Great Lakes Economics Club Debate on "Euro Zone Crisis"

1. Euro Crisis
Great Lakes Institute of Management (Chennai)
GLECONOMICS Club

2. The European Union
• Shared values: liberty, democracy, respect
for human rights and fundamental
27 Member States
freedoms, and the rule of law.
• Largest economic body in the world.
Combined
population of 490 • World’s most successful model for
EU Member advancing peace and democracy.
States million
• A unique institution – Member States
Percent of world’s voluntarily cede national sovereignty in
7 population many areas to carry out common policies
and governance.
Percent of
global GDP 30 • Not a super-state to replace existing states,
nor just an organization for international
Percent of combined cooperation.
55 worldwide Official
Development Assistance • World’s most open market for goods and
commodities from developing countries.

3. Timeline
• 1951 – European Coal and Steel Community
• Early 1950’s – EDC and EPC
• 1957 – Treaty of Rome – EEC and Euratom
• 1967 – EEC, Euratom and ESCC merged into EU
• 1989 – Fall of Berlin Wall, set the stage for unifying Europe and
EU enlargement

4. Why EU formed
War experience:
- 25 million people died in WW-I and 40 million died in WW-II
- EU formed to prevent Germany from regaining military might as
well as future Europe-wide conflicts
- put war-making industries (coal and iron) under international
control
- constrain nationalism through web of political rules
Cold War:
- end of Western European great powers, imperial rivalries in Africa,
South America, and Asia
- formed EU to unite against rising Soviet threat
- US was main catalyst of EU formation because they wanted a
strong Europe next to the USSR
Economic Benefits:
a. Comparative advantage
b. Economies of scale
c. Bargaining power

5. EU Institutions
European Commission European Parliament
• EU’s executive branch proposes • Voice of European citizens –
legislation, manages Union’s day- members elected for
to-day business and budget, and five-year terms.
enforces rules.
• With the Council, passes EU laws
• Negotiates trade agreements and
and adopts EU budgets.
manages Europe’s multilateral
development cooperation. • Approves EU Commissioners.
Council of the European Union European Court of Justice
• EU’s main decision-making body, • Highest EU judicial authority.
comprised of ministers of 27 • Ensures all EU laws are
Member States, representing interpreted and applied correctly
Member State’s point of view. and uniformly.
• Decides on foreign policy issues. • the ECJ can only deal with matters
covered by the Treaties.

6. European Commercial BANK
The European Central Bank (ECB) is
the central bank for Europe's single
currency, the euro.
The ECB’s main task is to maintain
the euro's purchasing power and
thus price stability in the euro area.
The euro area comprises the 15
European Union countries that have
introduced the euro since 1999. The euro was introduced in 1999
The ECB operates independently
from Member State governments.

7. Euro Zone
It is defined as economic,
monetary and geographic union of
17 member EU countries who
have accepted Euro as common
currency after satisfying entry
criteria

8. Why Eurozone was formed
• Convergence than confrontation
• Compete with Mighty US dollar
• Ease of trade

9. Entry Criteria
• Maastricht treaty – 1992 – to bring price stability
– Inflation rates < 1.5 (avg. of 3 best performing EU
countries)
– Govt. deficit to GDP should not exceed 3%
– Gross govt. debt to GDP should not exceed 60%
(Germany and France violated this rule)
– Applicant country must have joined the Exchange rate
mechanism under EMS
– Long term interest rate must not be more than 2%
• Copenhagen Treaty – 1993 – to preserve democratic
governance and human rights
– Political – democracy, rule of law, human rights and
respect for minority countries
– Economic – functioning marktet economy
– Legislative – legal laws in unison with EU laws

10. Agriculture
• France benefitting the most from Common Agriculture Policy
which provides agricultural subsidies whereas UK opposed to it
as it does away its competitive advantage, hence uses annual
UK Rebate to subsidize further.
• Tourism
• France- world's number one tourist destination followed by
Spain, Italy & UK.
• The enlargement was "a gift" for the Baltic States leading to
increased international travellers, overnight stays and rural
tourism development.
•New company Formation
• The low labour costs in Poland helps the bottom line, while the
sustained 5% annual growth guarantees market expansion.
• Right next door in Lithuania, friendly tax rates are the main
attractant, with their 15% corporate tax schedule among the
lowest in the EU.

11. Reduced administrative hurdles
• Dutch companies have saved the most due to reduced overall
administrative hurdles resulting from EU formation.

