DIPLOMATIC ACADEMIC OF VIETNAM

INTERNATIONAL ECONOMIC FACULTY

IMPACT OF GREEK DEBT CRISIS ON EUROPE UNION ECONOMY

Group 17: 1. 2. 3. 4. 5. 6. 7. Nguyn Th Thy ng Th Thy Giang Trn Th Hi Nguyn Ngc Qunh Trnh Th Ngc Lng Th Ha Phm Th Nga KT37C01455 KT37C01177 KT37A01193 KT37C01534 KT37C01360 KT37C01552 KT37C01343

TABLE OF CONTENTS A.Introduction I.Overview Greek debt crisis and Europe economic 1.Greek public debt crisis 2.EU economic 1.1.Government budget 1.The impact on nations 1.2.GDP growth rate 1.3.The effect domino 2.1.Interest rate B.Contents II.Impact of Greek debt crisis on Europe economic 2.The impact on banks system

2.2.Exchange rate 2.3.The banks system in EU 3.1.Wage and pension policy

3. The impact on citizens

3.2.Unemployment

3.3. Social welfare 1.In the short - run 2. In the long - run C.Conclusion LIST OF ABBREVIATIONS

III.Solutions

ABBREVIATIONS GDP EU IMF ECB EFSF EFSM IMF

FULL PHRASE Gross Domestic Product European Union International Monetary Fund Europe Central Bank The European Financial Stability Fund The European Financial Stability Machanism International Monetary Fund

A.

Introduction

The debt crisis in Greece which not only affects to itself but also influences strongly almost countries in Europe area. It starts a Great Depression in Europe. Now, the EU debt crisis lasts nearly 3 years, the relief efforts and austerity program of governments arent still very effective. In Greece, budget deficit and debt government is biger and biger, the value of currency is decreased, finance market is affected, the unemployment rate is high. Banks system in EU is in crisis. Many banks have been bankrupted such as: Ireland, Spain, FrancePolitical and social problems are instable (special protests). Governments are tried to out with that status by packages. Greece is a small country in EU with a little GDP every year but the default of Greece has seriously effects to global economy. This is a lession for countries which has a developed growth economy. B. Contents I, Overview of Greek debt crisis and Europe economy 1. Greek public debt crisis
160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Greece EU

According to this chart, we can see that Greece always has debt to GDP ratio higher a lot than average ratio of European Union ( EU). Since 2000, ECB had expressed anxiety with Greeces public debt and emphasized that ratio exceeded regular ceiling ratio of EU (government debt to GDP ratio) according to EUs regulation is 60%. In fact, Greeces government debt had accelerated since 2003 when Greece made preparation for Olympic. However, Greece published untrue figures. And in 2008, Greek government debt crisis really started. In 2010, when debt to GDP ratio came up to 127,1%, more than double EU s permission, it was over Greeces control. Greece was very close to lost payment capability and the probability of its bankrupt was very high. An economics and social crisis had broken out in Greece. However Greece is a member of EU as well as Euro zone, so this crisis has impacted not only on Greeces economy but also on Europeans economy. It had made bad impacts on financial and monetary system. And in

2011, it impacted sharply on EUs economy and caused the most serious EU public debt crisis. 2. EU economy A timely piece of analysis from Philip Poole, head of global macro and investment strategy at HSBC, shows just what the European leaders are up against in terms of the size of the debts of countries in Europe relative to the size of their economies.

Chart: Eurozone debt crisis - a rising tide. (Source: HSBC) The chart shows the yield (interest rate) on German government bonds compared with Italian and Spanish government bonds structural problems with economies are concerning markets too. Spain, for instance, as a country might not have the "leverage" problem on the same scale as Italy, but the markets have focused on the debts of the private sector and the fact that much of its growth in the recent past has been generated by the construction sector. Poole considers three scenarios and assigns probabilities to them. Positive scenario (15% probability). The issuance of eurozone eurobonds to help fund the peripheral countries. Central scenario (70% probability). The European Financial Stability Fund (EFSF), Europe's bailout fund, is able to buy bonds and countries grudgingly implement austerity measures. Negative scenario (15% probability). A "messy, unilateral default" by Greece which would cause shocks through the financial system. Poole warns: All things considered, the 'solution' to the eurozone problem is likely to be a series of half measures coupled with a fiscal adjustment rather than a decisive decision that triggers the end of the crisis gripping the region.1
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http://www.guardian.co.uk/business/blog/2011/oct/17/europe-debt-hangover-alarm-bells

