European Union

The European Union (EU) is an economic and political union or confederation of 27 member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), formed by six countries in 1958. The Maastricht Treaty established the European Union under its current name in 1993. The latest amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009. The EU operates through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states. Important institutions of the EU include the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank. The European Parliament is elected every five years by EU citizens. The EU has developed a single market through a standardised system of laws which apply in all member states. Within the Schengen Area (which includes EU and non-EU states) passport controls have been abolished. EU policies aim to ensure the free movement of people, goods, services, and capital, enact legislation in justice and home affairs, and maintain common policies on trade, agriculture,[20] fisheries and regional development. A monetary union, the eurozone, was established in 1999 and, as of January 2012, is composed of 17 member states. Through the Common Foreign and Security Policy the EU has developed a limited role in external relations and defence. Permanent diplomatic missions have been established around the world and the EU is represented at the United Nations, the WTO, the G8 and the G-20. With a combined population of over 500 million inhabitants, or 7.3% of the world population, the EU generated a nominal GDP of 16,242 billion US dollars in 2010, which represents an estimated 20% of global GDP when measured in terms of purchasing power parity.

Treaties
Main article: Treaties of the European Union
Signed 1948 1951 1954 In for 1948 1952 1955 Docum els y Trea ed ls Treat y Three pillars of the European U nion: 1957 1965 1975 1958 1967 N/A treati er ty an conclusi on 1985 1985 en 1986 1987 1992 1993 1997 1999 am Treaty 2001 2003 Treaty 2007 2009 Lisbon Treaty

ce Bruss Paris Modifi Rome Merg Europe Scheng Single ent Treat ty Brusse es Trea Council Treaty

Maastricht Amsterd Nice

European Act Treaty

European Communities:
European Atomic Energy Community (EURATOM) European Coal and Steel Community (ECSC) European Economic Community (EEC) Schengen Rules Justice TREVI and Home Affairs(J HA) European Political Cooperation ( EPC) Common Foreign and Security Policy(CFSP) European Community(EC) Police and Judicial Co-operation in Criminal Matters (PJCC) Europe an Union(E U)

Treaty expired in 2002

Unconsolida ted bodies

Western European Union (WEU)

Treaty terminated in 2011

[edit]Geography

Main article: Geography of the European Union

The EU's climate is influenced by its 65,993 km (41,006 mi) coastline (Cyprus).

Mont Blanc in the Alps is the highest peak in the EU.

The EU's member states cover an area of 4,423,147 square kilometres (1,707,787 sq mi).[c] The EU is larger in area than all butsix countries, and its highest peak is Mont Blanc in the Graian Alps, 4,810.45 metres (15,782 ft) above sea level.[43] The lowest point in the EU is Zuidplaspolder in the Netherlands, at 7 m (23 ft) below sea level. The landscape, climate, and economy of the EU are influenced by its coastline, which is 65,993 kilometres (41,006 mi) long. The EU has the world's second-longest coastline, after Canada. The combined member states share land borders with 19 non-member states for a total of 12,441 kilometres (7,730 mi), the fifth-longest border in the world.[15][44][45] Including the overseas territories of member states, the EU experiences most types of climate from Arctic (North-East Europe) to tropical (French Guyana), rendering meteorological averages for the EU as a whole meaningless. The majority of the people lives in areas with a temperate maritime climate (North-Western Europe and Central Europe), a Mediterranean climate (Southern Europe), or a warm summer continental or hemiboreal climate (Northern Balkans and Central Europe).[46] The EU's population is highly urbanised, with some 75% of inhabitants (and growing, projected to be 90% in 7 states by 2020) living in urban areas. Cities are largely spread out across the EU, although with a large grouping in and around the Benelux. An increasing percentage of this is due to low density urban sprawl which is extending into natural areas. In some cases this urban growth has been due to the influx of EU funds into a region. [47] [edit]Member

states

Main article: Member state of the European Union See also: Special member state territories and the European Union, Enlargement of the European Union, Future enlargement of the European Union, and Withdrawal from the European Union

The member states of the European Union (European Communities pre-1993), animated in order of accession. Only

territories in and around Europe are shown.

Austria Belgium

Albania

Belarus

Bulgaria Cyprus Czech Rep. Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg

Bos. & Herz. Croatia

Iceland

Mac.

