d

1. An Analysis of
the eurozone
financial crisis
EURO TO HERO

2. SUMMARY
• Formation of the eurozone
• Causes of the financial crisis
• Response of the ECB and governments
• Recommendations for the future

3. FORMATION OF EUROZONE
 1970s: Creation of the European Monetary System within the
European Community
 France/ German dynamic
 Early 1989: Delors Plan instigated by France
 Vague deadlines

4. TURMOIL BRINGS UNION
December 1989:
 Importance of uniting Germany to Europe
 Germany’s opposition and France’s concern
 Chancellor Kohl and President Mitterand agree on details of
Delors Plan at Strasbourg Summit – known at the Maastricht
Treaty

5.  Germany drags feet
 Slow process– “low levels of inflation, interest rates, and budget
defects”
 1990-1991: Maastricht Treaty final ized amid now-or-never
mentality
 I ronically, neither Kohl nor Mitterand were proficient in
economics.
DEVIL IN THE DETAILS

6. EMU REGULATIONS
 EMU Regulations Created
 Requirements regarding budget deficits, debt-to-GDP ratios, inflation,
and interest rates
 1997: Stability and Growth Pact enacted to continue these
 No sovereign bai louts (oh real ly?)

7. AND SO IT BEGINS
 1999: Currency implemented
 Initial implementation: 11 of 15 EU countries members
 2001: Greece joins
 2002: Currency begins circulating
 Greece and Italy do not achieve suf ficient debt -to-GDP level.

8.  EMU St ructure
HOW IT WORKS
 Common currency between countries
 European Central Bank charged with monetary policy
 Economic autonomy with caveat of Stability and Growth Pact

9. GLOBAL RECESSION STRIKES
 2 0 0 8 : Ho u s i n g B u b b le c o l l a ps e s ( t h a t ’ s a n ot h e r s to r y )
 Impact on Euro is dismal
 2009: Greece’s debt equals 113% of its GDP
 2010: Ireland receives bailout of 85 billion euros

10. WHAT HAPPENED?
 T h e P I IGS wr e c ked h avo c…
 PIIGS=Portugal, Ireland, Italy, Greece, and Spain
 Borrowing in their own currencies
 Interest rates compounded problems
 Rates converged at Germany’s (lower than other countries)
 Sovereign debt increases
 2008: Greece and Italy’s public debt as percent of GDP was 112.9
and 106.1

11. WHAT HAPPENED (CONT.)
 Germany saw an oppor tunity
 With low interest rates, the private sector was incentivized to
increase spending.
 2007: Ireland’s private sector debt 184.3% of GDP
 By 2010: Germany was the second largest creditor to Irish banks

12.  2010: ECB requires austerity measures af ter discovery that
Greece l ied about debt levels
 Austerity measures increase taxes and cut expenditures
 Decreased revenue
 A p r il 2 010 : B o nd s’ y i elds s o h i gh t h a t S t a nd a r d a n d Po o r
downgraded them to junk status
 G r e e c e ’ s b a n ks h a d a b o ut 2 5% o f G D P i n b o n ds
 2010: International Monetary Fund and eurozone announce
first bai lout for Greece
GREECE

13. MULTI-FACETED PROBLEM
 “ It is those countries that were borrowing (as opposed to
those whose governments were borrowing) that are currently
u n d e r a t t a c k” (Shambaugh).
 I taly and Greece (sovereign debt) ; Ireland and Spain were not
gui lty of this
 I nve s tme n t s “that had l ittle ef fect on future productivity
g rowt h ” (ie housing bubble) major problem.
 Revenue slowed, no liquidity (can’t print money, no profit)

14. ECB’S RESPONSE
 Austerity Measures--> stunted economic growth
 Bai louts to Greece, Por tugal, and Ireland
 Three-year loans if they implemented austerity measures and
structural reforms
 Banks invested in ECB bonds (not bad, just not fixing anything)
 ECB bought bonds from countries (especially I taly and Spain)
 Aimed at reducing bond yield
 Temporary Fix
 Current actions:
 Stress tests to determine assets
 ECB take over

15. WHAT SHOULD BE DONE?
 Option 1: Dissolve eurozone
 Not optimal
 Peripheral countries would lose 40-50% of GDP in first year alone
 Option 2: Remove Greece
 Run on banks (drachmas)

16. SUMMARY
 Eurozone is pol itically beneficial, economical ly disastrous
 Causes of the crisis are multi -faceted and debated
 Solution is not clear