II, Impact of Greek debt crisis on Europe economy The debt crisis in Greece has been an issue in world financial markets since the end of 2009. In May 2010 Greece became the first euro-area country requesting a financial rescue from the European Union and International Monetary Fund worth 110 billion. Although it has been more than a year since the bailout, the public debt problem remained unresolved. The Greece crisis has also spread to other countries, namely Ireland and Portugal, which have also requested financial assistance from the EU and IMF in November 2010 and April 2011. This debt problem has become a significant risk to the world financial market and economic recovery. 1.The impact on nations Despite of owning only 2, 4% GDP of EU, Greek debt crisis had significant negative impact on EUs stability. Moreover, it creates consecutive reaction to other countries, especially mortgagee countries. We will analyze the impact of Greek debt crisis on EUs countries basing on three factors They are government budget, GDP growth rate and effect Domino with others. 1.1. Government budget With some countries held huge amount of Greek bonds, they stood for risk of losing all of ones when Greece was inability to pay their debt, which led to deficit in budget of mortgagees. Top 10 countries with the largest debt value directly to Greece

Source: Bank of International Settlement Clearly, France and other countries in EU are the most exposed of Greek government. Therefore, the impact from crisis in Greece with EU is unavoidable and understandable. According to scientists, estimating the loss of the French and German banks were approximately 56.9 and 23.8 billion USD, respectively. Government budget balance (% of GDP) from 1991 to 2012

Source: OECD (E: prediction) Overall, as seen from line chart, not only do budget of almost countries in Euro area witness a significant fluctuation from the year 1991 to 2012 but it also stay at negative numbers. Especially, Greece becomes nation which belongs to budget deficit the most seriously. It was noticeable thing that only in 2009 as a result of debt crisis did budget of Greece go down the bottom at about -16% of GDP, which led to a dramatic decrease of other ones such as Ireland, Spain and Portugal, even France. In conclusion, it is undeniable that other countries in EU area are affected seriously by Greeces recession, which is reason of associating in a region. It is also another drawback of regionalization. 1.2. GDP growth rate Only by being worried about a global crisis did care of investors incline strongly, which affected negatively to investment and consumption of company and citizen, even government. It led to a downward trend of EUs GDP growth rate. In addition, huge economies had to share a part of their financial source to support Greece in aid packages, which was consequence of decreasing growth their economy.

Chart: GDP growth rate in EU between 2007 and 2012 In general, as seeing from bar chart, EUs GDP growth rate always stays in low level, especially when Greek debt crisis happened, these numbers dropped down to the lowest point. Starting with the figure between 0, 4% and 0, 8% in 2008, 2009 witnessed a dramatic decline with disadvantage indicators, even -2, 5%, followed by an impressive recovery to positive number until the end of year 2010. After being continued to see spectacular picture in 2011, the index came back to bad point was -0, 3% for the first three months in 2012. Statistics 1 have shown that the Euro zone GDP growth rate stayed at 1, 6% and saw an unequal among the countries. In group of developed nations in EU, only German still kept its growth speed stably at 3%. Besides, while belonged to index less positive than German, British, France, Italia and Spain developed at following level, in order : 0,9%; 1,6%; 0,4% and 0,7%, the opposing were true with Greece (-7,5%) and Portugal (-1,7%). In a word, Greek crisis had negative effects to GDP of EU extremely. However, by dint of efforts of EU, it is believed that the situation is improved and recovered gradually. 1.3. The effect domino Greece is a small country in EU area, but some people worry about the effect Domino when it is broken the debt. Facts have shown that debt crisis spread to Portugal, Spain, Italy and Ireland, which is consequence of prime minister of Greece and Italy had to be resigned2

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http://www.tapchicongsan.org.vn/Home/The-gioi-van-de-su-kien/2012/15619/Nam-2012-kinh-te-EU-co-lacquan.aspx 2 http://www.zing.vn/news/the-gioi/10-nuoc-chau-au-co-nhieu-nguoi-tre-that-nghiep-nhat/a235646.html

Budget deficit and Government debt in 2010 (%GDP) Greece Ireland Italia Portugal Spain Budget deficit 10.5 32.4 4.6 9.1 9.2 Government debt 142.8 96.2 119 93 60.1 Source: TradingEconomics.com The table shows five nations in group of EU countries stay in the most serious status. To specify, Greece had the highest number in government debt, followed by Italy, Portugal and other countries with those number were 119; 96,2; 93; 60,1; respectively. Besides, looking at the figure of budget deficit, it is clear that Ireland belonged to the most seriously index at 32,4% of GDP. Other nations also had lower number than allowed level of Euro zone. It is predictable that they must be faced to slow growth economic in the next years. In order to reduce budget deficit and bring a stable trend for bank system, governments need to contract their expenditure. Facts have shown that not only were five nations above suffered by debt crisis but Romanian Government also become the sixth country of EU area was collapsed official on 6th February, 20121. Moreover, Netherland is standing for risk of collapse2, which leads to series of nations in EU area are affected by Greek debt crisis. Up to now, people can call this crisis is Europe public debt crisis because of its impact. 2.The impact on banks system 2.1. Interest rate In the Europe area, interest rate decisions are taken by the Governing council of the European central bank. ECB has the monopoly supplier of the monetary base and bank reserves3. That means ECBs interest rate policies influence commercial banks system in Europe directly.

