Eurozone debt crisis


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Eurozone debt crisis

  1. 1. .BYRicha TomarNishant Parheta
  2. 2.  What is euro zone ? What is euro zone crisis? Country affected and impact on them... Present condition ..... Solutions.....
  3. 3.  Euro zone is an economic and monetary union[emu] of 17 European country..... The eurozone currently consists of Austria, Belgium,cyprus,estonia, Finland, France, Germany, Greece,Ireland, Italy Luxemburg, Malta, the Netherlands,portugal,slovakia, Slovenia, and Spain. In 1998 eleven member states of union had met theeuro convergence criteria, and the eurozone cameinto existence with the official launch of the euro(alongside national currencies) on 1 January 1999.
  4. 4.  The monetary policy of all countries in the eurozone ismanaged by the European central bank (ECB)Whereas all EU member states are part ofthe European System of Central Banks (ESCB
  5. 5.  It is biggest challenge Europe has faced since1990. Due to global financial crisis that began in2007-08 the euro zone entered its first officialrecession in third quarter of 2008. The official figures were released in 2009 Jan. On 11 Oct 2008, a summit was held in Parisby the euro group heads of state &Govt. , todefine a joint action plan for euro zone &central banks of Europe to stabilize theeconomy.
  6. 6. 6GLOBAL ECONOMIC CRISISEFFECT ON EU AND EUROCrisis starts in US sep.’08, but spread’s to Europe,where in many countries similar problems existed ofhousing bubble, excess debt of consumers,government.Crises most severe in Greece ,Portugal (fiscaldeficits),Ireland, Spain (housing bubbles, bankingsystem)
  7. 7. PORTUGALINFLATED TOP MANAGEMENT ANDHEAD OFFICER BONUSES ANDWAGES IN THE PERIOD BETWEENTHE CARNATION REVOLUTIONIN 1974 AND 2010. PERSISTENTAND LASTING RECRUITMENTPOLICIES BOOSTED THE NUMBEROF REDUNDANT PUBLICSERVANTS. RISKY CREDIT,PUBLIC DEBT CREATION.IRELANDTHE IRISH SOVEREIGN DEBTCRISIS WAS NOT BASED ONGOVERNMENT OVER-SPENDINGBUT FROM THE STATEGUARANTEEING THE SIX MAINIRISH-BASED BANKS WHO HADFINANCED A PROPERTY BUBBLESPAINDebt was largely avoidedby the ballooning taxrevenue from the housingbubble, which helpedaccommodate a decadeof increased governmentspending without debtaccumulationGREECEGreece was hit especially hardbecause its main industries—SHIPPING and TOURISM —were especially sensitive tochanges in the businesscycle.The government spent heavilyto keep the economyfunctioning and the countrysdebt increased accordingly.
  8. 8.  Huge imbalances between surplus countries (Germany,Holland, Finland) and deficit countries (Spain, Portugal,Italy) Lack of macroeconomic coordination Lack of supervision in the levels of private debt, andasset bubbles Lack of a centralised budget to overcome asymmetricshocks Lack of a pan-European debt market (Eurobonds) Lack of a lender of last resort Lack of jurisdiction on derivative markets and creditrating agencies
  9. 9.  European Financial Stability Facility (EFSF)On 9 May 2010, the 27 EU member states agreed to create theEuropean Financial Stability Facility, a legal instrument[ aimingat preserving financial stability in Europe by providing financialassistance to eurozone states in difficulty. The EFSF can issuebonds or other debt instruments on the market with the supportof the German Debt Management Office to raise the fundsneeded to provide loans to euro zone countries in financialtroubles, recapitalise banks or buy sovereign debt. On 26 October 2011, leaders of the 17 eurozone countries met inBrussels and agreed on a 50% write-off of Greek sovereign debtheld by banks, a fourfold increase (to about €1 trillion) in bail-out funds.
  10. 10.  ECB injected liquidity into European banksunable to obtain short-term funds in market. Federal Reserve used Euro-dollar swaps tomake dollars available to ECB to lend tobanks. ECB did not lower interest rates until October2008 because of its focus on inflation. Euro fell against the dollar due to “safehaven” flight to US Treasury securities.
  11. 11.  Automatic Stabilizers of falling taxes, risingwelfare and unemployment payments kick inas incomes fall and unemployment rises. Discretionary Fiscal Stimulus enacted in mostcountries, depending on their fiscal positions. European countries limited by Stability andGrowth Pact to 3% fiscal deficits, except intime of “exceptional economic distress.”
  12. 12.  Since joining the euro, Greece has had higherinflation than other Euro zone members. Greece has also increased debt faster than othersto finance generous public sector pay, welfare, andretirement benefits, while collecting a lower share intaxes due to widespread tax evasion. As a result, Greek goods have become increasinglyexpensive and uncompetitive, causing loss ofmarket share and further reducing revenues.
  13. 13. GDP-- $360 billionDebt-GDP ratio-- 113% of GDPBudget Deficit-- 12.9% of GDPCurrent Account Deficit--11.0% of GDPNet Foreign Debt-- 70% of GDPTotal Outstanding Public Debt-- 290billion euro
  14. 14.  Spain is experiencing the highestunemployment rate of 25%. Italy- has already taken austerity measures.The lower house of parliament has voted for25 billion Euros of cuts to reduce thecountry’s deficits. The govt. aims to reducebudget deficits down from 5.3% of GDP to2.7% by 2012.
  15. 15. India export to Europe could witness aslump close to 10%Export driven sector such as textile andsoftware are likely to bear the burnt About 22-28% revenues of India’s toptech major come from Europe whoserevenue got affected Govt overall target of $200 million fiscalcould be at stake.
  16. 16. Countries affected must:Grind Down WagesRaise ProductivitySlash SpendingRaise TaxesTransparent Banking SystemEndure Such Austerity Drives for manyyears
  17. 17.  Monetary Union is flawed without political unionbehind it European governments have tried to act together, notalways successfully. Common currency members avoided largedevaluations and foreign currency debt. There needs to be more macroeconomic cooperationto avoid internal imbalances Greece facing difficult adjustment problems, Europeanbanks avoiding losses on Greek bonds. Germany needs to stimulate internal demand EZ periphery needs to be more productive andcompetitive The EZ needs to tackle the appreciation bias of theeuro