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FIN243 – Money and Banking
Section 4
Report Group 3
Chan Chun Yeuk 053113
Kwan Yi Ting 053114
Chan Kin Ho 053115
Cheung Tsun Fung 053118
Tam Yiu Hon 053120
Should EEC member countries
integrate the currency to be Euro?
1. What is Euro
2. Benefits & drawback
3. Analysis
> exchange rate
> inflation rate
4. conclusion
Robert A. Mundell
1999 Nobel Laureate
in Economics
What’s Euro?
Euro Zone
• European System of Central Banks, ESCB
• European Central Bank, ECB
Duisenberg
(First president of the
European Central Bank)
Trichet
(Current president of
the European
Central Bank)
Coins
Banknotes
All EU member can join
• a budget deficit of less than 3% of their GDP
• a debt ratio of less than 60% of GDP
• inflation and interest rates close to the EU average
•
•
•
•
•
1/1/2007 - Slovenija
1/1/2008 - Eesti Vabariik, Latvijas, Malta, Cyprus
1/1/2009 - Lithuania, Slovakia
1/1/2010 - Czech Republic, Bulgaria
1/1/2011 – Poland, Hungary, Romania
Benefits
&
drawback
The benefits of Euro
1.
2.
3.
4.
5.
6.
Lower transaction rates
Increase trade
Transparency & Competition
Lower bank reserve
Capital Market
Low inflation rates
Drawbacks of Euro
1.
2.
3.
4.
The policies of the members
The cooperation of the EEC members
Limitation of using Euro
External economic factors
Analysis
1. exchange rate
2. inflation rate
• “Just brings from a simple mind that
not to devaluate in currency unit.”
• Is that already achieved?
• focus on the local effect of Euro
• exchange rate and the inflation rate
exchange rate variability from 1999
Jan to 2007 Jan.
against GBP
• purpose of the EMS was therefore to create a
zone of monetary and exchange rate stability.
• drop in the exchange rate of Euro and there
was a trend of being stable after 2003.
• Beside the policy factors in Euro
in 1999-2002
• people lack of confidence
in 2003
• weakness of the US Dollar
• between 0.66 and 0.7
exchange rate variability from 1999
Jan to 2007 Jan.
against US dollars
• same main reason
2002 July
• weakness of the US Dollar
• could Euro replace the state of the US Dollar
• between 1.1 and 1.3,
Hong Kong Dollar
• linking up with the US Dollar
• similar to the US Dollar.
2003
• not drop anymore
• already meet its target
• to satiable the exchange rate.
Inflation rates
• Inflation  a general rise in prices
• Pressure on price adjustment
• Asymmetries in the transmission mechanism
(Cecchetti, 1999)
• demand & supply shock (Bayoumi &
Eichengreen, 1993)
•
•
•
•
New currency not stable
Not well developed
unpredicted environment factors
e.g: exchange rate, oil price.
The inflation rate in Euro area and the
US
•
•
•
•
•
•
•
•
From the observe : Euro can
successful monetary union
low inflation rates
price stable
productive
more investment & consumption
Export & import
Avoiding loss from emancipated inflation
• Monetary policy
• Lack of degree of freedom to control area –
wide inflation
• minimizing the deviation of area –wide
inflation in long-run
• Shrink the inflation rate in Euro &US
• Keep the inflation rate in an acceptable level
Conclusion
• official currency of the Euro
zone
• process of triangulation
BENEFIT
DRAWBACK
Transaction Costs
The policies of the
members
Increase trade
The cooperation of
the EEC members
Transparency &
Competition
Limitation of using
Euro
Fiscal Discipline
External economic
factors
Capital Market
Low inflation rates
analysis of Euro
•
Exchange-rate
2003
not drop anymore
stable
• The Inflation rate
keep in the low level
no affect the market
stable
•
•
•
•
Euro seems work in some countries
Lots of benefits
Cannot omit the drawbacks
Deep consideration in taking as role model
END