What went wrong with Eurozone? A country wise analysis and overview of rescue policies

1. EUROZONE
CRISIS
GROUP 7 (SECTION B)
GAGANDEEP PGP05067
HARSHAN PGP05068
HENNA PGP05069
JAYESH PGP05071
JOEL PGP05072

2. Introduction
PIIGS
Economies
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
A Europe without frontiers
 January 1st 1999 the currencies of 11 countries were
fixed against a new currency, the Euro.
 In 2002 Euro came into circulation.
 Currently Eurozone has 18 members while the
European Union has 28 members.
 Economic and monetary union (EMU) -18 European
Euro-zone states and 10 non-Euro states.
 European Central Bank :define and implement the
monetary policy of the Monetary Union with target
of price stability (2% inflation)
 Joining of Eurozone under Maastricht qualifying
criteria(1991)
Country
National Currency per euro at time
of joining
Austria 13.76
Belgium 40.33
Finland 5.94
France 6.55
Germany 1.955
Greece 340.75
Ireland 0.787
Italy 1936.25
Luxembourg 40.33
Netherlands 2.202
Portugal 200.482
Spain 166.386

3.  Export dependent model: low labour cost after
labour market reforms in 2003 by Gerhard
Schröder.
 Devaluation of D-mark gave a boost to exports
as compared to other euro nations.
 Exports contribute about 45% to German GDP.
110
108
106
104
102
100
98
96
94
92
REER (index 2005=100)
 REER below other euro zone nations gave
it export competitiveness.
 Euro zone accounts for about 37% of
German exports.
50
45
40
35
30
25
20
15
10
5
0
German Exports as Percentage of GDP
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
90
1 2 3 4 5 6 7 8 9 10 11 12 13
GERMANY Spain Greece Italy
Introduction
PIIGS
Economies
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
The German Miracle

4. Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
PIIGS Economy
 PIIGS and other peripheral economies could borrow
at low rates after joining euro fuelling a spending
binge.
 Debt burden unsustainable after 2007 financial crisis.
 Ballooning budget deficits due to fall in tax receipts
and increased spending on unemployment benefits.
5.0
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
Budget Deficit
 Low interest rates fuelled domestic spending
and spurred inflation in wages and goods,
making their exports more expensive and left
imports relatively cheaper
10
5
0
-5
-10
-15
-20
Current account deficit
2006 2007 2008 2009 2010 2011 2012 2013
Germany Ireland Greece Spain Italy Portugal
-35.0
2006 2007 2008 2009 2010 2011 2012 2013
Germany Ireland Greece Spain Italy Portugal

5.  Southern economies have leant too heavily on
consumer spending, have weak public finances
and rely on foreign capital to supplement their low
savings.
 Southern European economies racked up huge
current-account deficits in the first decade of the
euro while countries in northern Europe ran offsetting
surpluses.
 Credit flows from the euro-zone core to the
overheated housing markets of countries like Spain
and Ireland.
45
40
35
30
25
20
15
10
5
0
Exports as a percentage of GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Greece Portugal Italy
Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Unsustainable growth in Southern Economies
Unit Labour cost % change (1999-2013)
0 10 20 30 40 50 60
Percentage increase
Portugal Italy France Spain Germany

6.  Investors considered euro-zone sovereign bonds to
be risk free.
 But seeing unsustainable debt levels after the
American crisis they started demanding a premium
from PIIGS(peripheral) economies.
 Refinancing of debt became impossible due to
spiraling bond yields.
 European Banks had exposure to sovereign debt .
 Falling confidence in banks reinforced falling
confidence in sovereigns which reinforced falling
confidence in banks.
30
25
20
15
10
5
0
10 year government bond yields
2007 2008 2009 2010 2011 2012 2013 2014
Germany Portugal Spain Italy Greece Ireland
Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Falling confidence in Sovereigns

7. Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Greece's sovereign-debt crunch
 Greece's mess largely thanks to its spendthrift
government and its citizens' refusal to pay their taxes.
 Most generous, and therefore expensive, state
pension systems added to budget deficit 12.7% of
GDP in 2010
 Current-account deficit widened to 14.6% of GDP in
2008.
 Unability to refinance existing debt led to bailout
from TROIKA formed by the European Commission,
the European Central Bank and the International
Monetary Fund
0 50 100 150 200
2013
Debt to GDP ratio
Portugal greece Italy Spain Ireland Germany