Malta

Netherlands Poland Portugal Romania

Moldova Mont. Norway

Slovakia Slovenia Spain Sweden

Russia Serbia

United Kingdom

Switzerland Turkey Ukraine

The European Union is composed of 27 sovereign Member States:Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark,Estonia, Finland, France, Germany, Greece, Hungary, Ireland,Italy, Latvia, Lithua nia, Luxembourg, Malta, the Netherlands,Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.[48] The Union's membership has grown from the original six founding statesBelgium, France, (then-West) Germany, Italy, Luxembourg and the Netherlandsto the present day 27 by

successive enlargements as countries acceded to thetreaties and by doing so, pooled their sovereignty in exchange for representation in the institutions. [49] To join the EU a country must meet the Copenhagen criteria, defined at the 1993 Copenhagen European Council. These require a stable democracy that respectshuman rights and the rule of law; a functioning market economycapable of competition within the EU; and the acceptance of the obligations of membership, including EU law. Evaluation of a country's fulfilment of the criteria is the responsibility of the European Council.[50] No member state has ever left the Union, although Greenland (an autonomous province of Denmark) withdrew in 1985.[51] The Lisbon Treaty now provides a clause dealing with how a member leaves the EU. [52] Croatia is expected to become the 28th member state of the EU on 1 July 2013 after a referendum on EU membership was approved by Croatian voters on 22 January 2012. The Croatian accession treaty still has to be ratified by all current EU member states. [53] There are five candidate countries: Iceland, Macedonia,[d] Montenegro, Serbia and Turkey.[54] Albania and Bosnia and Herzegovina are officially recognised as potential candidates. [54] Kosovo is also listed as a potential candidate but the European Commission does not list it as an independent country because not all member states recognise it as an independent country separate from Serbia.[55] Four countries forming the EFTA (that are not EU members) have partly committed to the EU's economy and regulations: Iceland (a candidate country for EU membership), Liechtenstein and Norway, which are a part of the single market through the European Economic Area, and Switzerland, which has similar ties through bilateral treaties.[56][57] The relationships of the European microstates, Andorra,Monaco, San Marino and the Vatican include the use of the euro and other areas of cooperation. [58] [edit]Environment

Further information: European Commissioner for the Environment and European Climate Change Programme
The first environmental policy of the European Community was launched in 1972. Since then it has addressed issues such as acid rain, the thinning of the ozone layer, air quality, noise pollution, waste and water pollution. Today, the European Union is thought to have some of the most progressive environmental policies of any state in the world. [59] The Water Framework Directive is an example of a water policy, aiming for rivers, lakes, ground and coastal waters to be of "good quality" by 2015.[60] The Birds Directive and the Habitats Directive are pieces of European Union legislation for protection of biodiversity and natural habitats. These protections however only directly cover animals and plants; fungi and microorganisms have no protection under European Union law. [61] The directives are implemented through the Natura 2000 programme and covers 30,000 sites throughout Europe. [60] In 2007, the Polish government sought to build a motorway through the Rospuda valley, but the Commission has been blocking construction as the valley is a wildlife area covered by the programme.[62] In 2007, member states agreed that the EU is to use 20% renewable energy in the future and that it has to reduce carbon dioxide emissions in 2020 by at least 20% compared to 1990 levels. [63] This includes measures that in 2020, 10% of the overall fuel quantity used by cars and trucks in EU

27 should be running on renewable energy such as biofuels. This is considered to be one of the most ambitious moves of an important industrialised region to fight global warming.[64] [edit]Politics

Main article: Politics of the European Union

European Union

This article is part of the series:

Politics and government of the European Union Parliament[show] Council of Ministers[show] European Council[show] Commission[show] Court of Justice[show] Other institutions[show] Policies and issues[show] Foreign relations[show] Elections[show] Law[show]

The EU operates solely within those competencies conferred on it upon the treaties and according to the principle of subsidiarity (which dictates that action by the EU should only be taken where an objective cannot be sufficiently achieved by the member states alone). Laws made by the EU institutions are passed in a variety of forms. Generally speaking they can be classified into two groups: those which come into force without the necessity for national implementation measures, and those which specifically require national implementation measures. [65]

[edit]Governance

Main articles: EU institutions and Legislature of the European Union

The European Union has seven institutions: the European Parliament, the Council of the European Union, theEuropean Commission, the European Council, the European Central Bank, the Court of Justice of the European Union and the European Court of Auditors. Competencies in scrutinising and amending legislation are divided between the European Parliament and the Council of the European Union while executive tasks are carried out by the European Commission and in a limited capacity by the European Council (not to be confused with the aforementioned Council of the European Union). The monetary policy of the eurozone is governed by theEuropean Central Bank. The interpretation and the application of EU law and the treaties are ensured by the Court of Justice of the European Union. The EU budget is scrutinised by the European Court of Auditors. There are also a number of ancillary bodies which advise the EU or operate in a specific area. [edit]European Council