Chart: ECBs interest rate between 1/2008 and 1/20121

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http://taichinh.vnexpress.net/tin-tuc/the-gioi-phang/2012/02/them-mot-chinh-phu-chau-au-sup-do-do-khunghoang-no-5454/ 2 http://laodong.com.vn/Kinh-te/Van-chua-het-thoi-gian-kho/61362.bld 3 http://www.tradingeconomics.com/euro-area/interest-rate

The chart shows the changing in ECBs interest rate policies between 1/2008 and 1/2012, especially in the peak of debt crisis. Generally, ECB maintains a low interest rate, it shows a tight interest policy by ECB. In early 2008, the interest rate was 4%. It was increased in the middle year (4,25%) but in the end of year the rate was decreased constantly (2,5%). During 2009, ECB regularly decreased the bank rate, in the end of the year the rate was 1%. ECB maintained the rate 1% during 2010. In 2011, the interest rate was usually changed. ASSESSMENT: Acording to ECB, based on regular economic and monetary analyses, they decided to keep the key ECB interest rate unchanged. Howerver, the signal of nations public debt in Euro zone in early 2008 influenced interest rate policies. Banking leaders had to change basic interest rate. In middle of 2008, there was a period of cutting rate because ECB feared of economic recession in area. ECB had maintained the interest rate near 0% for a long time. The spread of public debt in area, especially in Greek was the reason of this changing. In 2011, the interest rate was increased from 0,25 to 0,5%, this could influence the European economy. Inconclusion, Greek debt crisis has negatively impacted on banks system in Euro zone. ECB has changed the interest rate policies which has unchanged for a long time to stable the economy. 2.2 Exchange rate The same with changing in interest rate policies, the EUR exchange rate was fluctuated clearly. Before the debt crisis was getting worse, Euro was a strong currency. Overall, when the debt crisis was spreading, the Euro exchange rate decreased and the euro value is declined, too.

Chart: The exchange rate between EUR and USD from 1/2008 to 1/20121
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http://www.tradingeconomics.com/euro-area/currency

The chart shows the changing constantly in EUR exchange rate. In 2008, the exchange rate was 1,6. Howerver, this rate was decreased day by day and increased a little at the end. During ECB took interest rate near 0% policy, the exchange rate was fluctuated continuously but it was maintained at low rate. This follow table would show clearly the decreasing in Euro valuation1: This decreasing in Euro valuation made people transfer holding USD. As you can see, the highest exchange rate is 1,599 (1,6) in 2008. Lowest Date Rate 200 0 200 1 200 2 200 3 200 4 200 5 200 6 200 7 200 8 200 9 26/1 $0.825 0 2 06/0 $0.838 7 4 28/0 $0.857 1 8 08/0 $1.037 1 7 14/0 $1.180 5 2 15/1 $1.166 1 7 02/0 $1.182 1 6 12/0 $1.289 1 3 27/1 $1.246 0 0 04/0 $1.255 3 5 Highest Date Rate 06/0 $1.0388 1 05/0 $0.9545 1 31/1 $1.0487 2 31/1 $1.2630 2 28/1 $1.3633 2 03/0 $1.3507 1 05/1 $1.3331 2 27/1 $1.4874 1 15/0 $1.5990 7 03/1 $1.5120 2

201 05/0 $1.292 13/0 $1.4563 0 5 4 1 In conclusion, the euro is going through hard time since its inception while the debt crisis and economic recession is continuing unpredictable. Howerver, in a
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Euro exchange rates in USD, ECB

otherhand, this is an oppurtunity to experience the advantages of the Euro and ECBs policies. 2.3. The banks system in EU

