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Eurozone crisis

  1. 1. Eurozone Crisis 1
  2. 2. Presenters 1. Priyamvada Jha(2749) 2. Ankita Deambi(27) 3. Shiffali Garg(2704) 4. Gurleen Kaur(2744) 5. Ranu Aggarwal(2745) 2
  3. 3. Outline The European Union Genesis of Euro Genesis of Crisis Remedies/Solutions 3
  4. 4. 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. 4
  5. 5. 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 5
  6. 6. Growth of the EU 6
  7. 7. 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 7
  8. 8. Euro-The Common Currency 8
  9. 9. Timeline of Euro 1990 1979 1969 9
  10. 10. 1992 Maastricht Treaty 1 Jan 1999 1 Jan 2002 10
  11. 11. 11
  12. 12. 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) 12
  13. 13. Convergence (or “Maastricht”) Criteria Price Stability (low inflation) Public finance discipline (low government debt and deficit) Interest rate convergence % Exchange rate stability 13
  14. 14. EU vs. Euro-zone Euro-zone European Union Economic & 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 14
  15. 15. Benefits of Single Market Increased competition  Lower prices  Wider choice of products and services  More jobs Easier travel More opportunities to live, work and study in other EU countries 15
  16. 16. Additional Benefits of Adopting Euro Price stability and security of purchasing power Elimination of transaction costs 1€ Price transparency across countries Elimination of exchange rate risks 1990 1997 2004 2€ Countries can no longer change their interest rate or their exchange rate. Countries could not have an independent monetary policy! 16
  17. 17. The Crisis 17
  18. 18. Before Crisis 18
  19. 19. Increasing Order of Destruction 19
  20. 20. 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 20
  21. 21. 21
  22. 22. 22
  23. 23. Greece Low interest rates and no limit High interest rates Upto a limit 23
  24. 24. Big Daddy 24
  25. 25. Tourism Defense Social welfare Schemes Greece High public sector wage and pension commitments 25
  26. 26. 26
  27. 27. Ireland Housing 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. 27
  28. 28. 28
  29. 29. 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 29
  30. 30. 30
  31. 31. 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. 31
  32. 32. 32
  33. 33. Remedies 33
  34. 34. 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 34
  35. 35. EU Emergency Measures Country Year Bailout Package Greece 2nd bailout by EC, ECB, IMF) February 2012 130-billion euros Spain June 2012 100-billion euros Cyprus April 2013 12.5-billion euros 35
  36. 36. 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 36
  37. 37. 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 euros Ireland • 2011-2014 • 26 billion euros Portugal 37
  38. 38. 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%. 38
  39. 39. 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 39
  40. 40. 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. 40
  41. 41. Economic reforms and recovery proposals Direct loans to banks and banking regulation Less austerity, more investment Increase competitiveness Address current account imbalances 41
  42. 42. Increase competitiveness 42
  43. 43. 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. 43
  44. 44. Proposed Long-term Solutions 44
  45. 45. 1. European Fiscal Union Increased 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. Eurobonds The Stability bonds issued jointly by 17 Euro nations, matched by tight financial and budget coordination, would be an effective way to tackle crisis 4. 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 45
  46. 46. 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 46
  47. 47. 47

Notas del editor

  • Troika, a tripartite committee formed by the European Commission, the European Central Bank and the International Monetary Fund

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