Unit V - GAtt

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Unit IX – European Union and Euro : 

Unit IX – European Union and Euro Day and Date:

Unit Highlights : 

Unit Highlights Formation of European Union (EU) Introduction of Euro Concept of optimum currency areas

Text book reference chapters… : 

Text book reference chapters… International Economics by Dominick Salvatore – Chapter 10 International Economics by Francis Cherunilam – Chapter 13

Let us recapitulate… : 

Let us recapitulate… European Union (EU), a Customs Union, was formed in 1958 A Customs Union removes all trade barriers among member nations as well as adopts a common commercial policy with the rest of the world. EU became European Common Market in 1993

European Union (EU)… : 

European Union (EU)… The Customs Union, formed by Germany, France, Italy, Belgium, the Netherlands, and Luxembourg came into existence in July 1,1958, By the virtue of Treaty of Rome, 1957 It expanded to 15 nations with the joining of UK, Denmark, and Ireland in 1973, Greece in 1981, Spain and Portugal in 1986, and Australia, Finland and Sweden in 1995.

EU…The basis of its formation : 

EU…The basis of its formation Elimination of trade barriers Common tariff on imports from rest of the world Free movement of resources Harmonizing fiscal, monetary, and social security policies Adopt a common policy on agriculture, transport, and competition in industry

EURO (€) : 

EURO (€) Common currency adopted at the beginning of 1999 by 11 of the 15 member countries of the EU. The 11 countries – Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, Spain, Portugal, and Netherlands Greece was admitted on Jan.1, 2001 Britain, Sweden and Denmark chose not to participate.

Creation of the Euro : 

Creation of the Euro One of the most important events in post-war monetary history. Introduced from January 1, 1999 as a unit of account. Circulated as sole legal tender in the participating nations by July1, 2002

Optimum currency area/bloc : 

Optimum currency area/bloc A group of nations whose national currencies are linked through permanently fixed exchange rates.

Optimum currency area… Advantages for member nations : 

Optimum currency area… Advantages for member nations Eliminates uncertainties Greater price stability Saves the cost of official intervention in FX market Saves cost of hedging Saves cost of exchanging FX/maintaining FX reserves for payment of imports or enabling foreign travel

Optimum currency area… Disadvantage for member nations : 

Optimum currency area… Disadvantage for member nations Independent stabilization and growth policies cannot be pursued

Optimum currency area…maximizing benefits : 

Optimum currency area…maximizing benefits Benefits can be maximized and costs can be minimized when there is, greater resource mobility greater structural similarities close coordination in fiscal, monetary, and social policies

To conclude… : 

To conclude… Economies have increasingly become more interdependent. International policy coordination is, hence, not only desirable but essential.

You should now be able to… : 

You should now be able to… Trace the formation of European Union. Explain Euro. Elucidate on Optimum Currency Area, its benefits, and costs to member nations.

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