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Euro Crisis

Great Lakes Institute of Management (Chennai) GLECONOMICS Club

The European Union

27

Member States

Shared values: liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law. Largest economic body in the world. Worlds most successful model for advancing peace and democracy. A unique institution Member States voluntarily cede national sovereignty in many areas to carry out common policies and governance. Not a super-state to replace existing states, nor just an organization for international cooperation. Worlds most open market for goods and commodities from developing countries.

Combined population of EU Member States

490
million

Percent of worlds population Percent of global GDP

30

55

Percent of combined worldwide Official Development Assistance

Timeline
1951 European Coal and Steel Community Early 1950s 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

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

EU Institutions
European Commission EUs executive branch proposes legislation, manages Unions day-to-day business and budget, and enforces rules. Negotiates trade agreements and manages Europes multilateral development cooperation.
European Parliament Voice of European citizens members elected for five-year terms. With the Council, passes EU laws and adopts EU budgets. Approves EU Commissioners.

European Court of Justice Highest EU judicial authority. Ensures all EU laws are interpreted and applied correctly and uniformly. the ECJ can only deal with matters covered by the Treaties.

Council of the European Union


EUs main decision-making body, comprised of ministers of 27 Member States,

European Commercial BANK


The European Central Bank (ECB) is the central bank for Europe's single currency, the euro. The ECBs 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 ECB operates independently from Member State governments.

The euro was introduced in 1999

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.

Reduced administrative hurdles


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

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 wideranging 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.

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.

Greece

Before Entering Euro


In Greece the banks didnt sink the country. The country sank the banks. In the 1980s and 1990s Greece were considered far less likely to repay their loans. In late 1990s 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.

After Entering Euro


Greeks could now borrow long-term funds at roughly the same rate as Germansnot 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 Sachswhich, in effect, handed Greece a $1 billion loancarved out a reported $300 million in fees. Inside Greece there was no market for whistle-blowing, as basically everyone was in on the racket.

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, Finlands. As a result of inefficiency, Greek goods have become increasingly expensive and uncompetitive, causing loss of market share and further reducing revenues.

The Scandal
Votapaidi Monastery Affair They basically are Greek Cypriot Monks

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.

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.

Spain

A Brief Overview of the Spanish Economy


Spains mixed capitalist economy saw the fastest economic development in Western Europe since the 1960s Tourism, agriculture, industry, trade were the dominant players in the countrys economy Much of its growth was dominated by the housing bubble Many of the new jobs created were restricted to low wage, lowproductivity parts of the economy The economy attracted significant amounts of foreign investments

How it all happened for Spain


As Spains 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.

Repercussions
Real estate prices have dropped significantly (by 25%) The banking sector is highly indebted. Bankia, the countrys 4th largest bank, recently asked for a 19 bn Euro bailout 1 in 4 Spaniards are in risk of poverty or social exclusion Spains 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

Reasons why Spain might be the 1st to exit the Euro Zone
Spains 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

Republic of Ireland

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.

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, Moodys downgraded Irish banks debt as Junk The debt to GDP ratio of Ireland is

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

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

Italy

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.

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.

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

What next
Their tourism industry is expected to grow in the next five years because theyre 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.

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

Impact of crisis on India

FDI Spread

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

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

Indias 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.

Positive correlation between Indias exports and world economic activities except 2006 and 2007

Impact on India