LLM University of Reading 2013


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International Banking and Financial Law
Presentation: Crisis of Euro Zone

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LLM University of Reading 2013

  1. 1. International Banking and Finance Law
  2. 2. Group Members:YanaphakGong LeiBettina BognarWang LianqiuFu MenxiaArgyro Savva
  3. 3. Topic The Eurozone crisis is a crisis of ECB as well as Eurozone political institutional fundamentals reflecting fatal flaws in certain laws and policy.
  4. 4. Contents Introduction Flaws in Eurozone Fundamentals Greece VS Eurozone crisis Current Solutions of Eurozone Crisis Conclusion
  5. 5. Short history ofintegration • Treaty of Paris (1951-1952): European Coal and Steel Community • Robert Schuman • Jean Monnet
  6. 6. • Treaties of Rome (1957-1958): European Economic Community and European Coal and Steel Community• Merger Treaty (1965-1967): Common institutions > European Communities• Single European Act (1986-1987): to create a single market within the European Community by 1992• Maastricht Treaty (1992-1993): – establishing the European Union (3 pillars: European Communities; Common Foreign and Security Policy; Political and Judicial Cooperation in Criminal Matters) – amending the European Economic Community > European Community (EC) – single European currency, EMU – establish CFSP, expanding the common policy areas
  7. 7. • Treaty of Amsterdam (1997-1999)• Treaty of Nice (2001-2003)• Treaty of Lisbon (2007-2009): – amending the modified EC Treaty and Maastricht Treaty > Treaty on the Functioning of the European Union (TFEU) and Treaty on the European Union – only the EU exists – no pillar structure
  8. 8. Enlargement• 1951: BENELUX, France, Italy, Germany (West)• 1973: UK, Ireland, Denmark• 1981: Greece• 1986: Spain, Portugal• 1995: Austria, Sweden, Finland• 2004: Malta, Cyprus, Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Slovenia, Hungary• 2007: Bulgaria, Romania
  9. 9. Institutions• European Parliament – elections, represents the citizens – debating and passing EU law – scrutinizing other institutions – debating and adopting the budget with the Council• European Council (head of states and governments; policy making; president: Herman Van Rompuy)
  10. 10. Institutions • Council of the European Union (≠ Council of Europe!!!) – governments of member states – law making – CFSP – coordinating economic policies, between courts-police forces – adopts budget – signs international agreements • European Commission – promotes the public interest, commissioners for policy areas; president: José Manuel Barroso – proposing new law; enforcement; representing the EU • European Court of Justice • European Central Bank • Court of Auditors (audit the EU finance)
  11. 11. Otherbodies • EU High Representative for Foreign and Security Policy (Catherine Asthon) • European Economic and Social Committee • Committee of Regions • European Investment Bank • European Ombudsman • Other specialized agencies and representative bodies
  12. 12. Euro• Introduced by the Maastricht Treaty as of 1 January 2002
  13. 13. Developmentof the crisis The global financial crisis started in 2007 in the US This crisis was a liquidity shortage (credit crunch) which spread to Europe through the banking system after the collapse of Lehman Brothers The EU banking system started to feel the crunch first, then the sovereign debt crisis developed In this time the EU faces more crises: the credit crunch, the sovereign debt crisis as well as macroeconomic and political crises > certain deficiencies (political, structural) of the EU, which need to be solved
  14. 14. The euro is under attack from the financial markets, withGreece on the verge of default, Portuguese and IrishEurobonds demoted to junk status and Italian andBelgian bonds under speculative attack, with Spain nextin line.What is more, the real fear is that adefault in one country will trigger adomino effect and bring down some ofEuropes major banks.
  15. 15. Flaw in the Eurozone Fundamentals Fatal Flaw 1 Expanded Private Credit, Toothless Fiscal Discipline Fatal Flaw 2 Profits Are Private, Losses Are Public Fatal Flaw 3 Low Interest Credit Spurred Misallocation of Capital Fatal Flaw 4 The Imbalance Between Exporting and Importing Nations Fatal Flaw 5 The Euro Removed the Mechanism of Currency Devaluation Fatal Flaw 6 Crushing Private and Public Debts
  16. 16. Flaw in the Eurozone Fundamentals Fatal Flaw 1: Expanded Private Credit, Toothless Fiscal Discipline Rising Risk Leads to Rising Rates Needless to say, it was highly profitable for the big European and international banks to expand lending to these new, previously marginal borrowers. Fatal Flaw 2: Profits Are Private, Losses Are Public Once the unlimited credit issued by financialization poisons the sovereign states’ balance sheets and cash flows, then there is no mechanism to bail out all the players
