Broad Failures of Governmental Policies within Euro Zone Leading to Economic Crises
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How Wrong Governmental Policies can sometimes simulate the economic crises.
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Broad Failures of Governmental Policies within Euro Zone Leading to Economic Crises
- 1. Broad failures of Governmental Policies within Euro Zone leading to Economic Crises KOU Xiaoting ABOU SALEH Habib GIRDAL Sylvain MITCHELL Rodolfo MOHREZ Rafael
- 2. Presentation Outline Introduction What happened ? Greece Spain Why it happened ? Possible Solutions & Preventions
- 3. Introduction
- 4. Same Monetary Policies Different Financial Polices EU countries are tightly intertwined The financial crisis in 2008 affect EU EU is a Monetary Union Finical Polices VS
- 6. Overspending Policies: • Benefit programs (public sector, government committees, Olympic Airlines) • Early retirement pensions which allows Greeks to retire in their 40s • Overspending far more than most other EU members on arms Wrong Policies: • Absence of proper tax payments from citizens balanced with proper tax collection from the government • Absence of proper allocation of defense budget (80 % spent on administrative and staff payments) Greece entered EMU without preparation and fell into: the debt trap and the competitiveness trap Policies and Root Causes
- 7. Spain
- 8. Real Estate Bubble + Trade Balance deficit + Financial Crisis => Spain Debt Crisis Housing price Housing investment Unemployment (%)Debt (% GDP)Deficit (% GDP) Trade Balance (Billions of €)
- 9. Why it happened ?
- 10. Analysis Before 2007 Taxes Borrowing Spending Deficit spending After 2007 Dry money market Difficulties to refinance debts Austerity measures
- 11. Possible Solutions & Preventions
- 12. • Cutting spendings • Borrowing less • Paying back more debt • But... • Nobody wants austerity • It doenst balance the government accounts automatically • It will not prevent it from happening in the future Political organization with authority to set fiscal policy in the Euro Area • Cutting spending • Setting laws • Increasing taxes • Preventing excess Can Europe take the necessary steps to create a Fiscal Union alongside the Monetary Union?
- 13. Bibliography
- 14. • Tejvan, Pettinger (2011), Facts on European Debt Crisis, Economics, [online] Available at http://www.economicshelp.org/blog/2847/economics/eu-debt-crisis/ [ 1 February 2015] • Jarvis, J. (2014), The European Debt Crisis Visualized. Bloomberg Business, 11 February 2014 [online] Available at https://www.youtube.com/watch?v=C8xAXJx9WJ8 [ 4 February 2015] • Ventura, Luca; Aridas, Tina (December 2011). Public Debt by Country ,Global Finance, Gfmag.com. [ 5 February 2015] • Crisis in Euro-zone—Next Phase of Global Economic Turmoil ,Competition master, Archived from the original on 2010-05-25. [ 5 February 2015] • Aljazeera.com, 'Greece's Economic Crisis'. N.p., 2010. Web. [2 Feb. 2015]. http://www.aljazeera.com/news/europe/2010/04/201042961414904780.html • BBC News, 'Greek Debt Crisis'. N.p., 2012. Web. http://www.bbc.com/news/business-13798000[3 Feb. 2015]. • Stewart, Heather. 'A New Idea Steals Across Europe – Should Greece's Debt Be Forgiven'. the Guardian. N.p., 2015. Web http://www.theguardian.com/world/2015/jan/18/should-greece-debt- forgiven-new-idea-europe-syriza. [3 Feb. 2015]. • Eurozone Crisis explained - BBC News Business – Sptember 2012 - http://www.bbc.com/news/business-17549970 • Stephen Burgen - Pain in Spain as bank warns of 10-year jobs blight and public debt leaps €8.1bn – The Guardian – April 2014 - http://www.theguardian.com/world/2014/apr/14/spain-unemployment-economy- recovery-financial-crisis
