The document discusses the ongoing Eurozone crisis, providing background information on the evolution of the Eurozone and European Union over time. It outlines some of the key factors that contributed to the crisis, including unsustainable deficits and debt levels in peripheral Eurozone economies. It also describes some of the measures taken in response to the crisis, such as bailout packages for Greece, Ireland, Portugal, Spain, and Cyprus totaling hundreds of billions of euros, as well as the creation of institutions like the European Financial Stability Facility and European Stability Mechanism to manage the crisis.

1. The
Eurozone
Crisis
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Quick Questions
1. Who was awarded the Nobel Peace Prize in 2012? Why?
2. How many countries are there in Euro Zone?
• Will your answer change on 1st
January 2014?
3. How many countries are there in the European Union?
• What would have been your answer before 1st
July 2013?
4. How many countries are there in Europe?
5. When was Euro launched?
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Issues’ on www.testcracker.in you will
already know the answers!
Answers – 1. European Union (for keeping Europe free from war) 2. 17 (Latvia will become the 18th
in 2014) 3.
28 now (Croatia is the newest) 4. 50 5. 1999 (virtually)

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Once upon a time in Europe
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Just after World War II

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The Evolution of Euro Zone
European Coal and
Steel Community (1951
Treaty of Paris)
European Economic
Community (1957
Treaty of Rome)
European Free Trade
Association (1959)
Single
European
Act (1986)
Maastricht Treaty
(1992, EEC becomes
EU)
European
Central Bank
(1998)
Launch of Euro
(1999)
Treaty
of
Lisbon
(2007)
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Key Concepts
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The Convergence Criteria
What is
measured
How it is
measured
Convergence Criteria
Price stability
Harmonized
consumer price
inflation rate
Not more than 1.5% above the rate of
the three best performing Member
States; and this level of inflation must
be sustainable
Sound and
sustainable public
finances
Government
deficit as % of
GDP
Not exceeding the reference value of
3%,unless it "has declined
substantially and continuously and
reach a level that comes close to the
reference value”(Article 104 (2)(a) EC
Treaty)
Sound and
sustainable public
finances
Government debt
as % of GDP
Not exceeding the reference value of
60%,unless “the ratio is sufficiently
diminishing and approaching the
reference value at satisfactory
pace”(Article 104 (2)(b) EC Treaty)
Convergence in
long term interest
rates
Long term
interest rates
Not more than 2% above the rate of
three best performing Member States
in terms of price stability
Exchange rate
stability
Deviation from a
central rate
Participation in the Exchange Rate
Mechanism (ERM II) for two years
without severe tensions; no
devaluation on own initiative
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The Seven Institutions of the European Union
1. The European Parliament is the directly elected parliamentary institution of the
European Union (EU). Together with the Council of the European Union (the
Council) and the European Commission, it exercises the legislative function of the EU
and is one of the most powerful legislatures in the world.
2. The European Council is entrusted with the responsibility of defining "the general
political directions and priorities" of the Union. It is thus the Union's strategic (and
crisis solving) body.
3. The Council of European Union is is part of the essentially bicameral EU legislature,
representing the executives of EU member states.
4. The European Commission (EC) is the executive body of the European Union
responsible for proposing legislation, implementing decisions, upholding the Union's
treaties and day-to-day running of the EU.
5. The Court of Justice of the European Union (CJEU) is the institution of the
European Union (EU) that encompasses the whole judiciary. Seated in Luxembourg.
6. The European Central Bank (ECB) is the central bank for the euro and administers
the monetary policy of the 17 EU member states which constitute the Eurozone.
7. The Court of Auditors (ECA) has a mandate to externally check if the budget of the
European Union has been implemented correctly, in that EU funds have been spent
legally and with sound management.
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The Crisis was always coming…
Accumulation of massive and unsustainable deficits and public debt levels in a number of
peripheral economies
Failure to adhere to fiscal commitments
Excessive social spending
Lack of political will, individually or collectively to take strong action
The Eurozone comprised of the Strong economies (Germany, France, Italy, Spain) & the
Peripheral economies (Greece, Cyprus, Malta, Portugal, Estonia…)
• The periphery states thrived in the first years of the euro, propelled by large
infusions of liquidity and unprecedented access to credit from other eurozone
states.
• The "productive capacity" of the periphery was limited by rigid labor markets and
a reduction of economic competitiveness
 By 2010, a sovereign debt crisis--most pronounced in Greece--was spreading
throughout the periphery and endangering the future of the eurozone.
 Between spring 2010 and spring 2011, the EU and the IMF acted to bail out
Greece, Ireland, and Portugal.

