The document summarizes the Eurozone crisis, including its causes and potential outcomes and solutions. It discusses how countries like Greece, Portugal and Ireland accumulated large fiscal and trade deficits within the Eurozone, unable to devalue their currencies. This led to a sovereign debt crisis threatening the entire Eurozone. Proposed solutions included bailouts with austerity measures, new stabilization funds, and moves toward greater fiscal and political integration among Eurozone members.

1. EUROZONE CRISIS

2. Agenda
 Definitions
 The World
 European Union
 Eurozone
 What Went Wrong
 Outcome
 Analysis and Opinion
 What Can Plausibly Happen
 Recovery
 Solutions

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 value
Recession – A period of general economic decline; typically defined as
a decline in GDP for two or more consecutive quarters.
Depression – Persisting Recession

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. 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. 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. 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. 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. 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. 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. 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. What Went Wrong……

13. Year 1997
Agreed! Each Country It`s just a
should not borrow norm, right?
more than 3% of its
GDP

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. 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. 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. 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. Portugal and Greece
 High Fiscal Deficits
 Low growth economy
 Low Tax revenues
 High Government Spending
 Govt Employment
 Pensions and Subsidies
 FD 9-10%

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. 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. Analysis and Opinion

22. Mario Draghi, President, ECB
•ECB loans could indirectly help some heavily indebted European countries if the banks use ECB
loans 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 loans
to ECB for 3 years
•By then, region`s financial health might be resolved and governments restored to financial health

23. Uri Dadush
G20 must help manage Eurozone
crisis:
•Build a firewall around Spain and
Italy
• Impose demanding conditions on
Europe
• Foster open international trade
and reform the WTO
• Focus on the big pictire

24. What could plausibly happen?
Eurozone Deutschemark
splits replaces Euro
More
Catastrophe
Liquidity

25. Reform and recovery

26. Proposed long-term solutions
1. European fiscal union and revision of the
Lisbon Treaty
2. Eurobonds
3. European Stability Mechanism (ESM)
4. Address current account imbalances
5. European Monetary Fund
6. Speculation of the breakup of the Eurozone

27. Who can take Advantage of
Eurozone Crisis.

29. Eurozone crisis is 'biggest threat to
emerging Asia'

31. 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

32. 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