Euro zone crisis


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Euro zone crisis

  1. 1. Euro Zone Crisis DIV A:
  2. 2. <ul><li>CONTENTS </li></ul><ul><li>What is Euro Zone? </li></ul><ul><li>What is Euro Zone Crisis? </li></ul><ul><li>Countries affected and impact on them(PIIGS). </li></ul><ul><li>Effect on Greece. </li></ul><ul><li>Present condition. </li></ul><ul><li>Solution. </li></ul><ul><li>Conclusion. </li></ul>
  3. 3. EUROZONE Countries <ul><li>The eurozone officially the euro area,is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro currency as their sole legal tender. It currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, the Republic of Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Seven (not including Sweden, which has a de facto opt out) other states are obliged to join the zone once they fulfil the strict entry criteria. </li></ul>
  4. 5. <ul><li>Blue: Eurozone </li></ul><ul><li>Green : Oblized to join Eurozone(8) </li></ul><ul><li>Brown: EU state with an opt-out on Eurozone participation and no plan to join (1 - UK) </li></ul><ul><li>Red: EU state with an opt-out on Eurozone participation but planning a referendum to join (1 - Denmark) </li></ul><ul><li>Yellow: States outside the EU with issuing rights (3) Monaco, San Marino, and Vatican City </li></ul><ul><li>Purple: Other Non EU user(Andorra, Kosovo, Montenegro,Turkish Republic of Northern Cyprus </li></ul>
  5. 6. Euro Zone <ul><li>It is an economic and monetary union (EMU) of 17 European Union (EU) member states </li></ul><ul><li>They have adopted the euro as their sole trading currency. </li></ul><ul><li>Euro became a reality on Jan 1, 1998 , but came for the European consumers on Jan 1 2002. </li></ul>
  6. 7. <ul><li>Ten countries (Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, and the United Kingdom) are EU members but do not use the euro. </li></ul><ul><li>Denmark and the United Kingdom obtained special opt-outs </li></ul><ul><li>Sweden gained a de facto opt-out by using a legal loophole </li></ul>
  7. 9. Who All and Why? <ul><li>In 1998 eleven European Union member-states had met the convergence criteria, and the eurozone came into existence with the official launch of the euro on 1 January 1999. Greece qualified in 2000 and was admitted on 1 January 2001. Physical coins and banknotes were introduced on 1 January 2002. Slovenia qualified in 2006 and was admitted on 1 January 2007. </li></ul>
  8. 10. <ul><li>Cyprus and Malta qualified in 2007 and were admitted on 1 January 2008. Slovakia qualified in 2008 and joined on 1 January 2009. Estonia qualified in 2010 and joined on 1 January 2011. That makes 17 member states with 329 million people in the eurozone. </li></ul>
  9. 11. Euro Zone Criteria <ul><li>The euro convergence criteria (also known as the Maastricht criteria ) are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union (EMU) and adopt the euro as their currency. The 4 main criteria are based on Article 121(1) of the European Community Treaty. </li></ul><ul><li>. </li></ul>
  10. 12. Euro Zone Criteria <ul><li>In 2009 the IMF floated a suggestion that countries should be allowed to &quot;partially adopt&quot; the euro - adopting the currency but not qualifying for a seat on the European Central Bank. Monaco, San Marino and the Vatican City State are in a similar situation: they have adopted the euro and mint their own coins, but they do not have ECB seats </li></ul>
  11. 13. Euro Zone Criteria ?????(Explained) <ul><li>1. Inflation rates: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation, which may be negative) member states of the EU. </li></ul>
  12. 14. <ul><li>2. Government finance: </li></ul><ul><li>a) Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases. </li></ul>
  13. 15. <ul><li>b) Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace. </li></ul>
  14. 16. <ul><li>3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period. </li></ul>
  15. 17. <ul><li>4. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states. </li></ul>
  16. 18. <ul><li>Fulfilment of criteria </li></ul><ul><li>Country [nb 6] Inflation rate [nb 7] ( HICP ) [11] annual government deficit to GDP [ citation needed ] gross government debt to GDP ERM II membership Long-term interest rate [nb 8] Reference value [12] max. 1% max. 3% max. 60% min. 2 years max. 6% EU Member States   Bulgaria 1.7% 2.8% 17.4% 6.9%   Czech Republic 0.3% 5.7% 39.8% 4.7%   Denmark 2.1% −3.9% [nb 9] 41.6% since 1 January 1999 3.4%   Hungary 4.8% 4.1% 78.9% 8.4%   Latvia 0.1% 8.6% 48.5% since 2 May 2005 12.7%   Lithuania 2.0% 8.4% 38.6% since 28 June 2004 12.1%   Poland 3.9% 7.3% 53.9% 6.1%   Romania 5.0% 8.0% 30.5% 9.4%   Sweden 2.1% 2.1% 42.6% 3.3%   United Kingdom 3.0% 7.1% 68.1% 3.98% non-EU Member States   Albania 3.0% [13] 0.04% 55.9%   Bosnia and Herzegovina 1.5% 0.35% 34%   Croatia 1.4% [14] 2.2% 40.8%   Iceland 3.3% [15] −5.19% [nb 9] 103%   Macedonia 3.2% 0.6% 39.5%   Montenegro 0.6% [16] 38%   Norway [17] 2% [18] −17.27% [nb 9] 53%   Serbia 8.9% [19] 0.48% 37%   Switzerland [17] 0.9% −1.0% [nb 9] [20] 41.3% [21] 1.46% [22]   Turkey 5.08% −1.3% [nb 9] 38.8%   criterion fulfilled </li></ul>