President of the European Council,Herman Van Rompuy

The European Council gives direction to the EU, and convenes at least four times a year. It comprises the President of the European Council, the President of the European Commission and one representative per member state; either its head of state or head of government. The European Council has been described by some as the Union's "supreme political authority". [66] It is actively involved in the negotiation of the treaty changes and defines the EU's policy agenda and strategies. The European Council uses its leadership role to sort out disputes between member states and the institutions, and to resolve political crises and disagreements over controversial issues and policies. It acts externally as a "collective head of state" and ratifies important documents (for example, international agreements and treaties).[67] On 19 November 2009, Herman Van Rompuy was chosen as the first permanent President of the European Council. On 1 December 2009, the Treaty of Lisbon entered into force and he assumed office. Ensuring the external representation of the EU,[68] driving consensus and settling divergences among members are tasks for the President both during the convocations of the European Council and in the time periods between them. The European Council should not be mistaken for the Council of Europe, an international organisation independent from the EU. [edit]Commission

Commission PresidentJos Manuel Barroso

The European Commission acts as the EU's executive arm and is responsible for initiating legislation and the day-to-day running of the EU. The Commission is also seen as the motor of European integration. It operates as a cabinet government, with 27 Commissioners for different areas of policy, one from each member state, though Commissioners are bound to represent the interests of the EU as a whole rather than their home state. One of the 27 is the Commission President (currently Jos Manuel Duro Barroso) appointed by the European Council. After the President, the most prominent Commissioner is the High Representative of the Union for Foreign Affairs and Security Policy who is ex-officio Vice President of the Commission and is chosen by the European Council too.[69] The other 25 Commissioners are subsequently appointed by the Council of the European Union in agreement with the nominated President. The 27 Commissioners as a single body are subject to a vote of approval by the European Parliament. [edit]Parliament

The European Parliament building inStrasbourg, France

The European Parliament (EP) forms one half of the EU's legislature(the other half is the Council of the European Union, see below). The 736 (soon to be 751) Members of the European Parliament (MEPs) are directly elected by EU citizens every five years on the basis of proportional representation. Although MEPs are elected on a national basis, they sit according to political groups rather than their nationality. Each country has a set number of seats and is divided into subnational constituencies where this does not affect the proportional nature of the voting system. [70]

The ordinary legislative procedure of the European Union.

The Parliament and the Council of the European Union pass legislation jointly in nearly all areas under the ordinary legislative procedure. This also applies to the EU budget. Finally, the Commission is accountable to Parliament, requiring its approval to take office, having to report back to it and subject to motions of censure from it. The President of the European Parliament carries out the role of speaker in parliament and represents it externally. The EP President and Vice Presidents are elected by MEPs every two and a half years.[71] [edit]Council The Council of the European Union (also called the "Council"[72] and sometimes referred to as the "Council of Ministers")[73] forms the other half of the EU's legislature. It consists of a government ministerfrom each member state and meets in different compositions depending on the policy area being addressed. Notwithstanding its different configurations, it is considered to be one single body.[74] In addition to its legislative functions, the Council also exercises executive functions in relations to the Common Foreign and Security Policy. [edit]Budget

Main article: Budget of the European Union

The 2011 EU budget (141.9 bn. in total; commitment appropriations):[75]

Cohesion and competitiveness for growth and employment (45%) Citizenship, freedom, security and justice (1%) The EU as a global player (6%) Rural development (11%) Direct aids and market related expenditures (31%) Administration (6%)

