Economic crisis in eurozone
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To revitalize the economy in Eurozone, different monetary and fiscal policies have been considered and implemented. In the presentation, we also suggested our monetary and fiscal policies for year 2015 based. This slides were presented for professor Daniel Fernandez Kranz's Managerial Economics at IE Business School MBA.
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Economic crisis in eurozone
- 1. Economic Crisis in Eurozone What Monetary and Fiscal Policy Does the Eurozone Need?
- 3. 506 335 316 Population (Million) 16.4% 12.4% 17.5% % of World GDP $16.8 $ 12.7 $ 17.9 GDP (Trillion) $ 53,000 $ 39,400 $ 35,440 GDP per capita EU Eurozone US
- 4. GDP OECD 1.8% Euro Area 0.8% U.S. 2.2% UNEMPLOYMENT OECD 7.9% Euro Area 11.9% U.S. 7.4% FISCAL BALANCE OECD -3.9% Euro Area -2.6% U.S. -5.1% INFLATION OECD 1.5% Euro Area 1% U.S. 1.6% 2014 Source : Eurostat
- 5. © EuroGeographics Association for the administrative boundaries http://ec.europa.eu/eurostat/tgm/mapToolClosed.do?tab=map&init=1&plugin=1&language=en&pcode=teina225&toolbox=types General Govt. Gross Debt Unemployment Rate
- 6. Background of Financial Crisis Eurozone US Regional imbalances intensified and leverage in some euro area Member States became excessive. Risks to government debt sustainability, which lies at the heart of the sovereign debt crisis in a number of euro area countries, but also elsewhere. In the United States, balance sheet problems lay with households, following the housing and credit boom. Financial panic that gripped capital markets worldwide after the collapse of Lehman Brothers. Source: https://www.ecb.europa.eu/pub/pdf/other/art2_mb201205en_pp95-112en.pdf?83cb7037d4b11ad7bab69a4dd31e0c06
- 7. Organizational Structure of Monetary & Fiscal Policies Eurozone (19 countries) US European Central Bank 19 different countries U.S. Government Supported by 19 former central banks Monetary Fiscal Fiscal Federal Reserve 7 Boards of governors Monetary Federal Open Market Committee Federal Reserve Bank
- 8. Fiscal & Monetary Policies Policies Tools/Strategies Examples of Action Fiscal Tax Cut Government Spending Transfer Payment Austerity Structural Reform Deficit Reduction Monetary Interest Rate Reserve Ratio Open Market Operation Lowering Interest Rate Operation Twist Long Term Refinancing Program Quantitative Easing
- 9. Fiscal Policies in Eurozone and US 20152010 2011 2012 2013 2014 Austerity Lehman Brothers bankruptcy 2009 EURO ZONE US Deficit Reduction Transfer Payment ($800B) Extend Tax-cut “Tax Relief Act” Fiscal Cliff Increase the tax Avoided Structural Reform Greater Flexibility in the Stability and Growth Pact
- 10. Monetary Policies in Eurozone and US 20152010 2011 2012 2013 2014 Lehman Brothers bankruptcy Operation Twist 1 Operation Twist 2 Long Term Refinancing Program Outright Monetary Transaction Securities Market Program Troubled Asset Relief Program Lowering Interest Rate Lowering Interest Rate 2009 EURO ZONE US QE3 $1.6T QE1 $1.73T QE2 $0.6T “Whatever it takes” QE $1.2T Source: Economist, http://www.project-syndicate.org
- 11. What is QE(Quantitative Easing)? 1 Central bank creates money 2 to buy bonds from financial institutions 3 which reduces interest rates % 5 …so they spend more and create jobs… $ 4 leading business and people to borrow more 6 to boost the economy $ Source : BBC, http://www.project-syndicate.org
- 12. Result in US and Eurozone OECD Euro Area U.S. Source : Eurostat
- 13. Policy Proposal for Eurozone QE Benefits • Lower long-term interest rates • Causes currencies depreciation • Ease credit crunches • Raises equity prices Drawbacks • Most firms in EU borrow money from banks (*Most firms in US issue and sell bonds to finance) • Long-term interest rate has already been very low • Structure (19 countries vs. 1 US)
- 14. 3. Long-term Fiscal Investment • Subside education program • Healthcare • Regenerate fiscal space • Population balance • Generate confidence among C,I,G sectors 1.Fair Distribution • Buy bonds in relation to the outstanding debt of each country (Greece) • Improve immigration policy to promote mobility of jobs in Eurozone 2. Tax Restructuring • Consumers: Shift income tax to consumption tax • Biz: Investment tax credit • Households: Giving a tax credit for mortgage interest payment Policy Proposal for Eurozone
- 15. Monetary Policy could work only with a fiscal policy synergy to Keep euro zone together
Editor's Notes
- Eurozone: Consists of 19 countries that have adopted the Euro as their official currency. All Eurozone courtiers are European Union´s members, but not all EUM´s are Euro countries (think about England and Denmark). Other EU states (except for Denmark and the United Kingdom) are obliged to join once they meet the criteria to do so. They are represented in the Eurogroup, which is formed by the Finance Ministers of the euro countries. TMonetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a president and a board of the heads of national central banks. http://www.eesc.europa.eu/resources/toolip/img-thumb/2011/09/22/smact-logo-800-extra_large.jpg
