EUROZONE OVERVIEW

Aditya Bansal

THE EUROPEAN UNION & THE

EUROZONE
The European is a politico-economic
union of 28 European countries
The Maastricht Treaty established the
European Union under its current name in
1993 and introduced European citizenship
The Eurozone consists of those Member
States of the European Union that have
adopted the euro as their
currency(currently 19 countries)
Other EU states except Denmark and UK
are obliged to join the Eurozone once
they fulfil the criteria
Andorra, Monaco, San Marino and Vatican
City are not part of the European Union
but they use Euro as their currency.

EURO CONVERGENCE CRITERIA

The euro convergence criteria (also known as the Maastricht
criteria) are the criteria which European Union member states
are required to adopt the euro as their currency.
5 Euro Convergence Criterion
HICP inflation:ShallnotexceedtheHICPinflation

ratesinthe3EUmemberstateswiththe
lowestHICPinflationplus1.5%
Government budget deficit: Mustnotexceed3%
Government debt-to-GDP ratio: Mustnotexceed60%
Exchange rate stability:Applicantcountriesshouldnothave
devaluedthecentralrateoftheireuropeggedcurrency
Long-term interest rates:Shallbenomorethan2.0%higher

MONETARY POLICY IN THE

EUROZONE
By adopting the euro, the economies of the Eurozone
members become more integrated.
Monetary policy in the euro area is in the hands of the
independent Euro-system, comprising the European Central
Bank (ECB), which is based in Frankfurt, Germany, and the
national central banks of the euro-area Member States.
The ECB defines the monetary policy for the whole Eurozone
a single monetary authority with a single monetary policy
and the primary objective is to maintain price stability

FISCAL POLICY IN THE

EUROZONE
Fiscal policy remains largely the responsibility of the Member
States, but national governments must coordinate their
respective economic policies in order to attain the common
objectives of stability, growth and employment.
Coordination is achieved through a number of structures and
instruments, the Stability and Growth Pact (SGP) being a
central one. The SGP contains agreed rules for fiscal
discipline, such as limits on government deficits and on
national debt, which must be respected by all EU Member
States
The Pact set a limit of 3% of GDP for the yearly deficit of all
the Eurozone member states in 1997; with fines for any state
which exceeded this amount

WAS THE PACT FOLLOWED?

Germany - along with Italy - was the first big country to break the 3% rule
After that, France followed
Italy was the worst offender. It regularly broke the 3% annual borrowing
limit
The Spain government stayed within the 3% limit every year from the
euro's creation in 1999 until 2007
Greece never stuck to the 3% target, but manipulated its borrowing
statistics to look good, which allowed it to get into the euro in the first
place

TYPICAL PROBLEMS WITH

GREECE
Greece forged balance sheets to enter Eurozone
Main industry of Greece tourism suffered
Structural weakness of the Greek economy, administrative
weakness and rampant tax evasion in key sectors
Greeks have a perception that corruption, tax evasion, and
cheating should be not only tolerated but even rewarded.
Instead of adhering to virtues such as meritocracy and social
justice, Greeks began to pursue easy money.
In parallel, governments showed irrational fiscal
irresponsibility and populism to gain sympathy with voters,
while the population turned a blind eye as this was a win-win
situation for everyone.