12. General Drawback for the EU as a
whole
• Optimal currency theory first posed by American Robert Mundell in
1961, in order for a single currency to succeed in a multinational area
several conditions must be met.
 No barriers to the movement of labor forces across national,cultural, or
linguistic borders within the single-currency area.
 wage stability throughout the single currency area.
 Area-wide system to stabilize imbalanced transfers of labor, goods, or capital
within the single-currency area.
• These conditions do not exist in present-day Europe particularly
between those in the West and in the East.
• The challenges faced by the Economic and Monetary Union (EMU)
countries are far more complex than the current sole focus on sovereign
debt suggests.
• Many internal factors such as a political consensus in favour of wide-
ranging economic reforms, the structure of the debt, the quality of the
financing and, above all, the economic policy lessons learned from the
crisis (concrete form of the austerity measures and reforms) diverge
considerably from country to country.

13. •Unemployment
• Highest in Greece and lowest in Austria.
• The countries within the EU which were most affected were
Spain, Ireland and the Baltic countries with the unemployment
rate doubling or in case of the Baltic countries nearly tripling.

14. Greece

15. Before Entering Euro
• In Greece the banks didn’t sink the country. The country sank the
banks.
• In the 1980’s and 1990’s Greece were considered far less likely to
repay their loans.
• In late 1990’s they had a chance to get rid of their currency.
• In 2000, after a flurry of statistical manipulation, Greece hit the
targets.
• Greek-government statisticians did things like remove (high-priced)
tomatoes from the consumer price index on the day inflation was
measured.

16. After Entering Euro
• Greeks could now borrow long-term funds at roughly
the same rate as Germans—not 18 percent but 5
percent.
• In 2001, entered Goldman Sachs, he investment
bankers also taught the Greek-government officials
how to securitize future receipts from the national
lottery, highway tolls, airport landing fees, and even
funds granted to the country by the European Union.
• For these trades Goldman Sachs—which, in effect,
handed Greece a $1 billion loan—carved out a reported
$300 million in fees. Inside Greece there was no
market for whistle-blowing, as basically everyone was
in on the racket.

17. After Entering Euro…….
• In just the past decade the wage bill of the Greek public
sector has doubled.
• The average government job pays almost three times the
average private-sector job.
• The Greek public-school system is the site of
breathtaking inefficiency: one of the lowest-ranked
systems in Europe, it nonetheless employs four times as
many teachers per pupil as the highest-ranked,
Finland’s.
• As a result of inefficiency, Greek goods have become
increasingly expensive and uncompetitive, causing loss
of market share and further reducing revenues.

18. The Scandal
• Votapaidi Monastery Affair
• They basically are Greek Cypriot Monks

19. Truth comes out………
The Greek government had estimated its 2009 budget deficit at 3.7
percent. Two weeks later that number was revised upward to 12.5
percent and actually turned out to be nearly 14 percent.
A projected deficit of roughly 7 billion euros was actually more than
30 billion. They had no Congressional Budget Office and no
independent statistical service.

20. The reality………….
• The structure of the Greek economy is collectivist, but the
country, in spirit, is the opposite of a collective. Its real
structure is every man for himself. Into this system investors
had poured hundreds of billions of dollars. And the credit
boom had pushed the country over the edge, into total moral
collapse.
• Steps taken-----
• IMF and EU agreed to lend Greece up to $146 billion over
three years.
• Greece to increase sales taxes, reduce public sector salaries,
pensions, eliminate bonuses.

21. Spain

22. A Brief Overview of the Spanish Economy
 Spain’s mixed capitalist economy saw the fastest economic
development in Western Europe since the 1960’s
 Tourism, agriculture, industry, trade were the dominant players in
the country’s economy
 Much of its growth was dominated by the housing bubble
 Many of the new jobs created were restricted to low wage, low-
productivity parts of the economy
 The economy attracted significant amounts of foreign investments

23. How it all happened for Spain
 As Spain’s economy was rising rapidly before 2008, its debt-to-GDP
ratio was falling sharply
 When Spain joined the Euro the Spanish Government resisted the
lure of cheap loans but most ordinary Spaniards and its banks did
not
 The country experienced a long boom, underpinned by a housing
bubble, as Spanish households took on bigger and bigger
mortgages
 The economy which grew 3.7% per year on average from 1999 to
2007, has shrunk at an annual rate of 1% since then.