Chart: Global Debt Crisis-Country % Risk of Bankruptcy (2010)1 The chart shows that countries in EU have the biggest risk of going bankrupt. They are Ireland (about 42,5%) or Greece (about 31%). Belgium, Portugal, UK, Spain and France have high rate, too. The reason of this crisis is lending to EUs countries for government expenditures. After that, when these coutries defaulted, banks had to hold governments bonds in Euro zone for payments. To sum up, the above graph clearly illustrates that impacts of Greek debt crisis on EUs economy are deep. The collapse of the banks system in Euro zone shows that the global depression might not be recovered yet. 3. The impact on citizens 3.1. Wage and pension policy Not only Greece but also all the major European countries are facing pension deficits. It is a very difficult challenge. EU faces to the risk of the pension crisis: The difficulties in the debt crisis in Europe is not promptly resolved, this old continent must suffer a "new whipping." It is a sign of a pension crisis which can appear in the countries having so big public debts.2 At the end of 2010, pension funds of the EU are 1,900 billion euro deficit. Specifically, the lack of British pension funds are 379 billion euros, equivalent to 26% of GDP, this is also the largest fund in the EU. Followed by the funds of the German and Spanish with a deficit equivalent to 24% and 18% of GDP. With this situation, the workers in the EU must face to spending for old age by selling their
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www.marketoracle.co.uk http://www.cand.com.vn/News/PrintView.aspx?ID=169308

homes or accept reducing quality of life. Now, according to new research published by the European Central Bank (ECB), the total amount of pension EU 19 countries have to pay 5 times higher of their total debt. In Greece, cuts and austerity measures have driven more than one out of four (27.7%) citizens under the poverty line (according to data from the European statistics office). Policy measures have included 150,000 public sector lay-offs,an taxing of pensions for many public employees and a 22% reduction in the national minimum wage. Political and social instability Greece as well as other countries in EU have conducted austerity policies. So, this action has sparked waves of protests in the region and increased social unrest. For example, the draft of Greece delayed salaries for civil servants or applied more taxes makes wave of strong protests. Now, not only international markets but also Greek have no belief in the Greece government. In Europe, the conflict broke out on the street, workers demanded the wide retirement policy while government decreased pensions and increases retirement age. 3.2 . Unemployment Besides being hard to give consecutively bailout package of up to 300 billion euros to solve debt crisis for Greece, Portugal, Ireland, now the EU leaders suffer high pressure when unemployment rate in the area reached a record since 15 years.

Chart 1: The euro area unemployment rate from 1/2010 to 3/2012 The charts show that:1 Unemployment rate changes over time. Its fluctuation is unpredictable: - It decreased from January 2011 to April 2011 (10% to 9.9%) - From September 2011 to March 2012, it has increased sharply (10.2% to 10.9%)
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http://www.tradingeconomics.com/euro-area/unemployment-rate

 The rise in unemployment in Europe is said to be the direct result of the

"austerity" policy in many countries in the region are used to solve debts. Among the Member States, the lowest unemployment rates were recorded in Austria (4.0%), the Netherlands (5.0%), Luxembourg (5.2%) and Germany (5.6%), and the highest in Spain (24.1%) and Greece (21.7% in January 2012). High unemployment rate has bad impact on the economy in Europe, especially the unemployment problem of youth is very serious. In the case of Greece, according to Eurostat, the number of unemployed people, meanwhile, equates to an average rate of about 20 per cent across the population and among youth (under 25), close to 50 percent.1 3.3. Social welfare Europe is an area which combines high living standards with high standards of social welfare. The trouble is, such spending is helping to bankrupt governmentsnot least because those very same caring policies ensure that Europeans live longer, requiring more expenditure on health care and the payment of pensions for more years. However, the debt crisis in Greece has forced some countries in Eurpope to cut welfare programs to limit spending. It has affected the social benefits that European citizens are entitled. For those who are unemployed, the social welfare is the piece of rice, clothing them. Cut social welfare means that they must cut consumption. Most European countries are under severe budget deficit. Social welfare system of the continent is so bad. Many countries in Europe area were conducted cut spending policies. Germany will decide the budget for at least 3 billion euros, equivalent to USD 3.75 billion. The German government will first decide to reduce unemployment allowance. British government announced to reduce $ 8.6 billion of public spending, mainly salaries those working in government and some other costs. The British Government is committed to raising the age to receive allowance of the state, from 60 to 65 for women and from 65 to 66 for men. The UK government announced it would narrow the welfare system. In addition, tax credits for children and birth bonuses also cut. In conclusion, Greek debt crisis impacts on citizens on many aspects and make citizens life worse. So, European leaders need to review the financial policies for the region to give effective solutions to the problem of debt crisis. III, EUs solutions 1.In the short run a. The European Financial Stability Facility (EFSF)

http://eurodad.org/archives/1128313)

