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Euro Crisis - R Bays



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  • 1. © R Bays 2013
  • 2. The Euro € What is the Euro? The euro is the single currency shared currently by 17 of the European Union's 27 Member States, which together make up the euro area. The introduction of the euro in 1999 was a major step in European integration. Approximately 330 million EU citizens now use it as their currency.
  • 3. The Euro Which countries use the Euro? EU countries using the euro EU countries not using the euro
  • 4. The Euro Which countries have adopted the euro - and when? 1999 Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland 2001 Greece 2002 Introduction of euro banknotes and coins 2007 Slovenia 2008 Cyprus, Malta 2009 Slovakia 2011 Estonia
  • 5. The Euro and Economic and Monetary Union • All EU Member States form part of Economic and Monetary Union (EMU), which can be described as an advanced stage of economic integration based on a single market. • It involves close co-ordination of economic and fiscal policies and, for those countries fulfilling certain conditions, a single monetary policy and a single currency – the euro.
  • 6. The Euro and Economic and Monetary Union • The process of economic and monetary integration in the EU parallels the history of the Union itself. • When the EU was founded in 1957, the Member States concentrated on building a 'common market'. • However, over time it became clear that closer economic and monetary co-operation was desirable for the internal market to develop and flourish further.
  • 7. The Euro and Economic and Monetary Union • But the goal of achieving the EMU including a single currency was not enshrined until the 1992 Maastricht Treaty (Treaty on European Union), which set out the ground rules for its introduction. • These state what the objectives of EMU are, who is responsible for what, and what conditions Member States must meet in order to adopt the euro.
  • 8. The Euro and Economic and Monetary Union • These conditions are known as the 'convergence criteria' (or 'Maastricht criteria') and include: 1. Low and stable inflation 2. Exchange rate stability and 3. Sound public finances
  • 9. The Euro Who manages the Euro? The European Central Bank 1) Ensures price stability 2) Controls money supply and decides interest rates 3) Works independently from governments Mario Draghi President of the Central Bank
  • 10. Central Bankers Bernard Bernanke Chairman of the Federal Reserve Mervyn King Governor of the Bank of England Jean-Claude Trichet President of the European Central Bank
  • 11. How Did It Happen?
  • 12. Changing To The Euro 12 Original Eurozone Countries Austria, Belgium, Finland, France, Germany, Greece, Holland, Ireland, Italy, Luxembourg, Portugal and Spain *United Kingdom, Denmark and Sweden are members of the European Union but NOT the Eurozone.
  • 13. Euro Time Line January 1, 1999 • Euro is the currency of eleven countries • Conversion rates irrevocably fixed • Legislation on the euro entered into force • Financial markets in euro August 30, 2001 • European Central Bank releases final details of euro banknote designs and features to the media and public at a news conference in Frankfurt, Germany
  • 14. Euro Notes
  • 15. Euro Time Line January 1, 2002 • “E-day” or Euro Day” when euro banknotes and coins will be brought into circulation in the 12 participating states of EU. • All non-cash transactions will hereafter take place in euros. All currency issued by participating national banks and ATMs will be new euro banknotes and coins. • Dual circulation period begins, in which consumers can still use national currencies but will be given change only in euros
  • 16. Euro Public Opinion Poll Country Pro-euro Against Austria 59 32 Belgium 75 18 Denmark 40 56 Finland 49 46 France 67 28 Germany 53 38 Greece 72 22 Ireland 72 16 Italy 83 12 Luxembourg 81 15 Netherlands 66 30 Portugal 59 30 Spain 68 22 Sweden 29 62 UK 25 57 EU Overall 59 33
  • 17. Advantages • European countries saw the adoption of the Euro as a way of creating world wide competition • Integrate the European nations makes the union a strong world power • Strengthen Banking System • European Central Bank would provide an institution of monetary regulation comparable to the FED
  • 18. Advantages • Similarities between the European and United States banking system • The Euro would advance international trade • Way to challenge the power of the US in foreign exchange • Inspire exporters to denominate their goods in euros as well as dollars • Single Monetary Policy
  • 19. Inflation convergence – Slovakia Annual percentage change in the consumer price index Slovak Republic - Consumer Price Inflation Slovak Republic Euro Zone Source: Reuters EcoWin 99 00 01 02 03 04 05 06 07 08 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 Percent 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0
  • 20. Disadvantages • Introduction of a single monetary policy among 12 individual national policies of each country • Before joining the country controlled it’s own money supply • Monetary decisions with economic and national policies unique for the circumstances of the country • Surrender their individual policies on inflation, unemployment, and economic growth
  • 21. Disadvantages • Implementation of one Monetary policy as a detriment to their existing financial statuses • Traveling around different countries will have different prices for the same good or services
  • 22. Why Do We Need The Euro? • Apart from making travelling easier within the EU, a single currency makes economic and political sense. • The framework under which the euro is managed underpins its stability, contributes to low inflation and encourages sound public finances. • A single currency is also a logical complement to the single market and contributes to making it more efficient. • Using a common currency increases price transparency, eliminates currency exchange costs, facilitates international trade and gives the EU a more powerful voice in the world.
  • 23. Why Do We Need The Euro? • The size and strength of the euro area also better protect it from external economic shocks, such as unexpected oil price rises or turbulence in the currency markets. Last but not least, the euro gives the EU’s citizens a tangible symbol of their European identity. • Against the background of the current debt crisis important measures to improve the economic governance in the EU and the euro area in particular have been taken.
  • 24. Why Do We Need The Euro? • EU Member States have strengthened the Stability and Growth Pact, introduced a new mechanism to prevent or correct macroeconomic imbalances and are increasingly coordinating structural policies. • These are crucial steps to strengthen the "E" - the economic leg - of the EMU and to ensure the success of the euro in the long run.
