eurozone crisis
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Eurozone Crisis
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Presenters
1. Priyamvada Jha(2749)2. Ankita Deambi(27)3. Shiffali Garg(2704)4. Gurleen Kaur(2744)5. Ranu Aggarwal(2745)
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Outline
The European Union
Genesis of Euro
Genesis of Crisis
Remedies/Solutions
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The European Union
Comprises a set of common supranational institutions established by the member states, each of which gives up some of its sovereignty, to make decisions on matters of joint interest at a European level.
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Historical Roots
• Precursor to the European Union : established after World War II in the late 1940s in an effort to unite the countries of Europe
• A pooling of coal and steel production and the sources of all military power proposed as "the first concrete foundation of a European federation” by the French Foreign Minister Robert Schuman on 9 May 1950
• Founding members of EU: Belgium, France, Germany, Italy, Luxembourg, and the Netherlands (European
• Coal and Steel Community)• The six member states then signed the Treaty of Rome in 1957
forming the European Economic Community which created a common market between the countries allowing goods and services to move freely between them
Apr 1951
• Treaty of Paris
Mar 1957
• Treaty of Rome
Feb 1986
• Single European Act
Feb 1992
• Treaty of Maastricht
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Growth of the EU
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Purpose of the EU
Strengthen the democratic governing of participating nations
Improve the efficiency of the nations
Establish an economic and financial unification
Develop the "Community social dimension."
Date of joining the EU
Benefits for the
Members
• Members may use a common currency (Euro) that makes trade easier• EU works to improve trade, education, farming and industry among its
members• No tariffs among member countries-free trade zone• Citizens of one country can move freely to another country• Citizens can live and work in any other EU nation• Citizens can vote in local elections even if they aren’t the citizens of
that country
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Euro-The Common Currency
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1990
1979
1969
Timeline of Euro
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1 Jan 1999 1 Jan 2002
1992 Maastricht Treaty
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Second largest reserve currency
Second most traded currency
Replacing European currency unit (ECU)
International adoption of euro outside the EU
(used in a further five European countries)
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Price Stability
(low inflation)
Public finance discipline
(low government debt and deficit)
Interest rate convergence
%
Exchange rate stability
Convergence (or “Maastricht”) Criteria
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Euro-zone European UnionEconomic & Monetary Union
Economic & Political Union – Single Market
18 Member States of EU 28 Member States
Common Monetary Policy set by ECB for Low Inflation
Common Trade Policy & Free Movement of People, Goods & Services
EU vs. Euro-zone
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Increased competition
Lower prices
Wider choice of products and services
More jobs
More opportunities to live, work and study in other EU countries
Easier travel
Benefits of Single Market
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Price stability and security of purchasing power
Elimination of transaction costs
Price transparency across countries
Countries can no longer change their interest rate or their exchange rate.
Elimination of exchange rate risks
1990 1997 2004
1990 1997 2004
1€2€
Countries could not have an independent monetary policy!
Additional Benefits of Adopting Euro
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The Crisis
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Before Crisis
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Increasing Order of Destruction
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Monetary Policy, Multiple Fiscal Policies
Globalization of Finance
Financial Crisis of 2007-08
Real estate bubbles
Fiscal policy choices related to government revenues and expenses
Approaches used by states to bail out troubled banking industries and private bondholders
Under-reporting of budget deficit by countries like Greece
Greek debt exceeded $400 billion (over 120% of GDP)
France owned 10% of that debt
CAUSES
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Greece
Low interest rates and no
limit
High interest
rates
Upto a limit
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Big Daddy
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Tourism Defense
Social welfare Schemes
High public sector wage and pension
commitments
Greece
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IrelandHousing Bubble : state
guaranteeing the six main Irish-based banks who had financed a property bubble
Defaulted loans to property developers and homeowners
made in the midst of the property bubble, which burst
around 2007
The economy collapsed during 2008
Unemployment rose : 4% in 2006 to 14% by 2010
National budget : surplus in 2007 to a deficit of 32% GDP
in 2010 (the highest in the history of the eurozone,
despite austerity measures)
Ireland's credit rating falling rapidly
Guaranteed depositors and bondholders cashed in
during 2009–10
In return of bailout, Ireland agreed to decrease it’s
budget deficit to 3% of GDP
In April 2011, despite all the measures
taken, Moody's downgraded the banks' debt to junk
status.
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Portugal
Portugal was one of the first and most affected economies to succumb
Persistent and lasting recruitment policies!!
Uncountable redundant public servants
Considerable slippage in state-managed public works
Inflated top management and head officer bonuses and wages after Carnation Revolution
Risky credit, public debt creation
European structural and cohesion funds were mismanaged across almost four decades
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Spain
Housing bubble!!