  17. 19. Introduction to Euro Zone crisis <ul><li>It is the biggest challenge Europe has faced since 1990. </li></ul><ul><li>Due to global financial crisis that began in 2007-08 the euro zone entered its first official recession in third quarter of 2008. </li></ul><ul><li>The official figures were released in 2009 Jan. </li></ul><ul><li>On 11 Oct 2008, a summit was held in Paris by the Euro group heads of state and govt, to define a joint action plan for euro zone and central banks of Europe to stabilize the economy. </li></ul>
  18. 20. Beginning of Crisis <ul><li>Started in – Oct 2009 in Greece </li></ul><ul><li>Its immediate causes lie with the US crisis of 2007-09. </li></ul><ul><li>The result in Euro Zone was Sovereign debt crisis. </li></ul><ul><li>PIIGS: Portugal, Italy, Ireland, Greece, Spain. </li></ul>
  19. 21. STORY IN GREECE <ul><li>The Greek economy was one of the fastest growing in the eurozone during the 2000s; from 2000 to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. </li></ul>
  20. 24. Greece: Start from where? <ul><li>The global financial crisis that began in 2008 had a particularly large effect on Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009 </li></ul>
  21. 25. What wrong Greece did? <ul><li>To keep within the monetary union guidelines, the government of Greece has been found to have consistently and deliberately misreported the country's official economic statistics </li></ul>
  22. 26. Alarms!!!!! <ul><li>On 27 April 2010, the Greek debt rating was decreased to the first levels of 'junk' status by Standard & Poor's amidst fears of default by the Greek government. </li></ul><ul><li>Yields on Greek government two-year bonds rose to 15.3% following the downgrading </li></ul>
  23. 27. Saving the ship <ul><li>On 3 May 2010, the European Central Bank suspended its minimum threshold for Greek debt &quot;until further notice&quot;,meaning the bonds will remain eligible as collateral even with junk status. </li></ul>
  24. 28. Further Saving <ul><li>On 23 April 2010, the Greek government requested that the EU/IMF bailout package be activated.The IMF had said it was &quot;prepared to move expeditiously on this request&quot;. </li></ul><ul><li>Greece needed money before 19 May, or it would face a debt roll over of $11.3bn. </li></ul><ul><li>A total of €110 billion has been agreed </li></ul>
  25. 29. Tango of Greece <ul><li>Because Greece is a member of the eurozone, it cannot unilaterally stimulate its economy with monetary policy. </li></ul>
  26. 30. Self Discipline <ul><li>The government of Greece agreed to impose a fourth and final round of austerity measures. </li></ul>
  27. 31. <ul><li>Public sector limit of €1,000 introduced to bi-annual bonus, abolished entirely for those earning over €3,000 a month. </li></ul><ul><li>An 8% cut on public sector allowances and a 3% pay cut for DEKO (public sector utilities) employees. </li></ul><ul><li>Limit of €800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over €2,500 a month. </li></ul><ul><li>Return of a special tax on high pensions. </li></ul><ul><li>Changes were planned to the laws governing lay-offs and overtime pay. </li></ul>
  28. 32. <ul><li>Extraordinary taxes imposed on company profits. </li></ul><ul><li>Increases in VAT to 23%, 11% and 5.5%. </li></ul><ul><li>10% rise in luxury taxes and taxes on alcohol, cigarettes, and fuel. </li></ul><ul><li>Equalization of men's and women's pension age limits. </li></ul><ul><li>General pension age has not changed, but a mechanism has been introduced to scale them to life expectancy changes. </li></ul><ul><li>A financial stability fund has been created. </li></ul><ul><li>Average retirement age for public sector workers has increased from 61 to 65. [51] </li></ul><ul><li>Public-owned companies to be reduced from 6,000 to 2,000 </li></ul>
  29. 33. If not, what would have happen? <ul><li>Without a bailout agreement, there was a possibility that Greece would have been forced to default on some of its debt. </li></ul><ul><li>This would effectively remove Greece from the euro, as it would no longer have collateral with the European Central Bank. It would also destabilise the Euro Interbank Offered Rate, which is backed by government securities </li></ul>
