International Monetary System Part II
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Transcript of International Monetary System Part II
8/3/2019 International Monetary System Part II
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The International
Monetary System
PART II
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Introduction
The agreement reached at Bretton Woods
established two multinational institutions
— the World Bank and the International
Monetary Fund (IMF)
Since WWII, both institutions have played
an important role in the world economy
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The International Monetary Fund(IMF)
The International Monetary Fund (IMF) is an
organization of 187 countries, working to foster :
Global monetary cooperation
Secure financial stability
Facilitate international trade
Promote high employment andsustainable economic growth and
Reduce poverty around the world
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Role of the IMF
The role of the IMF is to maintain order in the
international monetary system
(1) To avoid a repetition of the competitive
devaluations of the 1930s, and
(2) To control price inflation by imposingmonetary discipline on countries
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The Special Drawing Right(SDR)
The Special Drawing Right (SDR) is an
international reserve asset, created by the
IMF in 1969 to supplement the existing
official reserves of member countries
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The Special Drawing Right(SDR)
The SDR is neither a currency, nor a claim
on the IMF
Rather, it is a potential claim on the freely
usable currencies of IMF members
Holders of SDRs can obtain these
currencies in exchange for their SDRs
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The Special Drawing Right(SDR)
The value of the SDR is based on a basket
of key international currencies—the euro,Japanese yen, pound sterling, and U.S.
dollar
The U.S. dollar-value of the SDR is posted
daily on the IMF’s website
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The World Bank
The World Bank is a vital source of
financial and technical assistance todeveloping countries around the world
The World Bank, established in 1944, is
headquartered in Washington, D.C.
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The World Bank
It is not a bank in the common sense; It is
made up of two unique development
institutions owned by 187 member countries:
1. The International Bank for Reconstructionand Development (IBRD) and
2. The International DevelopmentAssociation (IDA)
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EUROPEAN
MONETARY
SYSTEM
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Introduction
On 9 May 1950, the Schuman Declaration proposed the establishment of a EuropeanCoal and Steel Community (ECSC)-
( Treaty of Paris of 18 April 1951)This put in place a common market in coal
and steel between the six foundingcountries (Belgium, the Federal Republic ofGermany, France, Italy, Luxembourg andthe Netherlands)
So 9 May is celebrated as the EU's birthday
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Introduction
The Six then decided, on 25 March 1957with the Treaty of Rome, to build aEuropean Economic Community (EEC) based on a wider common marketcovering a whole range of goods andservices
Customs duties between the six countrieswere completely abolished on 1 July 1968and common policies, notably on tradeand agriculture, were also put in placeduring the 1960s
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Introduction
In 1971, the United States decided toabolish the fixed link between the dollar and
the official price of gold, which had ensuredglobal monetary stability after World WarTwo
This put an end to the system of fixedexchange rates
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European Monetary System (EMS)
After the collapse of Bretton Woods
system in 1971, most of the EEC countriesagreed in 1972 to maintain stableexchange rates by preventing exchangefluctuations of more than 2.25% (the
European "currency snake")
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European Monetary System (EMS)
In March 1979, this system began operatingunder the Jenkins European Commissionwhere most nations of the EuropeanEconomic Community (EEC) linked theircurrencies to prevent large fluctuationsrelative to one another by holding exchangerates within specified limits
The goal was to foster monetary stability inthe European Community
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European monetary system (EMS)
It had three main features:
1. Reference currency called the ECU: this wasa ‘basket’ made up of the currencies of all
the member states;2. An exchange rate mechanism: each
currency had an exchange rate linked to theECU; bilateral exchange rates were allowedto fluctuate within a band of 2.25 %;
3. A credit mechanism: each countrytransferred 20 % of its currency and gold
reserves to a joint fund
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European Currency Unit (ECU)
The quantity of each country's currency inthe ECU reflected the country’s relative
economic strength in the EuropeanCommunity
The ECU functioned as a unit of account, ameans of settlement and a reserve assetfor the members of the EMS
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European Union (EU)
By 1986, nine countries joined the EMS – Denmark, Ireland, UK, Greece, Portugal,Spain, Austria, Finland and Sweden
7th Feb. 1992, it was renamed as EuropeanUnion (EU)
The EU currently has 25 member states
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European Monetary System (EMS)
Periodic adjustments raised the values of
strong currencies and lowered those ofweaker ones, but after 1986 changes innational interest rates were used to keepthe currencies within a narrow range
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European Monetary System (EMS)
• In the early 1990s, the European Monetary
System was strained by the differingeconomic policies and conditions of itsmembers, especially the newly reunifiedGermany, and Britain (which had initially
