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  • 1. Group 5
  • 2. • Eurozone is an economic and monetary union (EMU) of 17 European Union(EU) member states that have adopted the euro (€) as their common currency.• Convergence criteria for joining the Euro –  Stable prices  Stable exchange rate  Sound government finances  Low interest rates• Greece was accepted into the Economic and Monetary Union by the European Council on 19th June 2000.
  • 3.  Greece has a capitalist economy with the public sector accounting for about 40% of GDP and with per capita GDP about two-thirds that of the leading euro-zone economies. The Greek economy grew by nearly 4.0% per year between 2003 and 2007. The economy went into recession in 2009 as a result of the world financial crisis, tightening credit conditions, and Athens failure to address a growing budget deficit. The economy contracted by 2% in 2009, and 4.8% in 2010.
  • 4.  Between 2001 and 2008, Greece’s government borrowed heavily from abroad to fund substantial government budget and current account deficits. Greece’s reported budget deficits averaged 5% per year, compared to a Eurozone average of 2%, and current account deficits averaged 9% per year, compared to a Eurozone average of 1%. Greece funded these twin deficits by borrowing in international capital markets, leaving it with a chronically high external debt (116% of GDP in 2009).
  • 5.  Government spending increased by 87% whereas revenues increased by 31%. Public spending soared and public sector wages practically doubled in the past decade. It has more than 340bn euros of debt - for a country of 11 million people, about 31,000 euros per person. Whilst money has flowed out of the governments coffers, its income has been hit by widespread tax evasion. It was given 110bn euros of bailout loans in May 2010 to help it get through the crisis - and then in July 2011
  • 6.  Greece is facing sovereign debt crisis since it accumulated high levels of debt during the decade before the financial crisis when the market was highly liquid. As the crisis got deepened, there was a liquidity crunch in the world economy thereby making borrowings difficult as well as expensive and thereby improper debt repayments on time. Reasons  High Government Spending and Weak Government Revenues  Structural Policies and Declining International Competitiveness  Increased Access to Capital at Low Interest Rates
  • 7. Greece has a GDP of US$ 310.365 billion (2010 estimate).
  • 8. Country 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010Greece 3 3.8 3.5 4.7 3.7 3.7 4.2 4 2.9 -2 -4.5
  • 9.  Impact on GDP growth Impact on Consumer Price Inflation Impact on Budget revenues
  • 10.  Inflation as on November 2011- 2.93%.
  • 11.  Larger foreign investments during 60s and 70s higher growth rates. In mid 70s higher labour costs and oil prices poor GDP growth rate and productivity. After joining EU, intially inflation rose because of removal of removal of protective barriers and expansionary policies . However, later it decreased dur to fiscal consolidation, wage restriction and strict Drachma policies .
  • 12.  Increasing government debt Increase in government spending(G) Increase in aggregate demand and shift of IS curve to the right. Shift of IS curve to the right Increase in i* and Y*. Increase in i* Crowding out effect if G is not accompanied by increasing tax rate (t). Crowding out effect can be reduced if LM curve is relatively flat. Thus IS-LM analysis shows the flaw in increase in G alone as a way to stimulate the economy.
  • 13.  Further rise in i Increase in 10 yr bond yield spread of Greece . High bond spread decline in investor confidence in greek economy. This is because higher i high perceived riskiness by investors demand for higher yields higher borrowing costs for government further fiscal strain on the economy. This forms a vicious circle.
  • 14. Greece reported a current account deficit equivalent to1097 Million EUR in September of 2011. Greeceremains a net importer of industrial and capitalgoods, foodstuffs and petroleum. The trade withEuropean Union countries ( Germany, Italy, U.K. )accounts for 65% of Greek trade.
  • 15.  Total (gross) inflows of foreign investment capital increased in 2010 by 4.96%. Net inflows of foreign investment capitals during the same year decreased by 5.82%. Inflows fell in 2009-10 but were higher than during 2003-05. In 2010, ratio of FDI in productive categories to that in M&A improved significantly.
  • 16.  This inflow in the form of loans reflects the confidence of foreign investors for investment in Greece. There exists a difference between total and net FDI inflows in 2010 because of repayment of loans to parent companies and expansion capital. This indicates the countries role as an investment springboard. Reforms and reduction of cost of production due to crisis created investment opportunities.
  • 17.  The debt-GDP ratio – 144% Plans to cut spending further without imposing new taxes. Salaries and pensions have been slashed. First bailout package of $147 billion in May 2010 prevented bankruptcy. Second deal of $174 billion in October 2011 forgives about about 50% of greece overall debt.
  • 18.  Deep cuts in public spending. Raised VAT from 19% to 23%. Increased taxes on fuel, tobacco, liquor and luxury goods. Structural reforms.
  • 19. US economy Scenario 1: Mild eurozone recession would lower US GDP growth by .1 to .2 % point in first half of 2012. Scenario 2: Financial meltdown would lower US GDP growth by 2.05% points in 2012 and by 2.77% points In 2013 and cause deflation and rise in unemployment figures.
  • 20. Indian economy Negative impact on foreign trade Loss of revenue and jobs in export oriented industries. If European contagion leads to global slowdown it will impact India’s trade with other nation also. This can translate into lower domestic demand.
  • 21. CONS Default can expose French and German banks to huge debt causing credit lockdown. The Eurozone partners would be reluctant to fund the Greece debt. Further, the contagion effect can spread the crisis to other peripheral economies. Hence the need to contain it. Higher prices for imported goods and lower wages are likely to drive people out of the country.
  • 22. PROS If Greece fails to pay its debt, it would also impact other Eurozone economies and the whole global economy. There is additional burden on other Eurozone nations to prevent Greek default. For Greeks, this would save them from the severe austerity measures. This would liberate from Eurozone fixed exchange rate allowing it to become more competitive exporter and even more attractive tourist destination.
  • 23.  Fiscal Union across Eurozone. Joint issue of Euro bonds. European stability mechanism. Raise country’s level of savings.
  • 24. THANK YOU!!!