Research Proposal on "Currencies Effects on Global Market"

Research Proposal 5 pages (1642 words) Sources: 1+ Style: MLA

[EXCERPT] . . . .

Currencies Effects on Global Market

Recession and its Impact on Global Economy

Overview and Update on the Implementation of the Euro

The euro was introduced on the 1st of January 1999 to become the national currency of eleven state members. Its introduction lead to the transformation of national currencies into euros; foreign operations between the eleven countries begun to be carried out in euros; the new public debt would be issued in euros and the old public debt would be converted from the former currency into euros; all financial markets in the member states would issues their stocks and bonds in euros and the former national currencies would become denominations of the euro, to be completely eliminated by 2002.

The euro is the official currency of the European Union and it is predominantly used within the Eurozone, formed today from a total of fifteen countries which have adopted it as their national currency (Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Holland, Ireland, Italy, Luxembourg, Malta, Portugal, Slovenia and Spain). "The euro is the single currency shared by (currently) 15 of the European Union's Member States, which together make up the euro area. The introduction of the euro in 1999 was a major step in European integration. It has also been one of its major successes: around 320 million EU citizens now use it as their currency and enjoy its benefits, which will spread even more widely as other EU countries adopt the euro"

Relative to the United States Dollar, the euro has suffered significant valuations. Introduced at an exchange rate of 1.16740 dollars per one euro, the currencies are now exchanged at 1.5861 dollars per one euro. The forecasts see that the difference between the two currencies will decrease and that by February 2009, a euro will be exchanged for 1.456 dollars.

2. Threats of the Euro upon Bulgarian Companies

Bulgaria has a surface of 110,990 square kilometres and a population of 7,679,290 individuals; it adhered to the European Union on the first of January 2007 and it has yet to adopt the euro as a national currency. The Bulgarian lev (BGN) is has a current exchange rate of 1.955 levs per one euro. "Bulgaria is not yet a member of the euro area. The lev is not yet within the Exchange Rate Mechanism (ERM II). [...] Bulgaria does not have a target date to adopt the euro."

The initial date was 2009, but it has then been changed to 2010, due to increased inflation that did not allow the adoption of the euro as the national currency. The current estimated deadline is 2012, but the country officials are not sure they will be able to reduce inflation to the requested limits.

The economic entities with Bulgaria have to suffer from the country's incapability to move to the euro, mostly when most of the operations are conducted in the currency of the European Union. The first disadvantage for the Bulgarian entrepreneurs is that they constantly lose money due to fluctuating exchange rates. And even when the rates are constant, money still goes on exchange commissions. Then, as the Ministry of Finance is making increased efforts to harmonize the fiscal policies and prepare the country for the adoption of the euro, and they ordered significant price increases. The measures were generically aimed to exert a better control over the inflation, but they also meant increased prices on commodities, energy and other vital resources, increasing as such the operational costs for the Bulgarian companies. In Romania for instance, Bulgaria's neighbour and a country found in a similar position, the National Romanian Bank significantly increased the interest rates on loans (also in an attempt to reduce inflation) making it as such more difficult for the Romanian entrepreneurs to get access to financial resources.

The increasing familiarization to the European currency also meant increased access to loans in euros. The interest rates on these loans were generically smaller than the interest rates for the loans in the Bulgarian lev, and the attraction was therefore tremendous. But the euro fluctuated and the Bulgarian entrepreneurs registered major losses as they had contracted loans in euros when the value was lower and had to reimburse them when the value of the euro had increased. In Romania for instance, numerous companies had contracted loans when the euro had a value of 3.5 RON and had then to reimburse them at a euro value of 4 RON. As a response, the National Bank implemented restrictive measures. "The powerful consumption and investment activity were accompanied by a record lending boom, particularly in Bulgaria and Romania. But the rise in appeal of foreign currency loans, which has its roots in interest and exchange rate movements, also led to stimulating the lending business in the other countries, causing some of the central banks to implement restrictive monetary policy measures." final argument on the threat of the euro is not a financial, but more a cultural one, and it is worth mentioning due to the implications it might generate within the European Union. The Bulgarian government successfully negotiated on the Cyrillic transcription of the euro, namely evro. More recently however, the EU is denying this right, stating that all countries must use the same transcription and pronunciation. The authorities representing the two parties fail to see eye-to-eye; the Bulgarian population is also dissatisfied with the outcome of the latest discussions. The Bulgarian government declared that "It is unacceptable for us that this is not Bulgarian. The Bulgarian parliament will not sign a new treaty unless we can sign it in our own language. The Bulgarian people demand full respect for their language."

3. Opportunities of the Euro upon Bulgarian Companies

The creation of the European Union alongside with its currency lead to a territorial expansion of the business practices. Once Bulgaria adhered to the EU and became a member with full rights, numerous investors from wealthier countries of the EU became interested in the Bulgarian capabilities and resources. As a result, euros began to pour and to finance several investments. As a result, the Bulgarian entrepreneurs gained increased access to financial resources. But the capital was not the single commodity introduced. The foreign investors also brought in specialized assistance and various high technologies, which eased the operational processes within Bulgarian companies and made the more efficient; ergo, the gains registered by the Bulgarian companies manifested in capital inflows. (the capital inflows however had not always generated the desired outcome, as they only put more pressure on inflation and demanded more restrictions and price increases)

The European currency also meant increased access to financial resources for the general population, which was now able to contract credits in euros at smaller interest rates. However the benefits had only been available on the short run and for a limited period, the Bulgarian population had registered increased living standards. As a result, their demands increased and their purchasing behaviours changed. This basically materialized in increased consumerism, which once again benefited the Bulgarian companies, which found it easier to sell large quantities of the manufactured products.

Aside from the capital inflows received from the wealthy investors, the euros also came from the European Union itself. This money is then used to finance small and medium size organizations. They are also offered to the population directly through loans or social programs, but also through improvements in the healthcare system, the educational system, communications and so on. All these once again to increases in living standards, and increased consumerism, to materialize in increased sales.

4. Recommendations for National Policy and Bulgarian Companies

In order to best cope with the future adoption of the euro as a national currency, the government should consider the following:

they should continue to implement regulations to reducing inflations the regulations must not suffocate the Bulgarian… READ MORE

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