8. Introduction PIIGS Economy
 Low interest rates and reckless lending, abetted by dozy
regulation, pushed up land values and caused Ireland to
turn into a nation of property developers.
 Property prices started sliding in 2006-07, leaving the banks
hopelessly exposed.
 After the Lehmann crisis with share prices
falling,government took the fateful decision to guarantee
liabilities worth €400 billion ($572 billion) at six financial
institutions.
 Growing banking losses resulted in sovereign debt crisis for
Ireland.
 Unsustainable debt levels resulted in Ireland being the
second country to be bailed out.
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Ireland's housing crash
15
10
5
0
-5
-10
-15
-20
Housing Price Growth in Ireland
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

9.  Budget deficit 9.4% of GDP and public debt
85% of GDP in 2009.
 Contagion from Greece and slow real GDP
growth over the decade since Portugal
joined the euro zone led to the crisis.
 Loss of export competitiveness and high
household debt of almost 100% of GDP.
 High borrowing costs led Portugal to seek
rescue funds from its euro-zone partners like
Greece and Ireland.
4
2
0
-2
-4
-6
-8
-10
-12
Portugal GDP,BUDGET Deficit
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP Budget deficit
Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Crisis in Portugal

10. Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Pain in Spain
 Caught in a spiral of deepening recession, drowning banks exposed to toxic real estate and
soaring borrowing costs.
 As in Ireland, the origins of Spain's debt problems were private, not public.
 Debt binge by Spanish households and firms fuelled a property bubble with spain's banks being
the conduit for this private borrowing binge.
 Bank bailouts and the economic downturn increased the country's budget deficit, which
reached 8.9% of GDP in 2011 and led to increase in borrowing costs.
 Aid package for recapitalization of the banks was granted to spain.
Crisis in Cyprus
 Global financial crisis and exposure to Greece made Cyprus vulnerable.
 Decision to wipe out about 80% of the value of Greek debt that the private sector held hit
Cypriot banks very hard and eventually a bailout for recapitalization of Cypriot banks.

11.  Real Italian GDP lower than it was in 2001
 Low competitiveness without any option
of devaluation to boost exports.
 High wage growth as compared to
productivity.
 €1.9 trillion ($2.6 trillion) of sovereign debt
outstanding in 2011.
 Political instability and feeble growth led
to the increase in borrowing cost.
140
120
100
80
60
40
20
0
3
2
1
0
-1
-2
-3
-4
-5
-6
Italy GDP rate
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP growth Debt to GDP
Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Italy’s lost decade in Euro

12. Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Unemployment and Deflationary pressures
4
3
2
1
0
-1
-2
-3
-4
-5
Euro inflation,GDP
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Inflation Euro GDP
24
19
14
9
4
Unemployment rate
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Germany Greece Italy Portugal Spain
 Youth unemployment above 50% in spain and Greece.
 Deflationary pressures adding to the Indebtedness of the peripheral economies.
 No fiscal leeway as need to comply with fiscal deficit target of 3% of GDP and austerity imposed by germans.
 No option of devaluation while in euro to boost export competitiveness.

13. Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
 Steps taken to tackle euro crisis:
 Loose monetary policy by ECB with rates as low
as 0.05 in 2014.
 Stability and growth pact focused on
monitoring member states' compliance with
the agreed targets for their budget deficits
and their public debt levels.
 Permanent crisis management mechanism -
the European Stability Mechanism (ESM) with a
maximum lending capacity of €500 billion
 Banking union - an EU-level banking supervision
and resolution system - has been created.
4
3.5
3
2.5
2
1.5
1
0.5
0
ECB rate
Taming the Crisis

14. Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
Taming the Crisis
 Funding-for-lending scheme-Provided banks with €1 trillion ($1.3 trillion) of cheap three-year
variable-rate loans to avert a funding crisis.
 Started with purchase of asset-based securities (ABS)—whose underlying claims are in the
private non-financial sector—and covered bonds—bonds issued by banks that are
backed by mortgages or public loans.
 Austerity and budget cuts imposed on profligate nations by troika to get public finances
back into shape.
 Stance taken by ECB chief Mario Draghi to do whatever it takes to save euro involving
buying sovereign bonds to give relief to bond yields of indebted economies.

15. Introduction PIIGS Economy
Country Wise
Analysis
Policies to
tackle the
Crisis
Conclusion
 Other measures that should be taken:
 Germany with budget deficit must increase
investment and boost consumption currently at 23%
and 18% of GDP.
 Structural reforms in peripheral economies to boost
competitiveness and more fiscal leeway given to
sovereign governments instead of imposing stringent
austerity measurements.
 More steps towards a banking union to break the
nexus between sovereigns and banks.
 Quantitative easing i.e. creating money to buy
financial assets to stave off deflation should be done
inspite of german opposition.
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
Average Exchage rate Dollars/euro