Term Paper & Presentation

The accession of the member

states to the Euro

Names: Natalie Zonis, Sinem Sahin

Study course: International Management, 5th term
Module: International Economics
Term: Summer term 2009
Lecturer: Prof. Dr. Wolfgang Cezanne
Created on: 06.05.2009
 The accession of the member states to the Euro

Contents

• History of the Euro

• Europe today

• Facts about the Euro

• Convergence Criteria of The Maastricht Treaty

- Did these strict standarts really apply to the current members of the
Eurozone?
- The apply of the Convergence Criteria today

• Why do we need the Euro?

Monetary Union: Reasons, PRO‘s and CON‘s

Natalie Zonis, Sinem Sahin 2

 The accession of the member states to the Euro

History
1995: The name EURO was officially adopted.
1999: On 1st of January: launch of the Euro replacing the former European
currency unit (ECU) at a ratio of 1:1 as the official currency of 11
member states with a virtual currency for cash-less payments
(banking, electronic transfers, traveller’s cheques) and accounting
purposes, while the old currencies continued to be used for cash
payments.
1999: On 1st of January: Belgium, Germany, Ireland, Spain, France, Italy,
Luxembourg, Austria, Portugal and Finland.
2001: Greece
2002: On 1st of January: introduction of Euro banknotes and coins;
it appeared first in physical form as what we call “cash”
2007: Slovenia
2008: Cyprus, Malta
2009: Slovakia
Today: Euro is the single currency shared by 16 of the 27 European Union´s
Member States, which together make up the Euro area
Natalie Zonis, Sinem Sahin 3
 The accession of the member states to the Euro

Europe today

Source: http://www.ecb.int

Natalie Zonis, Sinem Sahin 4

 The accession of the member states to the Euro

Facts
• The ECB in Frankfurt is in charge of the Eurozone´s monetary policy.
• ECB: independent central bank, has sole authority to set monetary policy.
• The Eurozone is managed and administrated by the ECB and the Eurosystem
(central banks of the Eurozone countries).
• Eurosystem is printing, minting and distributing banknotes and coins.

• The Euro is also gaining increasing international usage as a trading currency in

Cuba, North Korea and Syria, French and Dutch colonies, the 5 European micro
states with and without formal agreements and is consequently used daily by 327
millions of Europeans.
• UK, Sweden, and Denmark chose not to take part. A referendum in Denmark in
2000 rejected adoption of the single currency by 53% to 47%, and a referendum in
Sweden in 2003 rejected the euro 56% to 42%. The UK government has set out five
economic tests that will have to be met before any decision to join can be made.

• The Euro was established by the provisions in the 1992 Maastricht Treaty.
• In order to participate in the currency, member states are meant to meet strict
criteria, the Convergence Criteria.

Natalie Zonis, Sinem Sahin 5

 The accession of the member states to the Euro

Contents

• History of the Euro

• Europe today

• Facts about the Euro

• Convergence Criteria of The Maastricht Treaty

- Did these strict standarts really apply to the current members of the
Eurozone?
- The apply of the Convergence Criteria today

• Why do we need the Euro?

Monetary Union: Reasons, PRO‘s and CON‘s

Natalie Zonis, Sinem Sahin 6

 The accession of the member states to the Euro

Convergence Criteria of The Maastricht Treaty

• Sustainability of public finances:

The government deficit must not exceed 3% of GDP and the
government debt must not exceed 60% of GDP,
unless they are declining substantially and continuously .

• Price stability:
Countries should have an inflation rate within 1.5% of the three EU
countries with the lowest rate.

• Long-term interest rates

must be within 2% of the three lowest interest rates in EU.