24. Repercussions
 Real estate prices have dropped significantly (by 25%)
 The banking sector is highly indebted. Bankia, the country’s 4th
largest bank, recently asked for a 19 bn Euro bailout
 1 in 4 Spaniards are in risk of poverty or social exclusion
 Spain’s unemployment rate has become the highest in the EU
zone post the crisis - 24.3% (total) and 51.5% (youth)
 Spanish banks have 155.84bn euros of loans at risk of not being
repaid

25. Reasons why Spain might be the 1st to
exit the Euro Zone
 Spain’s economy is too big to be rescued
 Spain is tired of austerity already
 Spain has a real economy. Its export to GDP ratio is 26%, similar
to the U.K, France or Italy
 Spain is politically secure
 Spain has bigger horizons. It can look to global markets rather
than constraining itself to European markets only

26. Republic of Ireland

27. Origin
• Eurozone is monetary union but not fiscal union
• Differences in economies and their fiscal policies lead to
crisis
• Irish economy expanded rapidly from 1994-2007 because of
low corporate tax, low ECB interest rates etc.
• ISE went down from 10,000 points in April 2007 to 1,987
points in Feb., 2009 (a 14 year low).
• Reasons for Ireland is same as that of Greece i.e., property
bubble burst, effect of 2008 Economic crisis, ever increasing
debt  Asset-liability mismatch.

28. The Recession
• In September 2008, Ireland has been announced to be
under recession. It is the first country to enter
recession in Eurozone
• Emergency budget 2008 - Withdrawal of HPV
vaccines, medical cards, university fees, closure of
military barracks in the northern border
• Political turmoil and many protests. About 120000
people protested against pension levies, layoffs
• Government debt increased, businesses closed,
unemployment increased
• On April 2011, Moody’s downgraded Irish bank’s debt
as Junk
• The debt to GDP ratio of Ireland is

29. The impact
• Anglo Irish bank – Hidden loan
controversy and illiquidity
• Economic contraction and
unemployment
• Property market slump
• Emigration
• Political unrest and recession

30. The rescue plans
• Austerity plans of the Government are met
with protests and political coups
• November 21, 2010 Ireland formally
requested support from EFSF and IMF
• On November 28, 2010 85 bn euros
rescue package *doubt*
• Ireland might need a second bailout

31. Italy

32. About
 Italy is the world's 7th largest exporter of goods.
 It exports most of its products.
 Southern Italy : less developed, high unemployment.
 Italy supported the US-led invasion of Iraq in 2003 , causing dismay
amongst some members. Which was opposed by France
and Germany placing strain upon relations between member states.
• The famous 4 Fs: Food, Furniture, Fashion and Ferrari.
• Italy accounts for 16.8 per cent of eurozone GDP, behind Germany
and France in importance, compared with 2.3 per cent for Greece.

33. REASONS
• Starting in 2001, Italy's GDP growth turned absolutely
paltry, which was managing the large debt since long
time.
• Productivity: International Monetary Fund found that
compared to other euro zone countries, Italy suffered
from excessive regulation and a dearth of R&D
spending. Another reason was weak labour laws.
• South region: Unemployment, crime, and black market
labour are also concentrated in the South. GDP per
capita in the North and centre is more than 40% higher
than the south.

34. EURO CRISIS
• Italy's debts now top $2.2tn, or 120% of gross domestic
product.
• Hit hard by rising borrowing costs on its government debt
• Interest rates on its sovereign debt surging well above
seven per cent, there is a rising risk that Italy may soon
lose market access.
• It is too-big-to-fail but also too-big-to-save, this could
lead to a forced restructuring of its huge public debt

35. What next
 Their tourism industry is expected to grow in the next five
years because they’re bringing travellers from emerging
markets.
 Italy will offer up to 3 billion Euros of zero-coupon bonds and
up to 750 million Euros of bonds linked to euro zone inflation at
its regular end-month auction on Aug. 28,
 Italian PM Mario Monti is urging Berlin to present a "clear
action plan to achieve a democratic, federally structured
Europe”.
 A large part of Europe would find itself having to continue to
put up with very high interest rates, that would then impact on
the states, and also indirectly on firms
 Which is the direct opposite of what is needed for economic
growth.

36. What next
 Berlin has strenuously opposed the issue of joint
debt, or Eurobonds : as their cost of borrowing
would increase.
 Italian PM Mario Monti, said that Italy needs no
assistance of any kind.
 But if Italian economy slows down any further, it
would not be able to maintain its massive debt
burden on its own
 Monti suggests to buy up countries' debt on the
open market and reduce borrowing costs for Spain
and Italy

37. Impact of crisis on India

38. FDI Spread
Further in Euro Zone, distress countries contributed to India’s
GDP only marginally, Italy (0.7%), Spain (0.6%) and Greece 0%.
Together the contribute a marginal share of 1.3% to India’s
FDI’s flows

39. FII
The share of India’s FII in
the emerging and
developing markets has
declined from 19.25 in
2010 to 3.8 % in 2011.

40. India’s exports are
well diversified
across countries.
The share of PIGS
countries is quite
low at around 3%
and will not directly
have an impact on
our growth
prospects in
exports.

41. Positive correlation between India’s exports
and world economic activities except
2006 and 2007

42. Impact on India