  30. 34. What Happened and Why? <ul><li>Greece: Sharp Budget Deficit </li></ul><ul><li>Large government and External Debts in PIIGS. </li></ul><ul><li>Greece credit rating downgraded. </li></ul><ul><li>Interest rates surged on government bonds. </li></ul><ul><li>Need for external aid from EU and IMF </li></ul><ul><li>The high debts and rising rate of interests was a matter of concern. </li></ul>
  31. 35. Iceland
  32. 36. <ul><li>Reasons for rise in External Debts </li></ul><ul><li>High household indebtness. </li></ul><ul><li>Large current account deficit: </li></ul><ul><ul><ul><li>Excessive growth in domestic demand. </li></ul></ul></ul><ul><ul><ul><li>Increase in wage rates. </li></ul></ul></ul><ul><ul><ul><li>Lower exchange rate risk. </li></ul></ul></ul><ul><li>Weakening export competitiveness. </li></ul><ul><li>Reasons for rise in Internal Debts: </li></ul><ul><li>Rising Unemployment: Lower tax returns, higher budget deficits . </li></ul>
  33. 37. <ul><li>SPREAD BEYOND BOUNDARIES OF GREECE </li></ul>
  34. 39. PIIGGS SURPLUS 2002-2009
  36. 41. ICELAND <ul><li>Before the crash of the three largest banks in Iceland, with Glitnir, Landsbanki and Kaupthing, jointly owing about €14 billion ($19 billion)or 6 times Iceland's. </li></ul><ul><li>The Financial Supervisory Authority of Iceland used permission granted by the emergency legislation to take over the domestic operations of the three largest banks </li></ul>
  37. 42. Means??????? <ul><li>The crisis has reduced confidence in other European economies. </li></ul><ul><li>Ireland, with a government deficit of 14.3% of GDP, </li></ul><ul><li>the U.K. with 12.6%, </li></ul><ul><li>Spain with 11.2%, and </li></ul><ul><li>Portugal at 9.4% are most at risk. </li></ul>
  38. 43. <ul><li>Financing needs for the Eurozone in 2010 come to a total of €1.6 trillion </li></ul>
  39. 44. Slovenia <ul><li>In May 2010 Slovenia went heavily into debt paying for its part of the €110 billion ($145 billion) rescue package for Greece </li></ul>
  40. 45. U.K. <ul><li>On Friday 14 September 2008, the first day branches opened following the news, many customers queued outside branches to withdraw their savings (a run on the bank). </li></ul><ul><li>It was estimated that £1 billion was withdrawn by customers that day, about 5% of the total bank deposits held </li></ul>
  41. 46. Latvia, Lithuania, and Estonia <ul><li>The Baltic States have been amongst the worst hit by the global financial crisis. In December 2008, the Latvian unemployment rate stood at 7%. </li></ul><ul><li>By December 2009, the figure had risen to 22.8%.The number of unemployed has more than tripled since the onset of the crisis, giving Latvia the highest rate of unemployment growth in the EU </li></ul>
  42. 47. Belgium <ul><li>In 2010, Belgium's public debt was 100% of its GDP - the third highest in the Euro zone after Greece and Italy and there were doubts about the financial stability of the banks. After inconclusive elections in June, by November the country still had no government and no budget for 2011 as parties from the two main language groups in the country (Flemish and Walloon) were unable reach agreement on how to deal with the economy </li></ul>
  43. 48. Ireland germany,etc
  45. 51. GREEK DEBT CRISIS <ul><li>In the first quarter of 2010, the national debt of Greece was put at €300 billion ($413.6 billion), which is bigger than the country's economy . </li></ul><ul><li>Greece has the worst combination of high debt level, large budget deficit and large external debt </li></ul>
  46. 52. <ul><li>GDP - $360 billion </li></ul><ul><li>Debt-GDP ratio – 113% of GDP </li></ul><ul><li>Budget Deficit – 12.9% of GDP </li></ul><ul><li>Current Account Deficit- 11.0% of GDP </li></ul><ul><li>Net Foreign Debt – 70% of GDP </li></ul><ul><li>Total Outstanding Public Debt- 290 billion euro </li></ul>
  47. 53. Countries Affected By Greek Crisis <ul><li>South-eastern Europe </li></ul><ul><li>Neighboring Serbia, Albania, Macedonia, Romania, Bulgaria and Turkey </li></ul>
  48. 54. IMPACT <ul><li>Contagion Effect </li></ul><ul><li>Greek crisis has made investors nervous about lending money to governments through buying government bonds. </li></ul><ul><li>Reduced wealth : </li></ul><ul><li>Take-home pay is likely to fall as it is eroded by rising taxes . </li></ul><ul><li>Impact on private individuals </li></ul>
  49. 55. Why this happened in EU??? <ul><li>EU countries find themselves in is the result of a decade of debt-fueled macroeconomic policies pursued by local policy makers and complacent EU central bankers </li></ul><ul><li>“ Social contract,&quot; which involves &quot;buying&quot; social peace through public sector jobs, pensions, and other social benefits, will have to be changed to one predicated more on price stability and government restraint if the euro is to survive </li></ul>
