uk in the euro

newsnight 25/06

blair and marr discuss euro

big v small govt

life of julia (obama - govt as an enabler)

life of julia (romney - govt as an impediment)

euro crisis issues

Challenges facing the Euro Zone

1/ Little common fiscal policy

Big differences in size of fiscal deficits and debt levels

Fiscal stability pact has effectively collapsed

nyt interactive european debt levels

2/ Growing risk of one or more Euro Area countries defaulting on some of their debts

Will Euro Area nations bail out fellow members?

Years of fiscal austerity for some nations will create deep economic and social pressures

3/ Doubts about the likely strength of recovery

Unemployment high and rising

4/ Longer term challenges
Larger economic imbalances within the 17 nation currency union over wage levels, trade balances and productivity will also need to be addressed if the Euro Zone is to avoid future crises

Several weaker countries have become uncompetitive inside the Euro and this requires painful corrective policies which will be unpopular

crisis issues

• great depression and euro situation compared (newsnight nov 2011)
• eurozone crisis nyt focuspage
• newsnight greek exit video (newsnight feb 2012 - 5 mins)

EIU Eurozone FAQ Report October 2011

View more documents from Economist Intelligence Unit

eiu forecast june 2012

June EIU Global Economic Forecast June 2012

View more presentations from Economist Intelligence Unit

euro overview

eu background

eu 1952-2007

the next 8

eurozone background

history of eu to eurozone

where do the coins come from?

euro run game

Basic Euro History

1991-1993: Maastricht Treaty – pathway for Euro and Exchange Rate Mechanism (ERM)

1999: Euro starts life as a currency

1999-2001: Original members of system lock their currencies for two years

2002: Notes and coins come into circulation

2007: Slovenia becomes first of the new member states to enter the currency union

2008-09: Three new nations – Slovakia, Cyprus and Malta – the Euro Area extends to 16 nations

2011; estonia joins 17 nations in Eurozone

Euro essentials

• Monetary union is a deepening of economic integration between participating countries
• A single currency requires a common interest rate for the Euro Zone – i.e. a common monetary policy
• Countries have locked their currencies together forever and adopted one currency as a medium of exchange
• Euro as a currency floats against US dollar and sterling
• Member nations are also required (in principle) to keep control of government borrowing i.e. They are not allowed to run large budget deficits > 3% of their GDP (in normal times)

role of the european central bank



euro zone statistics

exchange rate overview

regimes (choice of types of exchange rate systems); specialisation and trade leads to the needs to convert domestic prices into international ones and vice versa. currency is in derived demand to trade

http://www.x-rates.com/

positive - partial adjustment for trade imbalance

one less thing for monetary authority to worry about when conducting policy

negative - volatility and uncertainty when creating international contracts over time but this may be reduced by hedging with futures to guarentee rates but extra cost involved

fix - peg reduces uncertainty by setting a price over time and can act as an anchor for inflation

• soft peg - price guarentee scheme price is maintained through intervention buying and selling by the central bank plus use of interest rates to influence currency demand
• buffer stock of commodity is international foreign currency reserves and gold used to buy domestic currency to support price

• examples of soft pegs
• UK ERM 1992: where 2.95 peg against Deutsch Mark deemed too high by market, waves of selling forced Bank of England to spend billions and hike interest rates from 10 to 15% in one day in the middle of a recession before giving up and letting the currency float
• Swiss franc September 2011: Swiss National Bank sells currency to bring the price down as safe haven status in face of euro crisis had led to a 25% appreciation in real terms





swiss france peg defence (ft video 6 sept 2011) article




• hard peg- a more sophisticated committment to fix one currency against another achieved in two ways
• currency board: peg currency is held in reserve to back every unit of domestic currency in circulation eg Argentina 1991-2002 1 to 1 against US Dollar.
• dollarization: adoption of another currency completely and removal of domestic currency, the Eurozone is an example of this

Exchange Rate Regimes may exist in a range of intermediate forms that offer the advantages (and disadvantages) of the polar extremes

• dirty float - demand and supply with the odd tweak from a central authority when deemed too high or too low
• acceptable range: ceilings and floors set out highest and lowest values with float between and soft peg intervention when challenging top or bottom
• adjustable peg - soft peg with intermitant movement of fix price to reflect changing market fundamentals

a country may pass though may phases of exchange rate policy:

china's xr story (lloyds)

Exchange Rate movement are key to influencing macro economic performance - growth issues in the sense that (X-M) is a component of AD

• X is total revenue from exports (Px Qx)
• M is total revenue from imports (Pm Qm)

Clearly a fall in the exchange rate (depreciation) will make exports cheaper and imports more expensive but it truth the impact on revenue flows is dependent on the elasticity of demand for exports and imports ie whether the Marshal Lerner Condition applys (combined elasticities for X and M must be greater than 1 for a fall in the exchange rate to have a positive effect on the trade balance).

The J-curve is a graph illustration of the Marshal Lerner Condition in action

Exchange Rates are a great way to combine micro and macro analysis - synoptic styles which lead to high marks use ADAS to analyse employment and inflation impacts - remember a depreciation will lead to pressure on costs as well and injecting competitiveness

economic history - gold standard

exchange rates introduction

euro v pound - where next? (daily mail may 2012)