The 27 member state EU had an agreed budget of 120.7 billion for the year 2007 and 864.3 billion for the period 20072013,[76] representing 1.10% and 1.05% of the EU27's GNI forecast for the respective periods. By comparison, the United Kingdom's expenditure for 2004 was estimated to be 759 billion, and France was estimated to have spent 801 billion. In 1960, the budget of the then European Economic Community was 0.03% of GDP. [77] In the 2010 budget of 141.5 billion, the largest single expenditure item is " cohesion & competitiveness" with around 45% of the total budget.[78] Next comes "agriculture" with approximately 31% of the total.[78] "Rural development, environment and fisheries" takes up around 11%.[78]"Administration" accounts for around 6%.[78] The "EU as a global partner" and "citizenship, freedom, security and justice" bring up the rear with approximately 6% and 1% respectively. [78] The European Court of Auditors aims to ensure that the budget of the European Union has been properly accounted for. The court provides an audit report for each financial year to the Council and the European Parliament. The Parliament uses this to decide whether to approve the Commission's handling of the budget. The Court also gives opinions and proposals on financial legislation and anti-fraud actions.[79] The Court of Auditors is legally obliged to provide the Parliament and the Council with "a statement of assurance as to the reliability of the accounts and the legality and regularity of the underlying transactions".[80] The Court has not given an unqualified approval of the Union's accounts since 1993.[81] In their report on 2009 the auditors found that five areas of Union expenditure, agriculture and the cohesion fund, were materially affected by error.[82] The European Commission estimated that the financial impact of irregularities was 1,863 million.[83] [edit]Competences EU member states retain all powers not explicitly handed to the European Union. In some areas the EU enjoys exclusive competence. These are areas in which member states have renounced any capacity to enact legislation. In other areas the EU and its member states share the competence to legislate. While both can legislate, member states can only legislate to the extent to which the EU has not. In other policy areas the EU can only co-ordinate, support and supplement member state action but cannot enact legislation with the aim of harmonising national laws. [84] That a particular policy area falls into a certain category of competence is not necessarily indicative of what legislative procedure is used for enacting legislation within that policy area. Different legislative procedures are used within the same category of competence, and even with the same policy area. The distribution of competences in various policy areas between Member States and the Union is divided in the following three categories:

As outlined in Part I, Title I of the consolidated Treaty on the Functioning of the European Union:

view

talk

edit

Exclusive competence:

Shared competence:
"Member States cannot exercise competence in areas where the Union has done so."
the internal market social policy, for the aspects defined in this Treaty economic, social and territorial cohesion

"The Union has exclusive competence to make directives and conclude international agreements when provided for in a Union legislative act." the customs union

"Union exercise of competence shall not result in Member States being prevented from exercising theirs in:"

Suppor compete

research, technological development and space

"The Union can car to support, coo supplement Mem actions

the protection

development cooperation, humanitarian aid

improvement of

the establishing of thecompetition rules necessary for the functioning of the internal market

industry culture tourism

agriculture and fisheries, excluding the conservation of marine biological resources

"The Union coordinates Member States policies or implements supplemental to theirs common policies, not covered elsewhere"

education, yout

monetary policy for the Member States whose currency is theeuro

environment consumer protection transport trans-European networks energy the area of freedom, security and justice

coordination of economic, employment and social policies

vocational train

civil protection prevention)

common foreign, security anddefence policies

the conservation of marine biological resources under thecommon fisheries policy

administrative

common commercial policy

common safety concerns in public health matters, for the aspects defined in this Treaty

[edit]Legal

system

Further information: EU Law, EU treaties, and Charter of Fundamental Rights of the European Union

The EU is based on a series of treaties. These first established the European Community and the EU, and then made amendments to those founding treaties. [85] These are power-giving treaties which set broad policy goals and establish institutions with the necessary legal powers to implement those goals. These legal powers include the ability to enact legislation [e] which can directly affect all member states and their inhabitants.[f] The EU has legal personality, with the right to sign agreements and international treaties. [86] Under the principle of supremacy, national courts are required to enforce the treaties that their member states have ratified, and thus the laws enacted under them, even if doing so requires them to ignore conflicting national law, and (within limits) even constitutional provisions. [g] [edit]Courts

of Justice

The judicial branch of the EUformally called the Court of Justice of the European Union consists of three courts: the Court of Justice, theGeneral Court, and the European Union Civil Service Tribunal. Together they interpret and apply the treaties and the law of the EU.[87] The Court of Justice primarily deals with cases taken by member states, the institutions, and cases referred to it by the courts of member states.[88] The General Court mainly deals with cases taken by individuals and companies directly before the EU's courts,[89] and the European Union Civil Service Tribunal adjudicates in disputes between the European Union and its civil service.[90] Decisions from the General Court can be appealed to the Court of Justice but only on a point of law.[91] [edit]Fundamental

rights

The last amendment to the constitutional basis of the EU came into force in 2009 and was the Lisbon Treaty.