  50. 57. Resolutions <ul><li>European governments and the International Monetary Fund (IMF) have stunned global stock markets with a 750bn-euro. </li></ul><ul><li>France agrees to pitch in with 17 billion euro. </li></ul>
  51. 58. Situation of other countries <ul><li>Spain is experiencing the highest unemployment rate of 20%. </li></ul><ul><li>Italy- has already taken austerity measures. The lower house of parliament has voted for 25 billion Euros of cuts to reduce the country’s deficit. The govt. aims to reduce budget deficits down from 5.3% of GDP to 2.7% by 2012. </li></ul>
  52. 59. Effect on India <ul><li>India’s exports to Europe could witness a slump close to 10%. </li></ul><ul><li>Export driven sectors such as textiles and softwares are likely to bear the brunt. </li></ul><ul><li>About 22-28 percent of revenues of India’s top tech majors come from Europe whose revenues will definitely be affected. </li></ul><ul><li>Government’s overall target of $200 billion for the fiscal could be at stake . </li></ul>
  53. 60. FUTURE PREDICTED <ul><li>Either the euro zone should go for integrating their economic policies. </li></ul><ul><li>OR </li></ul><ul><li>It collapses, and the Greeks and other profligate countries devalue and the banks (German, French, British and American) lose hundreds of billions. </li></ul>,
  54. 61. PROBLEMS <ul><li>It combines efficient and indiscipline economies. </li></ul><ul><li>Too high debts. </li></ul><ul><li>Political problems. </li></ul>
  55. 62. Analysis: <ul><li>Regardless of the corrective measures chosen to solve the current predicament, as long as cross border capital flows remain unregulated in the Euro Area, asset bubbles and current account imbalances are likely to continue. </li></ul>
  56. 63. Contd. <ul><li>A country that runs a large current account or trade deficit (i.e., it imports more than it exports) must also be a net importer of capital </li></ul>
  57. 64. Contd. <ul><li>The 2009 trade deficits for Spain, Greece, and Portugal were estimated to be $69.5 billion, $34.4B and $18.6B, respectively ($122.5B total), while Germany's trade surplus was $109.7B. [115] A similar imbalance exists in the U.S., which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad. </li></ul>
  58. 65. Contd. <ul><li>A &quot;savings glut&quot; in one country with a trade surplus can drive capital into other countries with trade deficits, artificially lowering interest rates and creating asset bubbles </li></ul>
  59. 66. This means: <ul><li>A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies, which would reduce the imbalance as the relative price of its exports increases. This currency appreciation occurs as the importing country sells its currency to buy the exporting country's currency used to purchase the goods. However, many of the countries involved in the crisis are on the Euro, so this is not an available solution at present. </li></ul>
  60. 67. OPTION <ul><li>Alternatively, trade imbalances might be addressed by changing consumption and savings habits. </li></ul>
  61. 68. Means: <ul><li>If a country's citizens saved more instead of consuming imports, this would reduce its trade deficit. Likewise, reducing budget deficits is another method of raising a country's level of saving. </li></ul>
  62. 69. Other options: <ul><li>Capital controls that restrict or penalize the flow of capital across borders is another method that can reduce trade imbalances. Interest rates can also be raised to encourage domestic saving, although this benefit is offset by slowing down an economy </li></ul>
  63. 70. Right on wrong side: <ul><li>The international credit rating agencies – Moody's, S&P and Fitch – have played a central and controversial role in the current European bond market crisis </li></ul>
  64. 71. SOLUTIONS <ul><li>Countries affected must: </li></ul><ul><li>Grind down Wages </li></ul><ul><li>Raise Productivity </li></ul><ul><li>Slash Spending </li></ul><ul><li>Raise taxes </li></ul><ul><li>Transparent Banking system </li></ul><ul><li>Endure such Austerity Drives for many years </li></ul>
  65. 72. CONCLUSION <ul><li>The US crisis led to Global financial crisis, which further spread to Euro zone and caused Euro zone crisis, as these countries were most affected. </li></ul><ul><li>Hence the Big Brothers should help the countries in problem to come out from the crisis. </li></ul>
  66. 73. <ul><li>Hurrayyyyy </li></ul><ul><li>Class over </li></ul>