Will Germany be able to save the Euro zone

Adarsh Raj Baronia (2011013) Akash Gupta (2011021) Akash Sethia (2011022) Aman Saxena (2011027) Arpan Sharma (2011046)

 I fear German power less than... German inactivity".

-Radoslaw Sikorski (Polish Foreign Minister )

Introduction to Euro zone

Established through the Maastricht Treaty of 1993. Currently, it has 27 member countries. Members have to abide by the following criteria:
Budget deficit to be less than 3% of GDP Debt by GDP ratio to be less than 60%. Inflation rates should be low, close to EU average.

Seeds of the problem

The first two clauses were wildly floundered Greece had a budget deficit of over 13% ( reported was 6% - higher than the mandate) Gradually other members were caught having high Budget Deficits, namely, Portugal, Italy, Ireland and Spain.

The Problem
Troubled nations requiring bailouts from EU/IMF was inevitable. Greece was the first to get 110bn suppport. Following were Ireland and Portugal which got 85bn and 78bn respectively. Greece failed to meet these conditions of bailout and thus had to be given a further 159bn.

Country

GDP GDP ( Nominal) growth (%YOY)

Debt (% of GDP)

Budget Deficit (% of GDP)

CPI (Inflation) (%YOY)

10yr Yield

Germany France Italy Spain Ireland

3.3 Tn 2.5 tn 2 tn 1.4 tn 204 bn

2.7% 1.6% 0.8% 0.7% 0.1%

82% 86% 121% 67% 96.2%

3.3% 7% 4.6% 9.2% 32.4%

2.4% 1.9% 2.7% 3.1% 2.7%

2.15% 2.81% 4.97% 4.98% 9.2%

Portugal
Greece

229 bn
305 bn

-0.9%
-5.7%

106%
165%

9.1%
10.5%

3.2%
2.4%

10.44%
16.38%

Why should Germany save E.U.

If E.U. falls apart, all the members would return to their original currency. Since Germany will be one of the strongest economy in the erstwhile EU, the Deutsche Mark would appreciate. Being an export oriented nation, rise in DM would raise the prices of exports and this would hamper Germanys growth.

Contd
The creation of E.U. has made the exports for Germany easier because of free trade policy. If Greece and other suffering nations default, it will ultimately affect the whole E.U., inculcating Germany into the trap. Possible problems may also include falling of consumption and production, increase in unemployment, contraction of GDP of E.U. It is the moral responsibility of Germany to save members of its union.

Why is Germany reluctant to save EU

ECB would help only if more Bonds are issued. Germany doesnt want to increase debt burden upon it because of the defaulting countries. According to Munich economic Ifo Institute, Germany would risk loosing $560bn by helping PIIGS.

Our Analysis

Germany will save E.U !!!

Reasons
Since the inception of Euro, Germanys exports have moved from a deficit to huge surplus

Contd
Composition of Germanys export to E.U. was 60% of its total exports last year. If EU breaks away, Germany will not be able to freely trade with the countries. A latest news is that Germany has agreed to pump in $200bn through IMF with support from other non EU nations. To keep the confidence level of the investors intact to invest in their union.

Thank You