• Exchange rate stability:

The exchange rate of the respective currency must respect, for at least
two years, the normal fluctuation margins provided for by ERM II
without devaluing against the currency of any other Member State.
Natalie Zonis, Sinem Sahin 7
 The accession of the member states to the Euro

Convergence Criteria

Source: http://wallstreetpit.com/wp-content/uploads/2009/04/image53.png

ARTICLE 104 c (b): “…whether the ratio of government debt to gross domestic
product exceeds a reference value, unless the ratio is sufficiently diminishing and approaching
the reference value at a satisfactory pace.”

Natalie Zonis, Sinem Sahin 8

 The accession of the member states to the Euro

Convergence Criteria

%
ARTICLE 104 c (a):
“…whether the ratio of the
planned or actual government
deficit to gross domestic
product exceeds a reference
value, unless:
-either the ratio has declined
substantially and
continuously and reached a
level that comes close to the
reference value;
-or, alternatively, the excess
over the reference value is
only exceptional and
temporary and the ratio
remains close to the reference
value.“
Source:http://wallstreetpit.com/wp-content/uploads/2009/04/image54.png
For Greece the two years prior to entry were 2000 and 2001

Natalie Zonis, Sinem Sahin 9

 The accession of the member states to the Euro

Convergence Criteria
%
INFLATION RATES DEVELOPMENT

Source: www.eurofound.europa.eu/eiro/2000/12/figures/tn0012333fcompf1de.gif

Natalie Zonis, Sinem Sahin 10

 The accession of the member states to the Euro

The Convergence Criteria today

POLITICS VS. ECONOMY?

• When the deadline of 1999 was reached, a large number of countries were in
the position to fail the entrance criteria.
• Only a few marginal countries would succeed – the whole thing would
collapse.
• Maastricht numbers were set aside.
• Today: the majority of the Eurozone is against a hasty entry of the new
member states.
• A literal and strictly use of the Maastricht Treaty to bar Lithuania from entry
into Eurozone two years ago because its inflation rate was 0.2% above the
maximum.
• The motivation is political. The Maastricht numbers that were relaxed for the
original member countries are now applied with pedantic care to prevent the
new member states from entering too quickly and to slow down the
enlargement of the Eurozone.

Natalie Zonis, Sinem Sahin 11

 The accession of the member states to the Euro

Contents

• History of the Euro

• Europe today

• Facts about the Euro

• Convergence Criteria of The Maastricht Treaty

- Did these strict standarts really apply to the current members of the
Eurozone?
- The apply of the Convergence Criteria today

• Why do we need the Euro?

Monetary Union: Reasons, PRO‘s and CON‘s

Natalie Zonis, Sinem Sahin 12

 The accession of the member states to the Euro

Why do we need the Euro?

WHY DO WE NEED THE EURO?

Monetary Union: Reasons, PRO‘s and CON‘s

Natalie Zonis, Sinem Sahin 13

 The accession of the member states to the Euro

Why do we need the Euro?

CON‘s:
The loss of sovereignty in the field of economic management – in particular the option to set
interest rates and change the exchange rate independently; and the risk that a common interest
rate, set by the ECB, will affect economies at varying cyclical stages in different ways. Some
critics believe that the EMU will only be able to work effectively if there is a federal Europe, on
the US model, with freer labour mobility and a system of stabilizing fiscal transfers across
states.
PRO‘s :
• makes travelling easier
• stable currency and price stability
• encourages sound public finances
• makes a single market more efficient
• increases price transparency
• lowers transaction costs
• eliminates currency exchange costs
• lowers risks in foreign investment
• facilitates international trade
• enforces competition and competitiveness
• makes the EU more powerful in the world
• symbol for a European identity

Natalie Zonis, Sinem Sahin 14

 The accession of the member states to the Euro

Thank you very much

for your attention!