  • 25. How Did It Happen?
  • 26. Eurozone Debt Crisis – What is it? • This is also known as Eurozone sovereign debt crisis • The term indicates the financial problems caused due to overspending by come European countries • When a nation lives beyond its means by borrowing heavily, a point comes when it cannot manage its financial obligations. • When that country faces insolvency (unable to repay its debts and lenders start demanding higher interest rates) that nation begins to get swallowed up by what is known as the Sovereign Debt Crisis
  • 27. Eurozone Debt Crisis – History • The EDC began in 2008 with the crash of Iceland’s banking system, which spread to Greece. • Greece had experienced corruption and spending as its government continued borrowing money despite not being able to produce sufficient income through work and goods. • It was admitted that Greece's debts had reached 300bn euros, the highest in modern history • Spain, Portugal, and the other nations later followed Greece.
  • 28. Eurozone Debt Crisis – History COUNTRIES STATISTICS France Debt/G.D.P: 81.7% Unemployment. Oct 2011: 9.8% S&P Rating: AAA Germany Debt/G.D.P: 83.2% Unemployment. Oct 2011: 5.5% S&P Rating: AAA Greece Debt/G.D.P: 142.8% Unemployment. July 2011: 18.3% S&P Rating: CC Italy Debt/G.D.P: 119% Unemployment. Oct 2011: 8.5% S&P Rating: A Portugal Debt/G.D.P: 93% Unemployment. Oct 2011: 12.9% S&P Rating: BBB- Spain Debt/G.D.P: 60.1% Unemployment. Oct 2011: 22.8% S&P Rating: AA The main European countries affected in the European Debt Crisis are:
  • 29. Eurozone Debt Crisis – History GREECE • November 5 2009-Greece reveals that their budget deficit is 1207 percent of GDP • December 8 2009- Greece's long-term debt to BBB+, from A-. • March 3 2010- Greece tries to persuade the financial market that they can repay their debts • April 23 2010- Papandreou asks help from International Monetary Fund after Greece is priced out of the international bond markets.
  • 30. Eurozone Debt Crisis – History GREECE • May 2 2010- European finance ministers lend €110bn which covers until 2013. Greece pledges to bring its budget deficit into line, through unprecedented budget cuts. • April 17 2011- Greek borrowing costs start rising sharply again, on fears that its austerity measures are failing to work. Greece is now deep in recession. • June 19 2011- Admits that they need to borrow money again
  • 31. Eurozone Debt Crisis – History GREECE • June 29, 2011- EU leaders agree on €109bn bailout – which will see private sector lenders take losses of 20% • October 27 2011- Europe leaders agree new deals that slash Greek debt and increase the power of the main bailout fund to around €1 trillion. • November 6 2011- Prime Minister resigns
  • 32. The Greek budget deficit - never got below the 3% of GDP limit, nor did the debt ever decline toward the 60% limit 32
  • 33. Eurozone Debt Crisis – History SPAIN • The country's public debt relative to GDP in 2010 was only 60% • As one of the largest euro zone economies, the condition of Spain's economy is of particular concern to international observers, and faced pressure from the United States, the IMF, other European countries and the European Commission to cut its deficit more aggressively
  • 34. Eurozone Debt Crisis – History SPAIN • Spain succeeded in minimizing its deficit from 11.2% of GDP in 2009 to 9.2% in 2010 and around 6% in 2011 • To build up additional trust in the financial markets, the government amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020 • The amendment states that public debt cannot exceed 60% of GDP
  • 35. Eurozone Debt Crisis – History PORTUGAL • In the first quarter of 2010 Portugal had one of the best rates of economic recovery in the EU. • A report was released that the Portuguese government public debt has increased due to mismanaged structural and cohesion funds which then resulted to the verge of bankruptcy of the country. • Bonuses and wages of head officers also resulted to their economic situation
  • 36. Eurozone Debt Crisis – History PORTUGAL • May 16 2011- Eurozone leaders officially approved a €78 billion bailout package for Portugal, which became the third Eurozone country, after Ireland and Greece, to receive emergency funds. • As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013. • July 6 2011- Rating’s agency Moody had cut Portugal’s credit rating to junk status
  • 37. Europe's response to the economic crisis Coordinated response from the EU's national governments, the European Central Bank and the European Commission: A. Commitment to the euro and to financial stability B. New crisis management tools and reforms of rules: 1. European Stability Mechanism: fund to help extraordinary economic difficulties 2. EU-wide financial supervisory authorities, new laws for stability of banks C. Better economic governance: 1. European Semester: annual procedure to coordinate public budgets 2. Euro+ pact, "Fiscal compact treaty” : mutual commitments to sound public finances
  • 38. Europe's response to the economic crisis The ECB reduces interest rates to historically low levels (1.25%) and begun “quantitative easing” Dec 08: EU governments adopt European Economic Recovery Plan - a coordinated fiscal stimulus Oct 08: euro area governments adopt concerted action plan to support their financial systems
  • 39. Europe's response to the economic crisis Conclusion: • Emergency loans have been extended as bailouts mainly by stronger economies like France and Germany, as also by the IMF. • The EU member states have also created the European Financial Stability Facility (EFSF) to provide emergency loans. • Restructuring of the debt
  • 40. Lessons Learned • Be careful who you admit to the EU • Use caution in leveraging funds
  • 41. QUESTIONS????
  • 42. Contact Infomation Richard Bays JD, MBA, RN, CPHQ +49 01796557037 +1 832.316.2701 Presented for the European School of Management and Technology (ESMT) Berlin, Germany 2013