- The size of the Euro Area (EU 28 countries, EZ 19 countries, USA 1 country) Population EU: 506 million, EZ: 335 million, USA: 316 million GDP: EU 17.9 USD trillion; EZ 12.7 USD Trillion; USA 16.8 trillion. GDP in World percentage: EU 21%, EZ 12.1%, USA 16.5% GDP per cápita: EU: 35,440 USD; EZ 39,400 USD; USA 53,000 usd. http://databank.worldbank.org/data/views/reports/chart.aspx# http://data.worldbank.org/indicator/NY.GDP.PCAP.CD/countries/EU-US-XC?display=graph
- Please fix the data
- Are we comparing the same year data?
- This is first slide of question 2. Before we talk about the fiscal & monetary policies of Eurozone & US, we will briefly explain about the background of current economic crisis in Eurozone and US. Yes, we can say the trigger for current economic crisis in both region was so called sub-prime mortgage crisis from US. However, the process and the destination of crisis in both region were different as above.
- As you know well, the organizational structures of two regions were different from the origin. As a result, both monetary and fiscal policies in Eurozone have been very limited compare to US.
- Let’s briefly look through the basic concept of fiscal and monetary policies. Fiscal policy is the means by which a government adjusts its spending level and tax rates to monitor and influence a nation’s economy. For example, the government increase transfer payment which includes welfare, social security, and subsidies for certain business. Opposite example of transfer payment can be Austerity policy. Monetary policy is the process by which the monetary authority of a country controls the supply of money.
- Let’s look through some important fiscal policies implemented in Eurozone and US from 2009 to now. The fiscal policies in both regions have been very different because they have different problem and different organizational structure. In Eurozone, Austerity and Structural reform policies were requested and conducted more or less since they targeted to reduce the governmental debt. Yet, in the US, tools were more likely to increase the aggregate demand directly.
- Both region lowered interest rate when the crisis occurred. Yet, following monetary policies have been different in two regions. In Eurozone, ECB has been more focused on policies about fixing the interest rate to make business sector to borrow money easily. Yet, it didn’t work well since banks were reluctant to lend money to business. In US, FED implemented policies both on fixing the interest rate and on changing the quantity of money in circulation. (Click) Like Quantitative Easing which is unconventional tool of monetary policy, buying and selling long-term bonds to supply money now. ECB President Draghi announced that Eurozone will implement Quantitative Easing from upcoming March, too.
- Amita - Started in US from March 2009 Quantitative easing (QE) is monetary policy used by a central bank to stimulate an economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base. This differs from the more usual policy of buying or selling short-term government bonds in order to keep interbank interest rates at a specified target value. ( You can also look up for details on page 556 of Economics book) Another point - The way QE operates The banks have their reserves kept electronically in the Fed reserve. Before 2008 the fed did not provide any interest on the excess reserve ( reserve kept at Fed - minimum reserve required to be kept at Fed). After 2008 they provided some interest on excess reserve which incentived the banks to not spend/lend all of their reserves at Fed. Thus it kept inflation low (inflation did not shoot up) illustrates by the following reference - http://www.project-syndicate.org/commentary/the-inflationary-risk-of-us-commercial-bank-reserves-by-martin-feldstein#kPVBRqBBRRexhDDO.99
- Amita-The measures taken by Fed and Euro zone’s central bank have thus led to above trends. Due to measures such as QE taken by Fed we have seen improvement in the desired inflation of US, reduction of employment and GDP growth in US. However since the fiscal (austerity, high fiscal deficit/debt) and monetary measures (central bank lends to lower banks but these banks not willing to lend to consumers or have very high interest rate leading to credit crunch) of the Euro zone have been relatively ineffective the problems of low inflation, and high unemployment persist in Euro zone. Euro zone recently initiated QE and it has led to build up of positive expectations in Euro zone.