Creating EFSF on 9 May 2010. The EFSFs mandate is to safeguard financial stability in Europe by providing financial assistance to members in Euro zone. To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets. EFSF is backed by guarantee commitments from the euro area Member States for a total of 780 billion euros and has a lending capacity of 440 billion euros.1 b. The European Financial Stabilisation Mechanism (EFSM) EFSM is 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. c. Treaty of Brussels According to this treaty, 17 countries in eurozone agreed to delete 50% debt for Greece by the bailout package of EFSF. d. Intervention of ECB - Receiving governmental and private debt up to 200 billion euros by the end of October, 2011 - Announcing the plan for distribution of activities refinancing in the long term. - Restarting swap contracts for dollar with the support of Fed2. In the short run, bailout packages have been given to implement these measures. All the countries received the EUs bailout packages have to pass the austerity. In detail: Country Bailout package (billion euros) Time to pass 110 May, 2010 Greece 130 February, 2012 Portugal 78 May, 2011 Ireland 85 November, 2010 - Greece: Firstly, it is a bailout worth 110 billion euro. This programme will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece. The second bailout package for Greece was approved by Europes finance ministers after negotiations in February, 2012 in Brussels. Greece was loaned 130 billion euros (170 billion dollars). - Ireland: The Eurogroup and the EU's Council of Economics and Finance Ministers decided on 28 November 2010 to grant financial assistance in response to the Irish
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http://www.efsf.europa.eu/about/index.htm http://www.tapchicongsan.org.vn/Home/The-gioi-van-de-su-kien/2012/15575/Dong-Euro-va-cuoc-khung-hoangno-cong-chau-Au.aspx

authorities request. The financial package will cover financing needs up to 85 billion. The EU will provide up to 22.5 billion through the EFSM and the EFSF up to 17.7 billion over 2011 and 2012. - Portugal: Following the formal request for financial assistance made on 7 April by the Portuguese authorities, the terms and conditions of the financial assistance package were agreed by the Eurogroup and the EUs Council of Economics and Finance Ministers on 17 May 2011. The financial package will cover Portugals financing needs of up to 78 billion. Through the EFSM and the EFSF, the European Union will each provide up to 26 billions to be disbursed over 3 years. Further support will be made available through the IMF for up to 26 billion, as approved by the IMF Executive Board on 20 May.1 2.In the long run2 a. European fiscal union Germany, France and other countries have taken another step in the establishment European fiscal union in Eurozone, with mechanisms of tight fiscal control and punish with the members of the European. England is not agree to. b. European bonds On 21 - 10 2011, The European Commission proposed European bonds for 17 countries in Eurozone, this was an effective way to solve the current crisis. However, according to Mr. Jose Manuel Barroso, the plan had to be attached with closely monitor systems and coordinate economic policy avoid consequences of political decisions hurt little voice countries as well as ensuring sustainable public finances. c. European stability mechanism That is a long-term bailout fund after European Financial Stability Facility (EFSF) and European Financial Stabilisation Mechanismin (EFSM). ESM is expected operation in July,2012 d. European monetary fund3 That is converted into European Financial Stability Facility, include supply interest rate lower than levels of economic growth for government bonds in the medium term C. Conclusion
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http://www.efsf.europa.eu/mediacentre/news/2011/2011-010-efsf-places-3-billion-bond-in-support-ofportugal.htm 2 http://dangcongsan.vn/cpv/Modules/News/NewsDetail.aspx?co_id=30127&cn_id=502449
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http://www.tapchicongsan.org.vn/Home/The-gioi-van-de-su-kien/2012/15575/Dong-Euro-va-cuoc-khung-hoangno-cong-chau-Au.aspx

The Greek debt crisis has been the beginning of the debt crisis in EU and in the world. This crisis has significantly impacted to the European Unions economy. To save the EUs economy especially economy of some countries with large public debt such as Greece, Ireland and Portugal, the authorities of European Union and its member have passed some measures as the austerity and cutting-down interest rate. Although there are still numerous difficulties, the status of EU has been improved.

Reference:
www.nytimes.com www.tapchicongsan.org.vn www.bbc.co.uk www.eubusiness.com www.tradingeconomics.com www.marketoracle.co.uk www.laodong.com www.vnexpress.com ASSESSMENT MEMBERS OF GROUP: 1. 2. 3. 4. 5. 6. 7. Member Nguyn Th Thy ng Th Thy Giang Trn Th Hi Nguyn Ngc Qunh Trnh Th Ngc Lng Th Ha Phm Th Nga Assignments B.II.2 + summing up B.II.1 + making slide B.II.3 + summing up B.III + C B.III + C B.I.2 B.I.1 + A Scored