Euro zone (Union) crisis
KOHINOOR BUSINESS SCHOOL
WHAT IS EURO ZONE?
• Established: 1st January 1999
• It is an economic and monetary union(EMU)of 17 European
[1-Germany, 2-Italy, 3-France, 4 -Finland, 5-Netherlands, 6-Ireland, 7-Greece, 8-Austria, 9-Spain, 10-
Portugal, 11-Belgium, 12-Luxembourg, 13-Slovakia, 14-Slovenia, 15-Malta, 16-Cyprus, 17-Estonia]
• They have fully adopted the euro as their national currency.
• The main objective behind forming Euro zone:
-Reduce trading cost
-Smooth the economy
PROBLEMS IN EURO ZONE
• Most governments were running a budget deficit.
(Spending more than there earning)
• All 17 countries were behaving differently (without any real
central fiscal control
• Lack of strong political leadership
INTRODUCTION TO EURO ZONE CRISIS
• Began in 2009 from Ireland:
1990 to 2000-Ireland economy was Booming
(But relied on personal debt + overinflated housing market)
• Other Smaller European countries (PIIGS: Portugal, Italy, Ireland, Greece,
and Spain) were having too much debt and become unable to repay them.
• The Global financial crises in 2008 affected huge specially to small
KEY FACTORS LED TO EURO ZONE CRISIS
• Violation of EU Rules:
-Countries such as Greece and Cyprus did not give real data about the financial and economic
-Greece and Portugal were spending more then there revenue
-Tex revenue started falling down
• Banking Sector Problem: Banks were having a highly risky financial instruments in
there portfolio such as:
-Collateralized Debt Obligations (CDOs)
-Credit Default Swaps
• Rising interest rates:
- Because of Liquidity problem interest rates started picking up
- Become difficult for the borrower to repay there loan
Interests Rates on 10-year Government Bonds (in percent):
• Huge DEBT: Because of rise in interest rates, reduction in government revenue (Tax).
DEBT TO GDP RATIO OF (PIIGS) COUNTRIES:
(Whole Europe owes €10.84 trillion) in2009
• Increase in wage rates: Because of inflation
• Investor confidence wavers: Investors started to transfer there money away
from the problem.
• Key stakeholders tighten their wallets: Reduce spending, Economy slow
-Government income started shrinking and debts become harder to repay.
MAJOR DEBT RIDDEN COUNTRIES BY JAN 2012
Government debt as a proportion of GDP:
• European Union, Government debt in 2012 (85.3% of GDP)
• Total debt should be no more than 60% of country’s GDP
IMPACT OF EUROZONE CRICIS
• Investor’s lose confidence on government securities:
- Greek crisis has made investors nervous about lending money to governments through buying
• Reduced wealth: By raising tax
• Unemployment: (Spain is experiencing the highest unemployment rate of 20%)
• Global economy slowdown:
IMPACT OF INDIA
• high volatility because of FII’s
• Big (FII) investment leads to increased inflationary pressures (Building of an
Exports and Foreign currency inflow:
• Slowdown in the Manufacturing and Service sectors:
• Depreciation of Rupee (Slow down in Europe, investors investing in US dollar, result USD
• 1/3rd of Indian tourist arrive from Euro zone, which is affected badly after Euro zone crisis.
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.
Hence US should help the countries in problem to come out
from the crisis.