european union established in accordance with masstricht treaty (1993) 27 countries motto: unity in...

European Union• Established in accordance with Masstricht Treaty

(1993)

• 27 countries– Motto: Unity in Diversity

• Four Freedoms– People– Goods– Services– Capital

Eurozone• Objectives

– Price Stability– Financial Stability– Financial Integration

• 16 participating countries– Austria, Belgium, Cyprus, Finland, France, Germany,

Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Spain

• Eight more countries will be inducted when they meet the criteria

Criteria• Inflation

– No more than 1.5 percent higher than average of the three lowest members

• Government Finance– Ratio of gov. defecit to GDP may not exceed 3 percent– Ratio of gov. debt to GDP may not exceed 60 percent

• Exchange Rate– Must be a member of ERM II for two years

• Interest Rates– Long-term rate cannot be more than two percent higher

than three lowest inflation members

Eurosystem• Governing monetary authority

• Price Stability; Financial Stability; Financial Integration

• European Central Bank (ECB)– Manages & administers euro

• National Banks– Prints, mints, and distributes notes and coins

The Euro• Non-physical release on January 1, 1999• Rates were locked in the day before• Actual notes and coins released January 1, 2002

• Epsilon– Double strikethrough denotes stability

• Placement of the sign isn’t definitive

Exchange Rate vs Dollar

www.ecb.eu/

A Few Benefits

• Low Inflation Rates

• Ease of Trade

• Governmental Influence

• International Risk Sharing