A very balanced presentation covering each and every aspect of eurozone economic crisis. A thorough analysis from the start of European Union formation and the further development of the problem of crisis. Also, effect on Indian Economy is pondered upon to make it good piece of word.
I hope it will fulfil everyone's need.
2. What is the
EUROZONE DEBT CRISIS ??
Failure of Euro , the currency that ties together 19 European countries(out of
28) in an intimate but flock manner.
• Over the past 3 years ,Greece ,Portugal ,Italy ,Ireland & Spain have all
triggered down on the blink of financial collapse threatening the breakdown
of the entire CONTINENT & rest of the WORLD.
3. How did it happened??
In most of Europe’s history its been a war itself
SO
• The countries war with each other
tend to do LESS business together.
• Allot of trade barriers and tariffs
made things worst further.
• Business across borders needed a
fee to exchange currency ;& also
pay tariffs to buy and sell
companies in other countries.
• Then came WORLD WAR II
which devastated Europe.
4. Measures Taken
TO
REBUILT
Europe
• Trade barriers were removed; like Steel
and Coal tariffs came down.
• Business was made easy across borders.
• 27(then) Countries signed the Maastricht
Treaty that created the EUROPEAN
UNION.
• On 1st January 1999, obstacle posed by
European countries due to varying
currencies was removed by the
introduction of EURO.
• 17(then) countries adopted Euro as their
currency discontinuing theirs.
5. Having A Look At The EUROZONE !
A UNIFORM Monetary policy controlled
by The European Central Bank(then
formed). Controlled by then formed
European Central Bank(ECB).
SINGLE CURRENCY i.e. euro
Different Fiscal policies i.e. own fiscal
policies of each and every Eurozone
member country.
6. Now what went wrong
that led to the current
CRISIS ??
7. Monetary Policy VS Fiscal Policy
• As part of Eurozone , countries started taking loans at much higher amount
due to low interest rates.
• Countries like Greece increased its DEFICIT SPENDING to a sky high
level as it was earlier getting the same loan at 18% and now at much lower
3%(same as Germany).
• These huge spending got possible only because of member country’s help
like Germany paid back Greece’s loans and Greece was able to maintain its
spending at the same pace through Germany’s credit cards(obviously, coz
they shared same currency).
• But this only built up Greece’s debt burden.
8. What were the RESULTS !!
• Countries like Greece were abnormally increasing its spendings in adherence to
its long list of promises to masses like jobs, pensions, etc.
• Governments of Greece , Portugal and Italy were able accumulate huge debts
however they were able to repay these with more borrowed money.
• In Ireland and Spain, cheap credits created enormous housing bubble just as in
the case of The United States.
• Credit flowed DEBT accumulated and the economies of Europe became
TIGHTLY INTERTWINED.
• Things continued until credit was available and it was available until 2008, when
US housing market collapsed bringing borrowing to a halt.
9. SO
• Suddenly the Greek economy couldn’t function. It cannot pay for the jobs
and benefits that it created. Had 330 bn euro of debt in 2010.
• To avert calamity, the so-called troika — the International Monetary Fund,
the European Central Bank and the European Commission — issued the
first of two international bailouts for Greece, which would eventually total
more than 240 billion euros, or about $264 billion at today’s exchange rates.
• The bailouts came with conditions. Lenders imposed harsh austerity terms,
requiring deep budget cuts and steep tax increases
10. • But it rather worsened the situation i.e. when a government cuts spending
then it cuts many people’s incomes and so they will pay less tax and thus less
income with the govt. to repay loans. Unemployment rate has risen to
25.6%.So there is even more risk of the country bailed out to repeat same
mistake again.
• Greece defaults IMF’s $1.7 bn payment on 30 july 2015. It will now be cut
off from access to IMF resources until the payment is made.
• Banks were remain shut for 2 weeks in june-july, people were not allowed a
withdrawal of more than 60 euros a day.
11. The most recent update!
Greece is now receiving much-needed funding from a third Eurozone
bailout - worth about €85bn ( $95bn). It is a three-year bailout programme
(2015-2018), to be provided in instalments by the EU's main bailout fund,
the European Stability Mechanism (ESM). It is based on an outline
agreement reached at a special EU summit on 13 July.
The bailout aims to: put privatization back on track, modernize and slim
down the state administration, tackle tax evasion and fraud, open up
regulated professions to competition, and cut pension costs to make the
welfare system sustainable.
12. • The highest ratios of government debt to
GDP at the end of the first quarter of
2015 were recorded in Greece (168.8
percent), Italy (135.1 percent) and
Portugal (129.6 percent), and the lowest
in Estonia (10.5 percent), Luxembourg
(21.6 percent) and Bulgaria (29.6
percent)”, the Eurostats report says.
13. SO WHAT ARE THE POSSIBLE
DIRECTIONS THAT EUROZONE CAN
MOVE ON TO ??
14. The first is the route of austerity, in particular, fiscal consolidation, including
privatization. This is the default policy choice. A forgone conclusion is that this
will impose social costs.
The second option, (rather an imperative), would be to go in for a closer fiscal
union and a substantially enlarged European budget with a limited system of
fiscal transfers from rich countries to the poor countries, a common form of
protection for employment on the German lines with more flexibility, greater cross
border investment even if this implies takeover of sick and ailing public sector
units by companies from the richer Euro zone states.
The third option is the radical one, GREECE leaving the euro zone(the
GREXIST). A breakdown of the currency may be a very expensive proposition.
But if that were to happen, it could lead to insolvency of several Euro zone
countries, a breakdown in intra zone payments.
15. What if Greece exists( if grexist happens)
• As Greece can't technically be expelled from the Eurozone, but it may have to bow
out “voluntarily” if the European Central Bank cuts off the emergency loans that
are now keeping the Greek banking system from collapsing. Were that to happen,
Athens would need to start printing money in order to bail out its financial sector.
• If Greece return to its previous currency, the drachma, With Greece making up
less than 2% of the Eurozone's gross domestic product (GDP), its exit might not
have much of an immediate impact.
• Drachma will be face devaluation and inflation .It will not help Greece’s economy
recover faster from the deep recession.
• It would only add to the debt burden without resolving Greece’s competitiveness
problem, which stems primarily from regulatory barriers to competition, restrictive
labor practices, and red tape that raise the cost of doing business. Greece ranks
100th in the World Bank’s “Doing Business” report.
16. SO WHAT THEN?
As the result will be economic chaos and uncontrollable social explosion,
then what is the way out??
What led Greece into this mess is its ineffective, incompetent, and corrupt
political establishment, which viewed politics as a means of providing
favours to special interest groups in exchange for vote-buying.
If you offer the printing press to this political system, it will just go back to
business as usual.
It is by cutting off their access to cash, by remaining in the euro, that you can
force political change along with economic change.
17. “Possible Effectsof Eurozone debt crisis and the GREXST(if happened)
In INDIA”
• Can be an indirect effect(but not direct)
• Interest rates on bonds will increase which may reduce our FDI
• We depend mainly on European capital goods imports(heavy machinery) so
this crisis may increase its demand in Europe thereby increasing its export
price there.
• This may reduce world Oil prices and also increase Gold prices here.
• So with much strong central bank reserves we are rather on a safe side.