- 15. • Francisco Carballo-Cruz – Causes and consequences of the Spanish economic Crisis : why the recovery is taken so long? – Panoeconomicus 2011-3 – September 2011 - http://www.google.fr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=14&ved=0CDgQFjADOAo&url= http%3A%2F%2Fwww.doiserbia.nb.rs%2Fft.aspx%3Fid%3D1452- 595X1103309C&ei=xRfmVOPDNcvxUtnHgqgE&usg=AFQjCNFPDPp4PqJO8UcA20jEezbHTCTzAA&sig 2=E0pA3AM8AzDOJjb1_fDhiw&bvm=bv.85970519,d.d24 • Lewis, M. (2012), Boomerang: travels in the new Third World 1th ed. New York: Norton & Company. • Jarvis, J. (2014), The European Debt Crisis Visualized. Bloomberg Business, 11 February 2014 [online] Available at https://www.youtube.com/watch?v=C8xAXJx9WJ8 [ 2 February 2015] • Spiegel (2010), PIIGS to the Slaughter: Can the Euro Zone Cope with a National Bankruptcy? Spiegel Online International, 22 February 2010 [online] Available at http://www.spiegel.de/international/europe/piigs-to-the-slaughter-can-the-euro-zone-cope-with- a-national-bankruptcy-a-679502.html [ 31 January 2015] • Jarvis, J. (2014), The European Debt Crisis Visualized. Bloomberg Business, 11 February 2014 [online] Available at https://www.youtube.com/watch?v=C8xAXJx9WJ8 [ 2 February 2015] • Bogdan, C, & Daniela, H 2014, 'IMPACT OF THE GLOBAL FINANCIAL CRISIS ON SOVEREIGN DEBT IN THE EUROPEAN UNION', Annals Of The University Of Oradea, Economic Science Series, 23, 1, pp. 719-727, Business Source Complete, EBSCOhost, viewed 02 February 2015. • Krajewska, A 2014, 'Fiscal Policy in the EU Countries Most Affected by the Crisis: Greece, Ireland, Portugal, and Spain',Comparative Economic Research, 17, 3, pp. 5-27, Business Source Complete, EBSCOhost, viewed 02 February 2015.
Notes de l'éditeur
- Speaker notes: Presentation outline About European debt crisis, we will introduce what happened: the facts, the wrong policies and the root causes. Then analyze why it happened and followed by the possible solutions & preventions. We researched 5 countries, which related to this debt crisis, they are Portugal, Ireland, Italy, Greece and Spain (often unflatteringly referred to as the PIIGS). As some of them share similar situation, we will go deeply to Greece and Spain out of the 5 countries to show the details.
- Speaker notes : Introduction EU is Economic and Monetary Union, which means there is the same monetary policy and different fiscal policies. They have one currency, which are controlled by the European Central Bank. I will make a brief introduction about the definition about monetary policy and fiscal policy: The monetary policy controls the money supply: how much money will be in the economy and what is the interest for borrowing. The fiscal policy controls how much money the government collect from taxes and how much it spends. If the spending is over taxes, the government has to borrow. This is called deficit spending. Before EU, the small country can only borrow a little money with high interested rate. But now they are part of the EU monetary system and can borrow a huge amount. With access to cheap money in large quantity, the PIIGS borrowed aggressively, created high deficit and debt. Once they cannot repay the money, German and other big economy have to pay for them as they are bonded by the same currency. The PIIGS own a large amount of debt, however, they can repay them by more borrowed money. The economics of the EU countries are tightly intertwined. Banks and government owe each other many billions of euros and have even larger debts to Britain, France and Germany. Any default will trigger serious problems in the other Euro states. The US financial crisis makes borrowing in a hot. No more money can be borrowed. Some countries like Greece borrowed the money they can never repay. There isn’t new borrowed money to repay the old debt and the interest. The European debt crisis emerged.