The treaties declare that the EU itself is "founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities... in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men prevail."[92] In 2009 the Lisbon Treaty gave legal effect to the Charter of Fundamental Rights of the European Union. The charter is a codified catalogue of fundamental rights against which the EU's legal acts can be judged. It consolidates many rights which were previously recognised by the Court of Justice and derived from the "constitutional traditions common to the member states."[93] The Court of Justice has long recognised fundamental rights and has, on occasion, invalidated EU legislation based on its failure to adhere to those fundamental rights.[94] The Charter of Fundamental Rights was drawn up in 2000. Although originally not legally binding the Charter was frequently cited by the EU's courts as encapsulating rights which the courts had long recognised as

the fundamental principles of EU law. Although signing the European Convention on Human Rights (ECHR) is a condition for EU membership,[h] previously, the EU itself could not accede to the Convention as it is neither a state[i] nor had the competence to accede.[j] The Lisbon Treaty and Protocol 14 to the ECHR have changed this: the former binds the EU to accede to the Convention while the latter formally permits it. The EU also promoted human rights issues in the wider world. The EU opposes the death penalty and has proposed its worldwide abolition.[95] Abolition of the death penalty is a condition for EU membership.[96] [edit]Acts The main legal acts of the EU come in three forms: regulations, directives, and decisions. Regulations become law in all member states the moment they come into force, without the requirement for any implementing measures,[k] and automatically override conflicting domestic provisions.[e] Directives require member states to achieve a certain result while leaving them discretion as to how to achieve the result. The details of how they are to be implemented are left to member states.[l] When the time limit for implementing directives passes, they may, under certain conditions, have direct effect in national law against member states. Decisions offer an alternative to the two above modes of legislation. They are legal acts which only apply to specified individuals, companies or a particular member state. They are most often used in Competition Law, or on rulings on State Aid, but are also frequently used for procedural or administrative matters within the institutions. Regulations, directives, and decisions are of equal legal value and apply without any formal hierarchy.[97] [edit]Justice

and home affairs

Further information: Area of freedom, security and justice

The Schengen Area comprises most member states ensuring open borders.

Since the creation of the EU in 1993, it has developed its competencies in the area of justice and home affairs, initially at an intergovernmental level and later by supranationalism. To this end, agencies have been established that co-ordinate associated actions: Europol for co-operation of police forces,[98] Eurojust for co-operation between prosecutors,[99] and Frontex for co-operation between border control authorities.[100] The EU also operates the Schengen Information System[17] which provides a common database for police and immigration authorities. This

cooperation had to particularly be developed with the advent of open borders through the Schengen Agreement and the associated cross border crime. Furthermore, the Union has legislated in areas such as extradition, [101] family law,[102] asylum law,[103] and criminal justice.[104] Prohibitions against sexual and nationality discrimination have a long standing in the treaties.[m] In more recent years, these have been supplemented by powers to legislate against discrimination based on race, religion, disability, age, and sexual orientation. [n]By virtue of these powers, the EU has enacted legislation on sexual discrimination in the workplace, age discrimination, and racial discrimination.[o] [edit]Foreign

relations

Main articles: Foreign relations of the European Union, Common Foreign and Security Policy, and European External Action Service

High Representative of the Union for Foreign Affairs and Security Policy, Catherine Ashton.

Foreign policy cooperation between member states dates from the establishment of the Community in 1957, when member states negotiated as a bloc in international trade negotiations under the Common Commercial Policy.[105]Steps for a more wide ranging coordination in foreign relations began in 1970 with the establishment of European Political Cooperation which created an informal consultation process between member states with the aim of forming common foreign policies. It was not, however, until 1987 when European Political Cooperation was introduced on a formal basis by the Single European Act. EPC was renamed as the Common Foreign and Security Policy (CFSP) by the Maastricht Treaty.[106] The aims of the CFSP are to promote both the EU's own interests and those of the international community as a whole, including the furtherance of international co-operation, respect for human rights, democracy, and the rule of law.[107] The CFSP requires unanimity among the member states on the appropriate policy to follow on any particular issue. The unanimity and difficult issues treated under the CFSP makes disagreements, such as those which occurred over the war in Iraq,[108] not uncommon.

The EU participates in all G8 and G20summits. (G20 summit in Seoul)

The co-ordinator and representative of the CFSP within the EU is theHigh Representative of the Union for Foreign Affairs and Security Policy(currently Catherine Ashton) who speaks on behalf of the EU in foreign policy and defence matters, and has the task of articulating the positions expressed by the member states on these fields of policy into a common alignment. The High Representative heads up the European External Action Service (EEAS), a unique EU department[109] that has been officially implemented and operational since 1 December 2010 on the occasion of the first anniversary of the entry into force of the Treaty of Lisbon.[110] The EEAS will serve as a foreign ministry and diplomatic corpsfor the European Union.[111] Besides the emerging international policy of the European Union, the international influence of the EU is also felt through enlargement. The perceived benefits of becoming a member of the EU act as an incentive for both political and economic reform in states wishing to fulfil the EU's accession criteria, and are considered an important factor contributing to the reform of European formerly Communist countries.[112] This influence on the internal affairs of other countries is generally referred to as "soft power", as opposed to military "hard power".[113] [edit]Military

Main article: Military of the European Union

The Eurofighter Typhoon and Eurocopter Tiger are built by a consortium of some EU states.

