1. Financial Crisis and
the European Union
• Adam Balogh
• Guillermo Palacios
• Lucas Pederzini
• Peter Bali
November, 2011
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2. Agenda
European Union Overview
Main Financial Indexes
How the Crisis Started
Main Impacts in European Union
Recovery Plan
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3. Capital Mobility
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4. Capital Mobility
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5. Unemployment
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6. Youth Unemployment
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7. Unemployment in the Great Depression
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8. How the crisis started
 Uncertainty among banks;
 Policy makers still described the crisis primarily as a liquidity
problem;
 European economy immune to the financial turbulence.
This sentiment dramatically changed in September 2008
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9. Result
 Panic in stock markets and the trade credit became scare:
Bank lending to private economy in the euro area 2000-09
16
14
12
10
8
6
4
2
0
0 1 2 3 4 5 6 7 8 9
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10. Result
 Negative growth:
Growth in % 2008 2009 2010
GDP 0,9 - 4,0 - 0,1
Private C 0,9 - 1,5 - 0,4
Public C 0,9 - 1,5 - 0,4
Total investments 0,1 - 10,5 - 2,9
Unemployment 7,0 9,4 10,9
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11. Impact on Budgetary Positions
 Rapid growth of fiscal costs:
• Fiscal Deficit;
• Public Finances;
• Sovereign Risk Spreads.
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12. Fiscal Deficit
 Housing Boom;
 European Commission analysis:
• Direct Channels;
• Indirect Channels.
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13. Public Debt
 Debt financed fiscal deficits;
 Capital injections in distressed banks.
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14. Fiscal Stress and Sovereign Risk Spreads
 Widening sovereign risk spreads;
 Downgrading in credit rating;
 Fiscal Space - risk re-pricing.
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15. Recovery Plan
 Short Term Actions:
• European Financial Stability Facility (EFSF);
• Special Purpose Vehicle (SPV) created in order to sell bonds to raise
money for granting loans to the euro zone nations in need.
• European Financial Stabilization Mechanism (EFSM);
• Emergency funding program created in order to raise founds on
the financial
markets, guaranteed by the European Commission, using the budget of the
European Union as collateral.
• ECB interventions.
• Open market operations buying Government's and private debts;
• Two 3-month and one 6-month full allotment of Long Term Refinancing
Operations;
• Reactivation of the dollar swap lines with Federal Reserve support.
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16. Recovery Plan
 On-going Happenings:
 Political changes:
• Greece and Italy - beginning of a new Management era.
• Results are expected before December/2012.
 Kick-out poor and negligent Countries:
• Impacts on Political issues and diplomacy.
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17. Recovery Plan
 Proposed long-term solutions:
• Common fiscal policy (European Treasury);
• European Stability Mechanism;
• European Monetary Fund (instead of EFSF);
• Address slow economic growth;
• Euro breakup – two currencies speculation.
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18. Future
?
What’s the future of European Union?
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