declined to join and only did so in 1990)permanently withdrew from the system inSeptember 1992
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European Monetary System (EMS)
Speculative attacks on the French Francduring the following year led to the so-called
Brussels Compromise in August 1993 whichestablished a new fluctuation band of +15%
To prevent wide currency fluctuations
among EU currencies and to eliminatecompetitive devaluations, EU governmentshad decided to relaunch the drive to fullmonetary union and to introduce a single
currency
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From the EMS to EMU
At the European Council in Madrid in June1989, EU leaders adopted a three-stage
plan for economic and monetary union
This plan became part of the MaastrichtTreaty on European Union adopted by the
European Council in December 1991
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From the EMS to EMU
The first stage (1 July 1990) :
• Completely free movement of capital within
the EU (abolition of exchange controls);• Increasing the amount of resources devoted
to removing inequalities between Europeanregions (Structural Funds);
• Economic convergence, through multilateralsurveillance of member states’ economic
policies
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From the EMS to EMU
The second stage (1 January 1994):
It provided for:
Establishing the European MonetaryInstitute (EMI) in Frankfurt; the EMI wasmade up of the governors of the centralbanks of the EU countries;
Independence of national central banks;
Rules to curb national budget deficits
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From the EMS to EMU
The third stage (1 January 1999):
The EMS was no longer a functionalarrangement in May 1998
In June 1998, the European Central Bankwas established
From this point onwards, the EuropeanCentral Bank took over from the EMI andbecame responsible for monetary policy,which is defined and implemented in euro
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The European Central Bank
The key responsibilities of the ECB are:
To formulate monetary policy,
To conduct foreign exchange,
To hold currency reserves andauthorize the issuance of bank notes
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Birth of Euro
On 1 January 1999, the ECU basket wasdiscarded and in January 1999, a unifiedcurrency, the euro, was born and came tobe used by most EU member countries
Participation is voluntary and the
fluctuation bands remain the same as in theoriginal i.e. +15 percent, once again with thepossibility of individually setting a narrowerband with respect to the euro
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Birth of Euro
11 countries adoptedthe euro, Austria,Belgium, Finland,France, Germany,Ireland, Italy,Luxembourg, the
Netherlands,Portugal and Spain.(Greece joined themon 1 January 2001)
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The Euro
The euro is the single currency of theEuropean Union. Twelve of the then 15countries adopted it for non-cash
transactions from 1999 and for all paymentsin 2002 when euro notes and coins wereissued
Three countries (Denmark, Sweden and theUnited Kingdom) did not participate in thismonetary union
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Eurozone
Euros are printed and managed by theEuropean System of Central Banks (ESCB)
Together, these countries create what iscalled the Eurozone, a region where the euroserves as a common national currency for allof the separate nations
The euro (sign: €; code: EUR) is the officialcurrency of the Eurozone
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The Eurozone
The eurozone is one of the largesteconomic regions in the world and itscurrency, the euro, is considered one of the
most liquid when compared to others
This region's currency continues to develop
over time and is taking a more prominentposition in the reserves of many centralbanks
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The Eurozone
Estonia joined the eurozone on 1 January2011
The currency is also used in a further fiveEuropean countries, with and without formalagreements, and is consequently used dailyby some 327 million Europeans
Over 175 million people worldwide usecurrencies which are pegged to the euro,including more than 150 million people inAfrica
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The Euro
As of June 2010, with more than €800 billion in circulation, the euro is thecurrency with the highest combined value
of banknotes and coins in circulation in theworld, having surpassed the U.S. dollar
Based on IMF estimates of 2008 GDP andpurchasing power parity among the variouscurrencies, the eurozone is the secondlargest economy in the world
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The Euro
The euro is the second largest reservecurrency (a status it inherited from theGerman mark) as well as the second most
traded currency in the world after the USdollar
The share of the euro as a reserve currency
has increased from 17.9% in 1999 to 26.5%in 2008, at the expense of the U.S. dollar (itsshare fell from 70.9% to 64.0% in the sametimeframe) and the Yen (it fell from 6.4% to
3.3)
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The Euro
The total of euros held as a reserve in theworld at the end of 2008 was equal to USD
1.1 trillion
Outside the eurozone, a total of 23 countriesand territories that do not belong to the EU
have currencies that are directly pegged tothe euro
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The Euro
17 Member States of the European Unionuse the euro as their currency
●
Belgium● Germany
● Ireland
● Greece
● Spain● France
● Italy
● Cyprus
● Estonia
●
Luxembourg● Malta● The Netherlands
● Austria
● Portugal● Slovenia
● Slovakia
● Finland
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The Euro
Non-participants
●
Bulgaria● Czech Republic
● Denmark
● Latvia
● Lithuania
●
Hungary● Poland● Romania
● Sweden
● United Kingdom
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GOOD LUCK TO YOU