Natalie and Sinem

Natalie Zonis, Sinem Sahin 15

 The accession of the member states to the Euro

Sources
• http://www.aede.eu/fileadmin/traineurop/Traineurop_images/6_criteres/illus6a.
gif
• http://www.ecb.int/ecb/orga/escb/html/convergence-criteria.en.html
• http://www.economist.com/research/articlesBySubject/display.cfm?id=348930
• http://www.euractiv.com/en/euro/enlargement-euro/article-111471
• http://europa.eu/scadplus/glossary/convergence_criteria_en.htm
• http://european-convention.eu.int/Docs/Treaty/pdf/898/global898.pdf
• http://www.imf.org/external/pubs/nft/2005/EURO/ENG/euroadop.pdf
• http://news.bbc.co.uk/2/hi/in_depth/europe/euro-glossary/1216651.stm
• http://specials.ft.com/euro/FT3XF8MJOTC.html
• http://en.wikipedia.org/wiki/Convergence_criteria
• http://www.voxeu.org/index.php?q=node/3454
• http://www.psr.keele.ac.uk/docs/efaq.htm#abolish
• http://encyclopedia.farlex.com/Pros+and+Cons+of+the+Euro
• http://www.economicshelp.org/2007/03/gordon-browns-5-economic-test-
for.html

Natalie Zonis, Sinem Sahin 16

 Comments on the slides
SLIDE 5:

• The UK government has set out the following five economic tests that will have to be met before
any decision to join can be made:

1. Economic Harmonisation: Are business cycles and economic structures compatible so that we
and others could live comfortably with Euro interest rates on a permanent basis?
2. Sufficient Flexibility: If problems emerge is there sufficient flexibility to deal with them?
3. Effect on Investment: Would joining EMU create better conditions for firms making long-term
decisions to invest in Britain?
4. Effect on Financial services: What impact would entry into EMU have on the competitive position
of the UK's financial services industry, particularly the City's wholesale markets?
5. Effect on Growth and Jobs: In summary, will joining EMU promote higher growth, stability and a
lasting increase in jobs?

• In addition to these self-imposed criteria, the UK would also have to meet the EU's economic
convergence criteria before being allowed to adopt the Euro. One criterion is two years'
membership of ERM II, of which the UK is currently not a member. Under the Maastricht Treaty,
the UK is not obliged to adopt the euro.

SLIDE 8:

• The criteria were massively relaxed for the current member states in 1998.
• Without that relaxation more than the half of them would have been denied Eurozone membership.
• Government dept (Treaty): should not exceed 60% of GDP.
• Seven of twelve original member countries had infact a dept level exceeding 60% in the year befor
entry.
• Article 104 c (b): the treaty however adds a condition if the dept ratio exceeded of 60% it should
have decreased in the past terms sufficiently and has to be close to the reference benchmark
(Belgium, Spain, Italy, Netherlands); Belgium and Italy: twice as permitted and they would need 20
to 30 years to reach the 60% target.
• Furthermore, in the year before entry: Germany's debt increased from 59.7% to 60.3%, Austria's
increased from 63.8% to 64.3% and Greece's government debt increased from 111.6% to 113.2%.

SLIDE 9:

• Only two countries exceeded the 3% reference value the year before entry (Greece and Spain).
• Spanish budget deficit has satified the condition in article 104 c (a) as it was close to the reference
value.
• In case of Greece it should not have been taken into the monetary union.
• The real problem with the budget deficit numbers is that they were maipulated.
• Greece, as it turned out later, has just cheated.
• In case of Belgium, France and Italy some “creative accounting” permitted to hide the true level of
budget defecits.
• For example: These countries took over pension funds of state companies and booked revenues
while failing to book the future additional pension liabilities. As a result, the budget deficits were
artificially and temporarily lowered.

SLIDE 10:

• The inflation convergence criteria were satisfied by the original member countries.
• However, this did not prevent inflation rates from systematically diverging (going in different
directions) after the start of the Eurozone, leading to substantial changes in competitive position
within the Eurozone.
• Thus convergence in inflation rates prior to entry is no guarantee of convergence afterwards.
• Italy did not satisfy another entry condition - it should have been in the ERM for at least two years
prior the entry.