CH20 Optimum Currency Areas and the European Experience.ppt

Chapter 20
Optimum Currency Areas and the European Experience
1
anization
How the European Single Currency Evolved
The Euro and Economic Policy in the Euro Zone
The Theory of Optimum Currency Areas
The Future of EMU
Summary
2
Introduction
European Union countries have progressively narrowed the fluctuations of their currencies against each other.
This culminated in the birth of the euro on January 1, 1999.
This chapter focuses on the following questions:
How and why did Europe set up its single currency?
Will the euro be good for the economies of its members?
How will the euro affect countries outside of the European ary Union (EMU)?
What lessons does the European experience carry for other potential currency blocks?
3
Introduction
Figure 20-1: Members of the Euro Zone as of January 1, 2001
4
Table 20-1: A Brief Glossary of Euronyms
How the European Single Currency Evolved
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How the European Single Currency Evolved
European Currency Reform Initiatives, 1969-1978
The Werner report (1969)
It set out a blueprint for the stage-by-stage realization of Economic and ary Union by proposing a three-phase program to:
Eliminate intra-European exchange rate movements
Centralize EU ary policy decisions
Lower remaining trade barriers within Europe
Two major reasons for adopting the Euro:
To enhance Europe’s role in the world ary system
To turn the European Union into a truly unified market
6
The European ary System, 1979-1998
Germany, herlands, Belgium, Luxemburg, France, Italy, and Britain participated in an informal joint float against the dollar known as the “snake.”
Most exchange rates could fluctuate up or down by as much as % relative to an assigned par value.
The snake served as a prologue to the prehensive European ary System (EMS).
Eight original participants in the EMS’s exchange rate mechanism began operating a work of mutually pegged exchange rates in March 1979.
How the European Single Currency Evolved
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Capital controls and frequent re