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The Road to the Euro

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Alexia Kong

on 23 March 2015

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Transcript of The Road to the Euro

The Road to the Euro
1. The Werner Plan
A background of international monetary crisis led to Europe's leaders setting up a high-level group led by Pierre Werner, the Luxembourg Prime Minister, to report on how Economic Monetary Union could be achieved


3 stages :
2. The Snake in the Tunnel
Stage 1
Preparing the ground
- Starts 1 June 1970 and lasts 3 years
- Principal aim : reinforcement of the coordination of economic policies
- convergence of monetary and fiscal policies
- Reduction in fluctuations between European currencies => Snake in the tunnel
Stage 3
Full monetary integration was to be achieved : convertibility of currencies, free movement of capital, permanent locking of exchange rates
Stage 2
The transition
Reinforcement of previously applied policies
Gradual narrowing down of exchange rate movements


Created in 1972 and ended in 1978
Economic system which limited fluctuations in exchange rates between the currencies of the EEC members
The central rate was the dollar
The causes
The Mechanism
The end of the Snake
The system proved unsustainable:

=> with several currencies rejoining and leaving the snake over the years
1. Causes
2. Mechanism
3. Failure
Nixon Shock :
IMS is now based on floating exchange rates
Increase Europe's role in the international monetary system
To achieve economic union, creating a zone of "monetary stability"
Basel Agreement in 1972

6 members of the EEC

UK, Denmark, Norway and Ireland also joined
Fluctuations and instability between currencies
Outcome of the Werner Plan
The plan was never fulfilled due to an unfavorable economic context and the report lacked the establishment of a new supranational institution
Remains a major step towards Economic Monetary Union : changed the way of thinking
Inspired the Dolors Report


Context
The EMS was an arrangement established in 1979 proposed by Valery Giscard d'Estaing and Helmut Schmidt:
Replaced the Snake
It was a way of creating an area of currency stability by encouraging countries to coordinate their monetary policies
The EMS
Achievements
The European Monetary System was important in ensuring currency stability in the European Community at a time when international markets were very volatile.
Without the EMS the completion of the single market project would have been more difficult.

Limits
Not adaptable evenly to every state
-2,25%
+2,25%
0%
Speculative attacks on European currencies
Strong tensions on the markets :

Low dollar
and
Petrol crisis
Political differences within the European countries
No central authority to supervise the system
Included 8 members : Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, and the Netherlands.
This meets the first step of the Werner Plan:

"Coordination of economic policy, and reduction in fluctuation between European currencies"
4. The European Exchange Rate Mechanism
Dollar was the central rate of the system

=> Need for something purely european
1. The Mechanism
Margin of +-2,25% for EC members
Main elements
- The ECU
- An Exchange Rate Mechanism
- The European Monetary Cooperation Fund

Same idea as the Snake but more flexible

System purely european=> ECU

Composition of the ECU
Need for central banks to intervene to respect the rules
Deutschmark supremacy
: unsatisfied other member states + was threatened by the cost of German reunification
1992
EMS Crisis
: Italy and the UK withdrew
=> Monetary organization was useful but needed better mechanisms
The Dolor's plan led to EMU
Exchange rate with ECU
0%
+2,25%
-2,25%
ECU
Exception for peseta, lira, escudo, pound : +-6%
2. Central banks interventions
3. The European Monetary System
If the currency exceeds the +2,25% limit
Interest rates
Decrease interest rates




Decrease the Demand for the currency




Depreciation of the currency
Foreign Exchange Reserves
If the currency exceeds the -2,25% limit
Interest rates
Foreign Exchange Reserves
Selling the currency on the FX market




Decrease the Demand for the currency




Depreciation of the currency
Increase interest rates




Increase the Demand for the currency




Appreciation of the currency
Selling one part of its foreign reserve on the FX market, and to be paid in its own currency



Decrease the Demand for the currency sold and increase of its own currency



Appreciation of its
own currency
Introduction
Conclusion
References
Alexia KONG
Pierre-Emmanuel IWEINS

Dimitrios Syrrakos, 2010 "
A reassessment of the Werner Plan
",
Peter B Kenen,1995
"Economic and Monetary Union in Europe"
http://home.aubg.bg/faculty/didar/eur324/europeanmonetarysystem.pdf
http://www.captaineconomics.fr/theorie-economique/item/241-le-serpent-monetaire-europeen-et-le-systeme-monetaire-europeen
http://www2.econ.iastate.edu/classes/econ355/choi/cur.htm
http://www.universalis.fr/encyclopedie/accords-de-bale/
http://ec.europa.eu/economy_finance/emu_history/documentation/chapter6/19720108fr10interimreportfluct.pdf
http://ec.europa.eu/economy_finance/emu_history/history/part_a_2_a.htm
http://egostino.blogspot.fr/2010/04/snake-in-tunnel.html
http://ec.europa.eu/economy_finance/publications/publication6730_en.pdf
http://www.eagletraders.com/advice/securities/european_monetary_system.htm
http://www.wisegeek.com/what-is-the-european-monetary-system.htm
1979
1991
2002
1999
1970
1957
End of the Snake in the Tunnel
and start of the EMS
Treaty of Maastricht

=> Pillar structure of the European Union
Democratization of the Euro as a global currency
Treaty of Rome

=> Start of the EEC
Werner Report

and start of the Snake in the Tunnel in 1971
From the Treaty of Rome to the Werner Report
From the Werner Report to the EMS
From the EMS to Maastricht
From Maastricht to the Euro
Euro Replaces the ECU

Creation of the Eurosystem
Economic Monetary Union has been a growing interests for countries after the collapse of the Bretton Woods Sysem, it promised currency stability and an environment of growth and employment.
However many political and economic obstacles barred the way that led to the 1992 Maastricht Treaty.
We will present the main steps that led to the creation of the Euro, starting from the Werner Plan and it’s Snake in the tunnel mechanism to the creation of the European Monetary System and it's Exchange Rate Mechanism.
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