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Background information on the euro and euro area The euro banknotes and coins were introduced on 1 January 2002, after a transitional period of three years.

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Presentation on theme: "Background information on the euro and euro area The euro banknotes and coins were introduced on 1 January 2002, after a transitional period of three years."— Presentation transcript:

1 Background information on the euro and euro area The euro banknotes and coins were introduced on 1 January 2002, after a transitional period of three years (one year in the case of Greece) during which the euro could be used as book money, while national banknotes and coins were still used in cash payments. Slovenia was the first of the 10 European countries joining the EU in 2004 to adopt the euro, on 1 January 2007. Cyprus and Malta followed on 1 January 2008, bringing the number of euro-area Member States to 16. The euro area will then include 318 million out of the EU's total 493 million population (see IP/07/1982).

2 What about the other 12 EU countries? As of January 2008, of the 12 EU countries that have not yet adopted the euro, 10 have what is known as a derogation, which means that they do not presently fulfill the necessary conditions to fully participate in the final stage of Economic and Monetary Union (= adoption of the euro). They are the Czech Republic, Estonia, Latvia, Lithuania, Hungary, and Poland (of the group that joined the EU in 2004), Bulgaria and Romania, which became EU members in 2007, and Sweden. Denmark and the United Kingdom have opted to stay out for the time being, and negotiated two Protocols to that end which are annexed to the Maastricht EU Treaty. However, the new Danish government announced in its program to give the Danish electorate the possibility of a fresh vote on the opt-outs concerning the euro and three other EU policies.

3 Which EU countries are likely to adopt the euro next? The Treaty expects all EU Member States to adopt the single currency. Being open economies, the Member States concerned will benefit from euro adoption provided the conditions of entry are right and the economies are sufficiently flexible to operate under the single monetary policy. Candidate countries should strive to pursue sound macroeconomic and budgetary policies to prepare their economy and meet the required criteria. The country with the closest target date for adoption of the euro is Slovakia, which aims to do so on 1 January 2009. (Now using Euro). The Commission and the ECB will assess the fulfillment of the degree of convergence reached by all the Member States with a derogation – Romania has set its target date at 2014. The other EU countries with a derogation have no specific target date but have expressed the intention to switch to the euro at some point between 2010 and 2014.

4 Current List of Euro Users As Of Jan 1, 2010 Austria Belgium Cyprus Finland France Germany Greece Ireland Italy Luxemburg Malta Netherlands Portugal Slovakia Slovenia Spain

5 The qualifying criteria and technical preparations What are the Maastricht criteria? According to Article 121 of the EU Treaty, the Commission and the ECB must examine whether a country satisfies the following conditions in a sustainable way: 1.the achievement of a high degree of price stability; Inflation rate within 1.5% of three best performing countries 2. sustainability of public finances; Budget deficit no more than 3% of GDP 3. observance of the normal exchange rate fluctuation margins provided for by the Exchange Rate Mechanism ERM for at least two years: no devaluation of currency. 4.durability of the convergence achieved by the Member State and of its participation in the ERM, as reflected in long-term interest-rate levels: within 2% of three countries with lowest interest rates.

6 What practical preparations are necessary in a country preparing for the adoption of the euro? National authorities are responsible for preparing and coordinating preparations for the introduction of the euro Framework document they prepare is called a national changeover plan. Setting a target date for the introduction of the euro and appointing a committee to deal with the changeover details: duration of the period during which the euro will circulate alongside the legacy currency when banks and shops start receiving euro cash to arrangements for extended bank opening hours around €-day a comprehensive information campaign of all those involved, including the population itself. most countries that have made changeover plans intend to make the transition in a 'Big Bang' scenario. This is what Slovenia did and what Cyprus and Malta will do as well. Commission issues regular reports on the state of practical preparations for the enlargement of the euro area. ] Comprehensive preparations, begun well in advance, are crucial for a smooth changeover ]

7 What is ERM II? ERM II is an exchange rate mechanism in which participating currencies fluctuate within a specified margin (+/-15%) around a stable but adjustable central rate defined against the euro. Training ground’ for the euro. ERM II replaced the European Monetary System and the original ERM in January 1999, when the euro was launched. A minimum of two years of participation without severe tensions in this mechanism is expected before euro adoption can be considered. An agreement between the ECB and the national central banks of the Member States outside the euro area lays down the operating procedures for ERM II. The present members of ERM II are Estonia and Lithuania, Cyprus, Malta and Latvia (2 May 2005), Slovakia (28 November 2005) and Denmark (1January 1999). Cyprus and Malta will leave the mechanism once they are in the euro area.

8 How has the Euro affected prices? The evolution of prices has been exceptionally good since the launch of the euro, with most Member States registering their lowest inflation rates for five decades [4]. [4] This is despite a series of adverse shocks including an increase in oil prices, which have more than trebled in dollar terms since 2003. In the 1970s, when oil prices also increased significantly, although not as much as in the last four years, average inflation rates reached more than 9%. When the Maastricht Treaty was approved by the Heads of State or Government at the European Council in Maastricht in 1991, the average inflation rate in the Member States which now form the euro area was around 4%. By comparison, since the launch of the euro annual inflation in the euro area has averaged 2.1%.

9 Why is inflation control crucial in the Eurozone? 1.Inflation makes home country’s exports less desirable – undermines competitiveness in world markets 2.Loss of exports may cause loss of jobs, lower AD, reduced asset prices (housing values) 3.Loss of faith in currency – encourages speculative attacks in foreign exchange markets 4.Forces devaluation of currency – lower wages and prices = recession 5.Government debt costs can rise with inflation

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