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Understanding the Eurozone Crisis
 

Understanding the Eurozone Crisis

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Isabelle Ramdoo, ECDPM, 14 November 2011

Isabelle Ramdoo, ECDPM, 14 November 2011

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    Understanding the Eurozone Crisis Understanding the Eurozone Crisis Presentation Transcript

    • UNDERSTANDING THE EUROZONE CRISIS
      • Isabelle Ramdoo (Ms)
      • Policy Officer, Economic and Trade Cooperation
      Pearl Beach Hotel 14 November 2011
      • 6 KEY STAGES: 2007 – 2011
      • Stage 1: 9 August 2007
      • The seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt.
      • Stage 2: 15 September 2008
      • The US government allowed the investment bank Lehman Brothers to go bankrupt
      1. KEY FACTS – FROM SUB-PRIME TO DEBT CRISIS
      • Stage 3: London, G20 summit, 2 April 2009 :
      • world leaders committed themselves to a $5trillion fiscal expansion to boost jobs and growth
      • Stage 4: 9 May 2010
      • The focus of concern switched from the private sector to the public sector. The issue was no longer the solvency of banks but the solvency of governments .
      • Stage 5: 5 August 2011 : the morphing of a private debt crisis into a sovereign debt crisis was accentuated when the rating agency, S&P announced that America's debt would no longer be classed as triple A
      • Stage 6 : 2010 – 2011 : The crisis moves from the periphery to the heart of the Eurozone, with the threat of contagion to the whole region – Bail of of Ireland and Portugal; Greece (3 times), now threat to Italy and Spain
    • 2. KEY FACTORS BEHIND MARKET TURMOIL
      • The key factor worrying investors is slowing growth in the US and Europe.
      (I) Growth Fears
      • The concerns about growth have also fuelled worries about the indebtedness of eurozone states.
      (ii) Debt Crisis Spreading Annual borrowing cost for 10 year bond, %
      • There are increasing fears that sovereign debt could spill over to the banking sector, given the share of banks and private lending in government debts
      (iii) Vulnerable Banks
      • The G20 group of leading economies has said it is ready to "take action" to stabilise global markets. But there is disagreement as to what form that action would take.
      •  
      • Any global action will be based on steps taken at a regional and national level.
      • With deficits already at record highs, governments have very limited room to manoeuvre.
      (iv) Lack of Political Leadership
      • (i) Borrowers v/s Lenders
      •   Europe faces a large overhang of government and private sector debt much of which is now not repayable.
      • In a fixed currency agreement like the Eurozone, the country with the credit sets the rule. And here it is Germany
      • Germany believes that the crisis is all the fault of bad fiscal policies. But this vies suffers from 2 drawbacks:
      • it may not be entirely true
      • It is self defeating
      3. Europe’s 4 big dilemma
      • (ii) Austerity v/s growth
      •  
      • Under pressure from Germany and the ECB, all of these countries have undertaken painful spending cuts and tax rises, which were rather counter productive.
      • But here's the problem: austerity is killing growth throughout Europe.
      • Requiring deep fiscal cuts, privatization and other structural reforms risk greater unemployment and deep recessions.
      • Discipline v/s Solidarity
      • Germany's view on the eurozone crisis is simple. Southern European governments borrowed recklessly at the cheap interest rates available inside the euro. Now they are being punished by markets, and must learn discipline. Germany wants other governments to incorporate strict budget rules into their constitutions to stop such recklessness in future.
      •  
      • But rules, with penalties attached, may not be credible. Imposing a fine on an over-indebted government is counter productive and may exacerbate the problem.
      • (iv) Europe v/s the Nations
      •  
      • The big political standoff in Europe is one of paymaster Germany versus bankrupt southern Europe.
      • For Germany, their country's post-War economic miracle was built on a hard currency, prudent finances, and strong exports. But Germany has everything to lose if it does not help the south out, and if the eurozone unravels.
    • 3. HOW THE EU IS DEALING WITH IT?
      • Stimulus Packages: Necessary but not sufficient
      • In 2010, EU, US and China all adopted ambitious stimulus packages to foster economic growth. While they provided a short term life jacket but did not address the causes of the crisis
      • (ii) Financial Response: Important, but somehow contradictory to stimulus packages
      • Fears of contagion and financial turmoil (due to high involvement of many European banks in Greece and the nervousness of markets) drove the Europeans, the IMF, the Greek government, and central banks to provide financial support to Ireland, Portugal and Greece.
      1. ECONOMIC POLICY RESPONSE
      • (iii) Political Response
      • The crisis has highlighted EU’s difficulties to take coherent and coordinated decisions
      • Fundamentally, EU lacks a European government and governance
      • It has proved quite difficulty for the EU to agree on the interpretation of the crisis and of its interests.
      • Strong political union is yet to be seen
      • The Greek crisis has raised some more specific economic and political implications:
      • Crisis has exacerbated concerns on the health of EU financial institutions
      • It has created new financial liabilities for other EU countries
      • It has highlighted the policy constraints on members of the Eurozone
      • It has sparked a broader re-examination of the EU governance
      • It has posed challenges and opportunities for deeper integration
      Broader Implications
      • Thank you!
      • Contact:
      • Isabelle Ramdoo ( [email_address] )
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