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Euro zone crisis


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Euro zone crisis

  2. 2. Agenda Definitions The World European Union Eurozone What Went Wrong Outcome Analysis and Opinion What Can Plausibly Happen Recovery Solutions
  3. 3. Definitions Crisis – Any event that is, or expected to lead to, an unstable and dangerous situation affecting an individual, group, community and whole society; negative changes in the security, economic, political, societal or environmental affairs. Financial Crisis – The term is applied broadly to the situations in which some financial institutions or assets suddenly lose a large part of their valueRecession – A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. Depression – Persisting Recession
  4. 4. The World 7 Continents External Debt - Population $60.47 trillion – About 7 (2010 ) billion 4.55 195 -Sovereign BILLION Nations YEARS OLD Total Area – 72 – Dependent WORLD 510.072 Areas million Sq. 6 – Disputed Km. Territories Land – Size of 29.1% economy? Water – 70.9
  5. 5. The 7 Continents Asia Africa North America SIZE South America Antartica Europe Australia A continent is one of the several landmasses on the Earth, generally identified by convention rather than any strict criteria.
  6. 6. Europe Second smallest continent 47 member countries Population of 731 million (Less than that of India) First to industrialize GDP in 2010 - $19.92 trillion (32.4% of the World) Germany, France and UK are 4th, 5th and 6th largest economy in the World..
  7. 7. European Union (EU) Unique economic and political partnership between 27 European countries. Free movement of Capital, Goods, Services and labor. GDP - €12,268,387 million (2010 est.)
  8. 8. Member States of EU (Chronologically) 1952 – Belgium, France, Germany, Italy, Luxembourg, Netherlands formed EU 1981 – Greece 1986 – Portugal and Spain 1995 – Austria, Finland and Sweden 1973 – Denmark, Ireland and UK 2004 – Cyprus, Czech, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia 2007 – Bulgaria and Romania
  9. 9. Who Governs EU? European Represents interests of the Union as a Commission whole Represents the governments of the Council of individual member countries; European Union Presidency shared by member states on a rotating basis Represents the EU`s citizens and is European Parliament directly elected by them
  10. 10. Eurozone A geographical and economic region consists of all the EU countries that have fully incorporated euro as their national currency 17 Countries Also called “Euro Area” Monetary Policies – ECB (Germany) Fiscal Policies - Individual Countries
  11. 11. A Comparison Population GDP % of World GDP Eurozone 317 million €08.4 trillion 14.6% EU (27) 494 million €11.9 trillion 21.0% USA 300 million €11.2 trillion 19.7% Japan 128 million €03.5 trillion 06.3%
  12. 12. What Went Wrong……
  13. 13. Year 1997Agreed! Each Country It`s just a should not borrow norm, right? more than 3% of its GDP
  14. 14. Offenders Italy –Worst offender; regular in breaking 3% limit Germany and France followed Almost everyone joined Greece never stuck to 3% target, manipulated its borrowing statistics Heavy borrowings
  15. 15. Fiscal Deficit Basics FD is shortfall of Government Revenue against its spending FD is financed by  Borrowings  Rise in interest rates  Monetization  Inflation and currency Devaluation
  16. 16. Trade Deficit Basics TD is shortfall of exports w.r.t to Imports TD has to be financed  Forex Borrowings  Rise in interest rates  FDI/FII inflows Trade Deficit has to be balanced by Surplus of Capital flows Leads of Currency Devaluation  Cheaper exports and costlier imports  Tendency to close the Trade Deficit
  17. 17. Eurozone Crisis In a nutshell Portugal, Spain, Greece  Trade Deficit especially with Germany  High Fiscal Deficit Common Currency & Monetary Union  Cannot devalue currency  Cannot Monetize FD The Results  German loans finance imports from Germany  Borrowings to finance FD keep rising
  18. 18. Portugal and Greece High Fiscal Deficits Low growth economy  Low Tax revenues High Government Spending  Govt Employment  Pensions and Subsidies  FD 9-10%
  19. 19. Ireland Failure of 6 Major Banks  Property bubble Irish Government Bailout  Protect Depositors and Shareholders  Bill upto $ 100 bn FD upto 32.4% of GDP
  20. 20. Outcome Greece defaults Huge Sovereign debt of Eurozone Countries Govt. and Banks in Eurozone have about $500 billion in outstanding bonds coming due in first quarter of 2012 Banks not in a position to issue corporate bonds at affordable rates Recession – Everyone is sitting on their money Weakening of Euro Impacted growth in other parts of theWorld
  21. 21. Analysis and Opinion
  22. 22. Mario Draghi, President, ECB•ECB loans could indirectly help some heavily indebted European countries if the banks use ECBloans to invest in govt. bonds.•Many European banks are now facing possible losses on their holdings of bonds issued by cash-strapped governments and don’t want to buy any more•But the bankss might be willing to resume their purchases if they don’t have to repay their loansto ECB for 3 years•By then, region`s financial health might be resolved and governments restored to financial health
  23. 23. Uri Dadush G20 must help manage Eurozone crisis:•Build a firewall around Spain andItaly• Impose demanding conditions onEurope• Foster open international tradeand reform the WTO• Focus on the big pictire
  24. 24. What could plausibly happen? Eurozone Deutschemark splits replaces Euro More Catastrophe Liquidity
  25. 25. Reform and recovery
  26. 26. Proposed long-term solutions1. European fiscal union and revision of the Lisbon Treaty2. Eurobonds3. European Stability Mechanism (ESM)4. Address current account imbalances5. European Monetary Fund6. Speculation of the breakup of the Eurozone
  27. 27. Who can take Advantage of Eurozone Crisis.
  28. 28. Eurozone crisis is biggest threat to emerging Asia
  29. 29. Solutions Bailouts  Loan write downs upto 50%  Interest rate cuts  Austerity measures to cut FD to 3% European Financial Stability Facility  Created by 27 member countries  Bonds from German market  $ 440 bn can go upto 1 Tn Other players – IMF, ECB etc
  30. 30. Solutions Liquidity – delay the crisis Eurozone countries want to funnel $200 billion through IMF Closer budgetary cooperation among 17 eurozone countries A Govt. of bureaucrats is formed in Italy to tackle the situation