The European Union does not have one unified military. The predecessors of the European Union were not devised as a strong military alliance becauseNATO was largely seen as appropriate and sufficient for defence purposes.[114] 21 EU members are members of NATO[115] while the remaining member states follow policies of neutrality.[116] The Western European Union, a military alliance with a mutual defence clause, was disbanded in 2010 as its role had been transferred to the EU. [117] According to the Stockholm International Peace Research Institute (SIPRI), France spent more than $44 billion on defence in 2010, placing it third in the world after the US and China, while the

United Kingdom spent almost 39 billion, the fourth largest. [118] Together, France and the United Kingdom account for 45 per cent of Europe's defence budget, 50 per cent of its military capacity and 70 per cent of all spending in military research and development. [119] In 2000, the United Kingdom, France, Spain, and Germany accounted for 97% of the total military research budget of the then 15 EU member states.[120] Following the Kosovo War in 1999, the European Council agreed that "the Union must have the capacity for autonomous action, backed by credible military forces, the means to decide to use them, and the readiness to do so, in order to respond to international crises without prejudice to actions by NATO". To that end, a number of efforts were made to increase the EU's military capability, notably the Helsinki Headline Goal process. After much discussion, the most concrete result was the EU Battlegroups initiative, each of which is planned to be able to deploy quickly about 1500 personnel.[121] EU forces have been deployed on peacekeeping missions from Africa to the former Yugoslavia and the Middle East.[122] EU military operations are supported by a number of bodies, including the European Defence Agency, European Union Satellite Centre and the European Union Military Staff.[123] In an EU consisting of 27 members, substantial security and defence cooperation is increasingly relying on great power cooperation.[124] [edit]Humanitarian

aid

Further information: ECHO (European Commission)

Collectively, the EU is the largest contributor of foreign aid in the world.

The European Commissions Humanitarian Aid Office, or "ECHO", provides humanitarian aid from the EU to developing countries. In 2006 its budget amounted to 671 million, 48% of which went to the African, Caribbean and Pacific countries.[125] Counting the EU's own contributions and those of its member states together, the EU is the largest aid donor in the world. [126] Humanitarian aid is financed directly by the budget (70%) as part of the financial instruments for external action and also by the European Development Fund (30%).[127] The EU's external action financing is divided into 'geographic' instruments and 'thematic' instruments.[127] The 'geographic' instruments provide aid through the Development Cooperation Instrument (DCI, 16.9 billion, 2007 2013), which must spend 95% of its budget on overseas development assistance (ODA), and from the European Neighbourhood and Partnership Instrument (ENPI), which contains some relevant programmes.[127] The European Development Fund (EDF, 22.7 bn, 20082013) is made up of voluntary contributions by member states, but there is pressure to merge the EDF into the budget-

financed instruments to encourage increased contributions to match the 0.7% target and allow the European Parliament greater oversight.[127] The EU's aid has previously been criticised by the eurosceptic think-tank Open Europe for being inefficient, mis-targeted and linked to economic objectives. [128] Furthermore, some charities such as ActionAid have claimed European governments have inflated the amount they have spent on aid by incorrectly including money spent on debt relief, foreign students, and refugees. Under the deinflated figures, the EU as a whole did not reach its internal aid target in 2006 [129] and is expected not to reach the international target of 0.7% of gross national incomeuntil 2015.[130] However, four countries have reached the 0.7% target: Sweden, Luxembourg, the Netherlands and Denmark.[126] In 2005 EU aid was 0.34% of the GNP which was higher than that of either the United States or Japan.[131] The previous Commissioner for Aid, Louis Michel, has called for aid to be delivered more rapidly, to greater effect, and on humanitarian principles. [132] [edit]Economy

Main articles: Economy of the European Union and Regional policy of the European Union

The ten largest economies in the world counting the EU as a single entity, by GDP (2010)[133]

