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.
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%
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
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
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
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