  17. 17. Flaw in the Eurozone Fundamentals Fatal Flaw 3: Low Interest Credit Spurred Misallocation of Capital Free money soon flows to malinvestments whose risks and marginal nature are masked by the asset bubble which inevitably results from massive quantities of free money seeking a speculative return. Fatal Flaw 4: The Imbalance Between Exporting and Importing Nations Another intrinsic source of instability is the imbalance between export powerhouse Germany that generates huge trade surpluses and its trading partners in the EU that run large trade and budget deficits— Portugal, Italy, Ireland, Greece, and Spain.
  18. 18. Flaw in the Eurozone Fundamentals Fatal Flaw 5: The Euro Removed the Mechanism of Currency Devaluation The Euro had another deceptively pernicious consequence: the overall strength of the currency enabled debtor nations to rapidly expand their borrowing at low rates of interest. Fatal Flaw 6: Crushing Private and Public Debts Banks around the world have a major challenge in the next few years: trillions of dollars in debt must be "rolled over" or refinanced.
  19. 19. Greece VS Eurozone crisis Greece joined in 2001 between the Euro’s establishment and introduction
  20. 20. Origins and Prospect :Greece Sovereign debt crisis• European monetary integration - The common currency and its monetary policy. - Not sufficiently integrated and lacked a fiscal union.• In 2001 when joining the Euro, Greece already had a public debt in excess of 100% of GDP• Adoption of the Euro currency allowed more favorable terms for the refinancing of government debt.• Greece Fiscal Policy - Over-borrowing of public spending. - Moral Hazard• In 2009 Greece’s government debt reached 115% of GDP
  21. 21. Greece receive a bail-out(EU and IMF) • In May 2010, Greece signed a memorandum of economic and financial polices for a three-year programme with the International Monetary Fund, The European Commission and the European Central Bank. • The programme provided 110 billion Euro loans. • The programme is focused on two key problems: – High public debt and deficits – Lack of competitiveness. • The programme is accompanied by severe austerity measures and structural reform programs.
  22. 22. Current Solutions and Conclusion
  23. 23. Continuing Problems Policy Problems Future Banking System
  24. 24. Solutions • Fiscal Consolidation. • ECB role • EFSF • Euro Fractures • Policies to argument resources
  25. 25. Interesting Issues Using the stability of European Stability Mechanism? -- Is it really the only access to solve the crisis? -- The stability of the European stability mechanism Main role the ECB playing --saver vs. viewer?
  26. 26. Suggestions • Short-term suggestions 1)Bailout package: The European Central Bank and IMF should offer bailout package to the countries in serious sovereign debt trouble like Greece and Ireland. 2)Bebt Write-off and restructuring: The creditors especially the financial institutions with large amount of junk sovereign bond might try to write off a certain percent of total debt.
  27. 27. Suggestions • Long-term suggestions 1) Integration of euro zone: First of all, we think the Euro zone should rebuild its fiscal system, which would coordinate the fiscal policy in each country soundly. 2) Regulation of government debt: First, the euro zone should strengthen the regulation of government fiscal deficit. Second, we think the Eurostat should verify the budget deficit and government debt in order to avoid the problem of hiding the real situation. 3) Economic growth:The real solution to the debt crisis is economic growth.
  28. 28. Conclusion• Direct intervention• Redefining institutional competences among international organisations• Strengthening ECB policy as ‘lender of last resort’ for its members• Increasing coordination among euro area members around fiscal policies
  29. 29. Team WorkPart 1-Bettina BognarPart 2-Gong LeiPart 3-Argyro Savva & YanaphakPart 4-Wang Lianqiu & Fu MenxiaPowerpoint organising-Gong Leri
  30. 30. ReferencesBell, S (2003): Common Currency Lessons from Europe: Have Member States Forsaken Their EconomicSteering Wheels?, in LP Rochon and M Seccareccia (eds.), Dollarisation: Lessons from Europe andtheAmericas (London and New York: Routledge).Buiter, W, G Corsetti and N Roubini (1993): Excessive Deficits: Sense and Nonsense in the TreatyofMaastricht, Economic Policy, Vol 8, No 16, April, pp 57-100.Flassbeck, H (2000): Wanted: An International Exchange Rate Regime - The Missed Lesson of the FinancialCrisis, IPG - International Politics and Society, 3/2000.- (2005): Exchange Rate Management in Developing Countries: The Need for a Multilateral Solution, in BFritz and M Metzger (eds.), New Issues in Regional Monetary Coordination (New York: Palgrave Macmillan).- (2007): Wage Divergences in Euroland: Explosive in the Making, in J Bibow and A Terzi (eds.), Eurolandand the World Economy: Global Player or Global Drag? (New York: Palgrave Macmillan).Galbraith, JK (2009): The Predator State (New York: Free Press).Godley, W (1992): Maastricht and All That: Letter from Europe, London Review of Books, Vol 14, No 19,October.Godley, W and A Izurieta (2004): Balances, Imbalances and Fiscal Targets: ANew Cambridge View,Cambridge Endowment for Research in Finance Strategic Analysis Series, February.Godley, W and M Lavoie (2007): A Simple Model of Three Economies with Two Currencies: The Eurozoneand the USA, Cambridge Journal of Economics, Vol 31, doic10.1093/cje/bel010, pp 1-23.
  31. 31. Thank you!