisticated international
 EFFECT OF EURO

 Trade INFLATION
RATE
 Investment
• Mid 1999: 1.0%
 Inflation • Mid 2000: 2.0%
 Exchange risk • Mid 2001: 2.8%
• Mid 2002: 1.9%
 Financial integration • Mid 2003: 1.9%
 Effect on interest rate • May 2004: 2.5%
 Price convergence • May 2005: 2.0%
• May 2006: 2.5%
 Tourism • May 2007: 1.9%
• May 2008: 3.7%
• May 2009:
0.0%
EURO CRISIS
 GREECE’S TROUBLES

 Greece's debt crisis 2009 when a

new government took office and
revealed that the country had been
overspending.
 It was also under-reporting its debt,
which had ballooned to 12.7 % of the
GDP. Four times the limit allowed by
the European.
 Several credit ratings agencies have
downgraded Greece’s credit
rating. These actions has fostered
potential fear among investors in
Greek Bonds, making it very difficult
for the country to borrow money to
fund its debts.

 If Greece were to default on its debt,

banks in Greece as well as other
countries holding Greek bonds
would suffer very badly.
 GOVERNMENT MEASURES

•Return of special tax (LAFKA) on high pensions.

•10% rise in taxes on alcohol, cigarettes, and fuels.
•10% increase in luxury taxes.
•Equalization of men's and women's pension age
limits.
•Public-owned companies to diminish from 6,000
to 2,000.
•Freeze on increases in public sector wages for
three years
 PORTUGAL CRISIS
 The country faced cheap lending

 Years of unrestrained spending

 Failure to implement financial reforms

 Portugal’s deficit is on track to exceed 8% this year with

public debt hitting 75% of gross domestic product
 Struggling government position
 They have been downgraded to the lowest in the euro zone
 OTHER COUNTRIES
 Italy
 Exchange rate wrt. Germany
increased to < 20%
 One of Unit of Labour cost 9% more
than Germany
 Devaluation not an option; budget
deficit higher than 3% of GDP
consistently
 Reverting back to Lira not possible
 Germany
 10% depreciation in real exchange
rates
 Strong exports; Stagnating domestic
demand
 Economic Growth of .6% since 2001
till 2005
 budget deficit higher than 3% of
GDP consistently
 France
 Fear of Delocalization
 budget deficit higher than 3% of
GDP consistently; Blames
recession
 Spain
 Benefited by low interest rate;
Economic growth was 3.1% in
2004 and 2.4% in 2005
 Had lower wage rate; reduce
inflation rate
 But had high unemployment
21
 EFFECT ON EURO
 Greece’s debts effects pulls down the value of euro and
stock markets .
 The Euro crisis is also impacting the value of the US dollar
 The accounting impact of this sovereign crisis
is the impact it is having on determining the fair value of
all securities denominated in Euro. This also impacts trade
based earnings statements and the value of securities
of all companies which trade with the
EURO area in some manner or other
 Currency value of the entire European Continent is now
linked to the fortunes of one single country
 CONCLUSION
 New rules to enforce transparency & corporate governance
for all.
 Political unity for enforcing stricter monetary policies.
 Even though Euro is facing difficult times as a single
currency among different nations, it can be stabilized
through a new Euro-Dollar exchange rate
 EU depends on Euro’s stability to be politically united
 The Euro’s credibility has taken a major hit.
 Integrity of EMU is diminished when fiscal constraints are
ignored.
 Even if Euro won’t fail, its value will respond to the traumas
of the users.
 PREDICTION

 Rising tensions within the Euro zone would

portend for a weaker currency.
 Euro is still overvalued relative to rest of world.
 Valuation models based on PPP put Value of Euro
between 10-15 % lower than today.
 No immunity from fallout from trading system.