The EU has established a single market across the territory of all its members. A monetary union, the eurozone, using a single currency comprises 17 member states. [134] In 2010 the EU generated an estimated 26% (16.242 billion international dollars) share of the global gross domestic product[24] making it the largest economy in the world. It is the largest exporter, [135] the largest importer[136] of goods and services, and the biggest trading partner to several large countries such as China,[137]India,[138] and the United States. Of the top 500 largest corporations measured by revenue (Fortune Global 500 in 2010), 161 have their headquarters in the EU.[139] In May 2007 unemployment in the EU stood at 7%[140] while investment was at 21.4% of GDP, inflation at 2.2% and public deficit at 0.9% of GDP.[141] There is a significant variance for GDP (PPP) per capita within individual EU states, these range from 11,000 to 70,000 (about US$14,000 to US$90,000).[142] The difference between the richest and poorest regions (271 NUTS-2 regions of the Nomenclature of Territorial Units for Statistics) ranged, in 2008, from 28% of the EU27 average in the region of Severozapaden in Bulgaria, to 343% of the average in Inner London in the United Kingdom. On the high end, Inner London has 85,800 PPPper capita, Luxembourg 70,000, and Bruxelles-Cap 54,100, while the poorest regions, are Severozapaden with 7,100 PPP per capita,Nord-Est with 7,200 PPP per

capita, Severen tsentralen with 7,500 and Yuzhen tsentralen with 7,600.[142] Structural Funds and Cohesion Funds are supporting the development of underdeveloped regions of the EU. Such regions are primarily located in the states of central andsouthern Europe.[143][144] Several funds provide emergency aid, support for candidate members to transform their country to conform to the EU's standard (Phare, ISPA, and SAPARD), and support to the former USSR Commonwealth of Independent States (TACIS). TACIS has now become part of the worldwide EuropeAid programme. The EU Seventh Framework Programme (FP7) sponsors research conducted by consortia from all EU members to work towards a single European Research Area.[145] [edit]Internal

market

Main article: Internal Market (European Union)

EU Member States have a standardised passportdesign with the name of the member state, a symbol, and the words "European Union" given in their official language(s). (Ireland model)

Two of the original core objectives of the European Economic Community were the development of a common market, subsequently renamed the single market, and a customs union between its member states. The single market involves the free circulation of goods, capital, people and services within the EU,[134] and the customs union involves the application of a common external tariff on all goods entering the market. Once goods have been admitted into the market they cannot be subjected to customs duties, discriminatory taxes or import quotas, as they travel internally. The non-EU member states of Iceland, Norway, Liechtenstein and Switzerlandparticipate in the single market but not in the customs union.[56] Half the trade in the EU is covered by legislation harmonised by the EU.[146] Free movement of capital is intended to permit movement of investments such as property purchases and buying of shares between countries.[147] Until the drive towards Economic and Monetary Union the development of the capital provisions had been slow. Post-Maastricht there has been a rapidly developing corpus of ECJ judgements regarding this initially neglected freedom. The free movement of capital is unique insofar as it is granted equally to non-member states. The free movement of persons means that EU citizens can move freely between member states to live, work, study or retire in another country. This required the lowering of administrative formalities and recognition of professional qualifications of other states. [148]

The free movement of services and of establishment allows self-employed persons to move between member states to provide services on a temporary or permanent basis. While services account for 6070% of GDP, legislation in the area is not as developed as in other areas. This lacuna has been addressed by the recently passed Directive on services in the internal market which aims to liberalise the cross border provision of services.[149] According to the Treaty the provision of services is a residual freedom that only applies if no other freedom is being exercised. [edit]Competition

Further information: European Union competition law and European Commissioner for Competition
The EU operates a competition policy intended to ensure undistorted competition within the single market.[p] The Commission as the competition regulator for the single market is responsible for antitrust issues, approving mergers, breaking up cartels, working for economic liberalisation and preventing state aid.[150] The Competition Commissioner, currently Joaqun Almunia, is one of the most powerful positions in the Commission, notable for the ability to affect the commercial interests of trans-national corporations.[151] For example, in 2001 the Commission for the first time prevented a merger between two companies based in the United States (GE and Honeywell) which had already been approved by their national authority.[152]Another high profile case against Microsoft, resulted in the Commission fining Microsoft over 777 million following nine years of legal action.[153] [edit]Monetary

union

Main articles: Eurozone and Economic and Monetary Union of the European Union

The eurozone (in darker blue) is constituted by 17 member states adopting the euro as legal tender.

The European Central Bank in Frankfurt governs the monetary policy.