- Speaker notes : Greece is undergoing financial turmoil over its $400bn debt, with increasingly expensive repayments and a continually downgraded credit rating. The country's credit rating has been lowered to junk status, a risk level that will now force many groups to stop investing in the country's bonds. Due to the broad failure of governmental policies adopted in Greece, Athens has even less money to pay back its huge loans and there are now fears that its problems will spread to other EU nations and some countries further afield. Overspending Policies: -------------------------- The Mediterranean nation incurred annual budget deficits of billions of dollars via overspending in several areas: Benefit programs Over spending in the public sector and government committees, Loss making utilities, such as Olympic Airways, the national airline, that was eventually privatized in 2008. The government's benevolence allowed civil servants to retire in their 40s and permitted their unmarried or divorced daughters to collect their pension after they had died, the latter at a cost of about $70 million annually by some estimates. Political Tensions with Turkey pushed Greece to spend far more than most other EU members on arms, about six per cent of its GDP in 2009. (talk about the graph). Wrong Policies: ----------------- Absence of proper allocation of defense budget as about 80 per cent of it is spent on administrative and staff payments. Absence of proper tax payments from citizens balanced with proper tax collection from the government. As a result, Debt % increased with time and it is way higher than European Average Debt % (Figure) As a conclusion: Greece entered EMU without adequate preparation and fell into both traps: the debt trap and the competitiveness trap
- Speaker notes : * Before the crisis, Spain (12% of Europe GDP) was in good shape compares to Greece : low debt and low deficit. Spain seemed to be one of the best of the European countries in terms of budget and fiscal policy management. * Thanks to Europe, € as unique currency and common European monetary policy, Spain has also been able to borrow money at a cheap cost but for other purposes than Greece. They massively invest in housing construction. It has been huge as a bubble appears : prices increased a lot and investments also until things started to go wrong. They also had a huge trade balance deficit that required to be financed. Then, the financial crisis came and the cost of money increased. The bubble crushed and Spain had huge issues to finance his economy as it was based on construction and low cost money. It implied a increase of the deficit, of the debt and a an amazing increase of the unemployment. After that, Austerity came ……
- Speaker notes: Why it happened? Before Portugal, Ireland, Italy, Greece, and Spain (PIIGS) entered to the Euro Area, they were able to borrow money at very high interest rates (around 18%) because of their overregulated labor markets, tax evasion, and weak industries. After these countries entered to the Euro Area, they had access to almost unlimited credit, at roughly the same interest rates as Germany (3%), since they were backed up by economies such as The Netherlands, Belgium and France. So that, not only PIIGS governments skyrocketed their fiscal imbalances by increasing their spending in areas such as infrastructure, housing, government wages, politician`s advertisement, and so on. But also, they did not increase their productivity, their taxpayers’ base neither decrease the levels of corruption. As a result, they became seriously uncompetitive against other countries in the Euro Area, as well as they accumulated unplayable debts. Before 2007, this overspending was financed with more and more foreign credit (government bond issuing) instead of tax collection. But, once 2007 crises began, and the international money market dried, these governments faced too many difficulties to refinance their debts and pay their obligations; therefore they could not keep the same level of spending. They had to fire people, cut spending, and tried to pay all their debt obligations. When these governments realized that they did not find the resources in the financial markets to face their obligations, they had to ask for help to the European Central Bank and the International Monetary Fund in order to avoid insolvency. Hence, these institutions help them but with the condition of adapting some austerity measures such as cut spending, borrowing less and pay as much debt as they could
- Speaker notes: Possible solutions & Preventions In Europe differences between nations´ culture and morals, such as responsibility of the governments on how to spend money were amplified when Europe became economically integrated with the creation of the Euro and the monetary union (smallest countries could borrow more money with the same interest rate as strong economies). After the economic crisis in 2008, Germany implemented austerity measures trying to control the amount of money spent by countries such as Greece. They offer to pay their debt but only if they adopt an austerity policy: “Our money, our morals”. The idea was to cut spending, borrowing less and paying more debts. The problem is “austerity measures” is not a complete solution because it will not balance the government accounts: less spending, reducing growth generating less tax. In addition, nobody wants austerity (cultural differences). To save Europe and the Euro in the long run, a possible solution is the fiscal union (such as the monetary union); not only cutting spending but also setting laws and preventing excess. All countries in Europe must be subordinated to an unified fiscal authority that will be responsible to set the Fiscal policy in the Euro Area (“United States of Europe”) and will regulate the taxes versus spend of each member of the union. Fiscal union it is a simple idea but will be hard to be implemented in Europe.