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It is not ‘One Crisis’!
Each troubled country of Eurozone has its own reasons for the crisis
Greece - prolonged deficit spending, economic mismanagement, government
misreporting, and tax evasion.
Ireland's debt crisis was triggered by a bank default crisis, a result of its housing bubble
collapsing in 2008.
Spain is struggling with massive unemployment – 29% along with depressing GDP
Portugal is in crisis because of over-expenditure and investment bubbles
The crisis in Cyprus is a spill-over from Greece!
 Overarching theme is the inability of the governments to imagine that there will
be a day when they will not be able to finance the deficits!
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The Bailouts
1. Greece has received two bailout packages (110 b Euros in May 2010 +
130 b Euros in Feb 2012) from its eurozone partners and the
International Monetary Fund.
2. Ireland secured a 67.5-billion euro package in November 2010.
3. In May 2011, Portugal agreed to a package of 78-billion euros in
rescue loans.
4. The Spanish government agreed a deal in July 2012 with eurozone
officials to get up to 100-billion euros in rescue loans directly for the
banks. The European Central Bank vowed to do “whatever it takes”
to save the euro.
5. Cyprus agreed to confiscate a part of deposits in exchange for 10-
billion euros in rescue loans (March 2013)
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The EFSF
• The European Financial Stability Facility (EFSF) was created by the
euro area Member States in May 2010
• Its mandate is to safeguard financial stability in Europe by providing
financial assistance to euro area Member States within the framework
of a macro-economic adjustment programme.
• EFSF was created as a temporary rescue mechanism.
• In October 2010, it was decided to create a permanent rescue
mechanism, the European Stability Mechanism (ESM).
 From this date onwards, the ESM became the main instrument to
finance new programmes.
 In parallel to the ESM, the EFSF will continue with the ongoing
programmes for Greece, Portugal and Ireland.
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Key Facts about ESM
The European Stability Mechanism is a permanent crisis
resolution mechanism for the countries of the euro area. The ESM
issues debt instruments in order to finance loans and other forms
of financial assistance to euro area Members States.
 intergovernmental organisation under public international law,
based in Luxembourg
 total subscribed capital of €700 billion, with paid-in capital (€80
billion) and committed callable capital (€620 billion)
 effective lending capacity of €500 billion
 shareholders are the 17 euro area Member States
 Managing Director: Klaus Regling
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The roots of the crisis
 Euro Zone is a monetary
union – but not a fiscal
union
 Unsustainable spending
on social welfare
 ‘Soft’ taxation policies
 Easy credit conditions
 Increase in bond yields
due to credit downgrades
 Globalization of
finance?
Rootsofthecrisis
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Is Crisis the New Normal?
Risk of default => Bail-outs => Austerity measures =>
Subdued economic activity + Political unrest =>
No solution in sight
The Big Question
Whom to follow -Whom to follow -
Keynes or Hayek?Keynes or Hayek?

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India EU FTA – 6 years & counting
 Negotiations started in 2007
 15 round of negotiation without result
 Contested issues –
• Germany wants
 Duty cut in automobile sector, wines and spirits and dairy products
 Hike in FDI cap in the insurance sector
 Strong intellectual property regime
• India wants
• Liberalised visa norms for its professionals
• Data secure status
• Market access in services and pharmaceuticals sector.
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