Spain had a comparatively low debt level
Debt was largely avoided by the ballooning tax revenue from the housing bubble
The bank bailouts and the economic downturn increased the country's deficit and debt levels
Substantial downgrading of its credit rating
In June 2012, Spain became a prime concern for the Euro-zone when interest on Spain's 10-year bonds reached the 7% level and it faced difficulty in accessing bond
markets.
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Remedies
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Policy reactions
• EU emergency measures – A.1.1 European Financial Stability Facility (EFSF)– A.1.2 European Financial Stabilisation Mechanism (EFSM)– A.1.3 Brussels agreement and aftermath
• European Central Bank• European Stability Mechanism (ESM)• European Fiscal Compact
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EU Emergency Measures
Country Year Bailout PackageGreece 2nd bailout by EC, ECB, IMF)
February 2012 130-billion euros
Spain June 2012 100-billion eurosCyprus April 2013 12.5-billion euros
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European Financial Stability Facility (EFSF)
• An organization created by the European Union to provide assistance to member states with unstable economies.
• The fund raises money by issuing debt, and distributes the funds to eurozone countries
• November 2010 -• €17.7 billion Ireland
• May 2011 • One third of the €78 billion package Portugal
• Second bailout • €164 billion (130bn new package plus 34.4bn
remaining from Greek Loan Facility) Greece
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European Financial Stabilisation Mechanism (EFSM)
• On 5 January 2011, the European Union created the European Financial Stabilisation Mechanism (EFSM), an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral.
• Authority to raise up to €60 billion• Like the EFSF, the EFSM was replaced by the permanent rescue funding
programme ESM (September 2012)
• 2010-2013• 22.4 billion eurosIreland
• 2011-2014• 26 billion eurosPortugal
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European Central
Bank
Reducing Volatility
Improving Liquidity
In May 2010 it took the following actions:• It began open market operations buying
government and private debt securities• It simultaneously absorbed the same amount
of liquidity to prevent a rise in inflation• It changed its policy regarding the necessary
credit rating for loan deposits, accepting as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating.
• It has cut its bank rates in multiple steps in 2012–2013, reaching an historic low of 0.25% in November 2013.
• Long Term Refinancing Operation (LTRO) - loaned €489 billion - 523 banks - three years – 1%.
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European Stability Mechanism (ESM)
• EFSF and EFSM were followed by permanent ESM in Sep 2012• Permanent firewall for the eurozone to safeguard and provide
instant access to financial assistance programs for member states
• Maximum lending capacity of €500 billion• All new bailouts for any eurozone member state will now be
covered by ESM
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European Fiscal Compact
Known as Fiscal Stability Treaty (1 January 2013)-
• Adopting an automatic procedure for imposing of penalties in case of breaches of either the 3% deficit or the 60% debt rules.
• New intergovernmental treaty to put strict caps on government spending and borrowing, with penalties for those countries who violate the limits.
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Economic reforms and recovery proposals
Direct loans to banks and banking regulation
Less austerity, more investment
Increase competitiveness
Address current account imbalances
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Increase competitiveness
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Address current account imbalances • The 2009 trade deficits for Italy, Spain, Greece, and Portugal were
estimated to be $42.96 billion, $75.31bn and $35.97bn, and $25.6bn respectively, while Germany's trade surplus was $188.6bn.
• devaluation, individual interest rates and capital controls are not available• Solution –
• reduce budget deficits• change consumption and savings habits• improve their exporting industries• Export driven countries with a large trade surplus, such as Germany, Austria and the
Netherlands would need to shift their economies more towards domestic services and increase wages to support domestic consumption.
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Proposed Long-term Solutions
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1. European Fiscal UnionIncreased European integration giving a central body increased control over the budgets of member states.2. European bank recovery and resolution authority• Proposed framework sets out the necessary steps
and powers to ensure that bank failures across the EU are managed in a way which avoids financial instability
• The member states will get the power to impose losses, resulting from a bank failure, on the bondholders to minimize costs for taxpayers
3. EurobondsThe Stability bonds issued jointly by 17 Euro nations, matched by tight financial and budget coordination, would be an effective way to tackle crisis4. European Monetary Fund• EMF would provide governments with fixed
interest rate Eurobonds at a rate slightly below medium-term economic growth
• Non-tradable but could be held by investors with the EMF and liquidated at any time
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5. Drastic debt write-off financed by wealth tax• To aim for an overall debt level well below 180 percent for the private and government sector• To reach sustainable levels the Eurozone must reduce its overall debt level by €6.1 trillion• This could be financed by a one-time wealth tax of between 11 and 30% for most countries,
apart from the crisis countries (particularly Ireland) where a write-off would have to be substantially higher
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