¶ … Negative Effect of the Euro
The major issue facing the euro as a single currency is the potential problems that EU nations may face in absorbing future economic shocks. This is largely due to the fact that unlike most monetary unions, the euro will not be governed by a central fiscal policy since most member states are reluctant to give up control of taxation and expenditure policies. To compensate, euro countries are bound to observe fiscal guidelines laid down by the Maastricht Treaty of 1992 and the Stability and Growth Pact drawn up in 1997.
The Maastricht Treaty defined criteria that entails annual budget deficits held to 3% of GDP and the gross debt-to-GDP ratio reduced to 60% in order to avoid excessive borrowing by member states. Subsequently the Stability and Growth Pact defined the penalty sanctions to be imposed on defaulting nations. The EU believed that these measures would result in greater fiscal discipline on the part of member states. However, concerns on the negative effects of insufficient flexibility of fiscal policies within the EU continue.
For one, it is deemed that unlike other federations where regional economic shocks get quickly stabilized through redistribution of wealth from a centralized federal budget, the EU budget is too small and lacks the benefit of uniformity in taxation and expenditure. The EU also lacks flexibility in wages and prices, a high degree of labor mobility and centralization of budget transfers. In the absence of sufficient flexibility in fiscal policies, it is believed...
Exchange Rate Volatility on Trade Flows Exchange Rate Volatility Impact on International Trade Flows Exchange Rate Volatility Impact on International Trade Flows Bretton Woods Trade Flow Trade Flow Responsiveness Commodities The dissolution of the Bretton-Woods system in 1973 introduced a new era for international markets. No longer would the exchange rates be pegged and fluctuating exchange rates changed the game for international trade and investment. The newly introduced increase in volatility in the foreign exchange markets also increases
Managing Exchange Rate Risk For a number of multinational corporations, currency fluctuations can pose an extreme risk for them. This is because of sudden changes and dramatic amounts of volatility inside the marketplace can have a negative effect on their bottom line results. When this happens, there is a realistic possibility that these challenges could negatively impact their financial position and ability to compete inside many different markets. (Berger, 2011) In the
Euro had a positive effect upon its members? The euro has been the currency of the European Monetary Union (EMU) since January 1, 1999 (Auswartiges Amt, 2004). The euro was introduced slowly for member states. It has been a deposit currency since January 1999 and notes and coins have been in circulation since January 2002. Since March 2002 most European countries have exclusively used euro and cent as their currency. The
Exposure Transaction exposure risk may be defined as "cash flow risk" and is associated with the impact of FX rate moves on exposure due to transactional accounts, regarding exports, import or dividend repatriation: and FX "rate change in the currency of denomination of any such contract will result in a direct transaction exchange rate risk" (Papaioannou, 2006, p. 4), thus impacting the multinational corporation in terms of affecting the inflow
Eurozone Maastricht Treaty Euro zone Treaty The European Community established the convergence criteria. These criteria was established in order to allow its EU Member states to take part in the Euro Zone, and using the Euro, as an official currency. The members of the European Union formed the Maastricht Treaty in 1992. The principle goals of the treaty were to establish an economic and monetary union, strengthen the democratic legitimacy of its
It is administratively aggravated which will only assist European policy makers. Account means a continuing shift of domestic monetary autonomy to the European Central Bank indicating providing elasticity on exchange rates and interim interest rates. Domestic monetary policy would in no case be able to react supplely to exterior economic alarms like the increase in goods price increase. The prospect for lessening local economic problems will be more narrowed
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