3. INTRODUCTION
• In our presentation we will answer the following
questions:
• A) Why was euroland deemed to be a non-optimal
currency area?
• B) Why did euroland happen despite the fact that so
many thought it was a calculated risk?
• C) Describe briefly the following precursors to the euro? (
ERM 1980’s) EMU project/ convergence criteria 1990’s
• D) Discuss the following in the context of the advantages
of having a single currency: (why and how a single
currency encourages trade and also the advantages of
having the ECB as our central bank).
4. A) WHY WAS EUROLAND DEEMED TO
BE A NON-OPTIMAL CURRENCY AREA?
• The Eurozone did not meet a number of the criteria
to be considered an optimal currency area.
• Firstly, it has poor labour mobility due to the array of
languages and cultures it has.
• For example, despite the Spanish economy being in
poor shape, it is very difficult for a Spaniard to move
to the likes of Germany (whose economy is far
healthier) because they do not speak the
language. This is known as the Mundell criterion.
5. A) WHY WAS EUROLAND DEEMED TO
BE A NON-OPTIMAL CURRENCY AREA?
• Secondly, the Eurozone does not have a fiscal
transfer system like the United States.
• A fiscal transfer system helps alleviate a recession in
one part of the currency area by increasing taxes in
an area that is experiencing a boom and
transferring them to the recession-hit part.
• For example, the United States has such a system.
The fact that Europe does not have this system has
made the current crisis worse for the
peripheral, recession-hit countries like
Spain, Italy, Greece and Ireland.
6. WHY DID EUROLAND HAPPEN DESPITE
THE FACT THAT SO MANY THOUGHT IT
WAS A CALCULATED RISK?
• The Eurozone was very much a political project.
Europe has historically been a very divided part of
the world and World War 2 is still fresh in the minds of
many. The EU was established to try and integrate
the countries of Europe by introducing the “four
freedoms”.
7. WHY DID EUROLAND HAPPEN DESPITE
THE FACT THAT SO MANY THOUGHT IT
WAS A CALCULATED RISK?
• Economic integration was the next step in this
process of convergence and so the euro was
introduced. In the eyes of the European countries
that became members of the Eurozone, the
political reasons were more powerful than the
economic reasons and this is why it came about.
8. C) DESCRIBE BRIEFLY THE FOLLOWING
PRECURSORS TO THE EURO:
• - the ERM in the 1980's
• The European Exchange Rate system came into effect in 1979
as part of the European Monetary System. All the countries
that signed-up to had their currency pegged to the ECU
(European Currency Unit).
• Most of the countries were given a margin of +/-2.25% within
which their currencies could fluctuate against the ECU.
• The difficulty with introducing a fixed exchange rate system is
that all countries that are part of it need to have more or less
the same level of inflation.
• A number of countries struggled with this - particularly the
inflation-prone, peripheral countries that were now part of the
same currency system as Germany who has very low inflation.
It also resulted in Black Wednesday where the Bank of England
spent over £3bn trying to stop the pound sterling depreciating
too much.
9. C) DESCRIBE BRIEFLY THE FOLLOWING
PRECURSORS TO THE EURO:
• - the EMU project in the 1990s and the convergence criteria
• The Economic and Monetary Union introduced a number of
policies to help all member states of the European Union to
converge economically.
• The EMU was formally set out in the Maastricht Treaty and laidout the convergence criteria. The convergence criteria were
particularly important for countries intent on joining the euro.
• The convergence criteria consisted of 1) keeping both
inflation and interest rates relatively low compared to other
members 2) government budget deficits not being allowed
exceed 3% of GDP 3) government debt-to-GDP not
exceeding 60% 4) keeping their exchange rate stable against
other members
10. D) DISCUSS THE FOLLOWING IN THE
CONTEXT OF THE ADVANTAGES OF
HAVING A SINGLE CURRENCY:
• - why and how a single currency encourages trade
• One key reason behind a single currency promoting
trade is that it does away with certain transaction costs
like having to exchange currencies.
• Another reason is that you can be guaranteed you will
not lose money when being paid at a later date.
• For example, if an Irish company provides a service in
Japan and agrees not to receive payment for a few
months in yen, they will lose money if the yen
depreciates against the euro in that time frame. This
cannot happen between two countries using the euro.
11. D) DISCUSS THE FOLLOWING IN THE
CONTEXT OF THE ADVANTAGES OF
HAVING A SINGLE CURRENCY:
• - the advantages of having the ECB as our central bank
• The main advantage of having the ECB as our central
bank is that it is modelled on the Bundesbank of
Germany, which has a stellar record of keeping inflation
low.
• Having the ECB as our central bank has certainly helped
reduce the level of inflation in Ireland. This is great for
savers, as their deposits cannot be eroded by inflation.
• Arguably, another advantage (in the eyes of the
peripheral countries at least) is the ability of the ECB to
purchase government debt on the secondary market.
This will help calm market jitters and reduce the cost of
borrowing for highly indebted European countries
