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Why is Germany so Important to the Continued Use of the Euro? Group 5 Sophie Lo Michael Chou Julia Brito Howard Chang.

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Presentation on theme: "Why is Germany so Important to the Continued Use of the Euro? Group 5 Sophie Lo Michael Chou Julia Brito Howard Chang."— Presentation transcript:

1 Why is Germany so Important to the Continued Use of the Euro? Group 5 Sophie Lo Michael Chou Julia Brito Howard Chang

2 1) The Euro Zone (EZ) Which countries have adopted € ? The introduction of a single currency involves an advanced stage of economic integration. The euro is shared by 18 of the European Union's Member States (EU). Denmark and the United Kingdom have ‘opt-out’ clauses that exempt them from participation. The remainder have yet to meet the conditions for adopting the single currency.

3 Benefits of being part of the Euro Zone: More choice and stable prices for consumers and citizens Greater security and more opportunities for businesses and markets Improved economic stability and growth : achieved through the rules of the Union Treaty and the Stability and Growth Pact (SGP) More integrated financial markets A stronger presence for the EU in the global economy A tangible sign of a European identity More than 333 million EU citizens use the Euro as currency now.

4 Each country member left the responsibility of their monetary policy to the European Central Bank (ECB) inflation, interest rate. But in order to achieve the common economic goals of the zone, each country also agreed to coordinate other macroeconomic issues like: The fiscal policy that still remains in the hands of individual national authorities. Countries also retain overall responsibility for their structural policies (Ex. labour markets, pension and capital markets). Which are the compromises of being part of the Euro Zone ?

5 2) Measuring external economic relations Balance of payments (BOP): include all commercial transactions (goods, services and capital) that take place between residents of a country with the rest of the world, over a period of time. 1)Current account: refers to goods and services, representing the country's exports and imports (Net income)  ( X – I) 2) Capital and financial account: shows the financial assets and investments. This component tracks capital flows in and out of the country  Foreign Direct Investment, portfolio capital flows, Variation of the central bank reserves. Economic identity  BOP ≡ 0 (zero) means that if one component has a deficit the other component should be in surplus or vice versa. Ex. The country whose current account is deficit, need to borrow from their trade and financial partners to finance it by invited foreign investors to bring capital and raise government saving (increasing reserves).

6 How do the countries improve their BOP ? But apllied any of this economic policies is not so easy for each country when they are part of the a monetary and economic union.

7 3) Germany Economy Germany is the largest economy in the Euro Zone, and the presumption was that forming the euro as ‘a currency without a state’ would provide a more symmetric structure to Europe and contain the fear of a German hegemony. This supposition seemed to work only in ‘good times’ just for the first decade of the euro. Now the both sides of de BOP are under discussion: 1)Germany’s export success and its enormous trade surplus in current account 2)Germany is the biggest lender, helping out stricken European economies

8 Pro-German policy: analyst said that the main reason for the Germany´s competitiveness is their austerity policy and the country’s manufacturing products specialisation exports. The export of high added value products has been the main driver of growth in recent years. Critics claim that by being part of the euro Germany has been an enormous advantage. They said that the Euro monetary policy is consistent with the need of this giant and ignores the other European economies claims that are looking through the ECB action, (ex. currency deflation and an quantitative easing program, to improve their competitiveness exports.) Since German economy is export driven, manufacturing accounts for 25 percent of total GDP and is crucial for the growth.

9 4) Conclusions According to Stephen Pope, if Germany´s economy slowdown that will be felt elsewhere in the Euro Zone. “If the number one economy is running at anything less than full tilt then the overall region will struggle to expand and the ECB will face an enduring headache of disinflation leading to deflation. Without a vibrant Germany, the 18-member euro zone will struggle to expand”. Germany is Europe economic core: is essential for the health of the wider currency union, as it accounts for almost 30% of the euro zone’s GDP by nominal value. But German economy is not large and receptive enough to carry on the whole Eurozone alone. The benefits to Germany companies has been enormous, since sales to other Euro Zone countries make up roughly half their exports. The dilemma is between nationalist forces and possibilities to overcome differences within the Economic and Monetary Union, reflected on the ECB. Will they withstand the difficulties of the way to achieve the converge economically?

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