The creation of a European single currency became an official objective of the European Economic Community in 1969. However, it was only with the advent of the Maastricht Treaty in 1993 that member states were legally bound to start themonetary union no later than 1 January 1999. On this date the euro was dulylaunched by eleven of the then 15 member states of the EU. It remained an accounting currency until 1 January 2002, when euro notes and coins were issued and national currencies began to phase out in the eurozone, which by then consisted of 12 member states. The eurozone (constituted by the EU member states which have adopted the euro) has since grown to 17 countries, the most recent being Estonia which joined on 1 January 2011. All other EU member states, except Denmark and the United Kingdom, are legally bound to join the euro[154] when the convergence criteria are met, however only a few countries have set target dates for accession. Sweden has circumvented the requirement to join the euro by not meeting the membership criteria.[q] The euro is designed to help build a single market by, for example: easing travel of citizens and goods, eliminating exchange rate problems, providing price transparency, creating a single financial market, price stability and low interest rates, and providing a currency used internationally and protected against shocks by the large amount of internal trade within the eurozone. It is also intended as a political symbol of integration and stimulus for more.[155] Since its launch the euro has become the second reserve currency in the world with a quarter of foreign exchanges reserves being in euro.[156] The euro, and the monetary policies of those who have adopted it in agreement with the EU, are under the control of the European Central Bank (ECB).[157] The ECB is the central bank for the eurozone, and thus controls monetary policy in that area with an agenda to maintain price stability. It is at the centre of the European System of Central Banks, which comprehends all EU national central banks and is controlled by its General Council, consisting of the President of the ECB, who is appointed by the European Council, the Vice-President of the ECB, and the governors of the national central banks of all 27 EU member states. [158] The monetary union has been shaken by the European sovereign debt crisis since 2009. [edit]Financial

supervision

The European System of Financial Supervisors is an institutional architecture of the EU's framework of financial supervision composed by three authorities: the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. To complement this framework, there is also a European Systemic Risk Board under the responsibility of the ECB. The aim of this financial control system is to ensure the economic stability of the EU.[159] [edit]Energy

Main article: Energy policy of the European Union

EU energy production

46% of total EU primary energy use

Nuclear energy[r]

29.3%

Coal & lignite

21.9%

Gas

19.4%

Renewable energy

14.6%

Oil

13.4%

Other

1.4%

Net imports of energy

54% of total primary EU energy use

Oil & petroleum products

60.2%

Gas

26.4%

Other

13.4%

In 2006, the 27 member states of the EU had a gross inland energy consumption of 1,825 million tonnes of oil equivalent (toe).[160] Around 46% of the energy consumed was produced within the member states while 54% was imported.[160] In these statistics, nuclear energy is treated as primary energy produced in the EU, regardless of the source of the uranium, of which less than 3% is produced in the EU.[161] The EU has had legislative power in the area of energy policy for most of its existence; this has its roots in the original European Coal and Steel Community. The introduction of a mandatory and

comprehensive European energy policy was approved at the meeting of the European Council in October 2005, and the first draft policy was published in January 2007. [162] The EU has five key points in its energy policy: increase competition in the internal market, encourage investment and boost interconnections between electricity grids; diversify energy resources with better systems to respond to a crisis; establish a new treaty framework for energy co-operation with Russiawhile improving relations with energy-rich states in Central Asia[163] and North Africa; use existing energy supplies more efficiently while increasing use of renewable energy; and finally increase funding for new energy technologies. [162] The EU currently imports 82% of its oil, 57% of its natural gas[164] and 97.48% of its uranium[161]demands. There are concerns that Europe's dependence on Russian energy is endangering the Union and its member countries. The EU is attempting to diversify its energy supply.[165] [edit]Infrastructure

Further information: European Commissioner for Transport and European Commissioner for Industry and Entrepreneurship

The resund Bridge between Denmark and Sweden is part of the Trans-European Networks.

The EU is working to improve cross-border infrastructure within the EU, for example through theTrans-European Networks (TEN). Projects under TEN include the Channel Tunnel, LGV Est, theFrjus Rail Tunnel, the resund Bridge, the Brenner Base Tunnel and the Strait of Messina Bridge. In 2001 it was estimated that by 2010 the network would cover: 75,200 kilometres (46,700 mi) of roads; 78,000 kilometres (48,000 mi) of railways; 330 airports; 270 maritime harbours; and 210 internal harbours.[166][167] The developing European transport policies will increase the pressure on the environment in many regions by the increased transport network. In the pre-2004 EU members, the major problem in transport deals with congestion and pollution. After the recent enlargement, the new states that joined since 2004 added the problem of solving accessibility to the transport agenda. [168] ThePolish road network in particular was in poor condition: at Poland's accession to the EU, 4,600 roads needed to be upgraded to EU standards, demanding approximately 17 billion.[169][not in citation given] The Galileo positioning system is another EU infrastructure project. Galileo is a proposed Satellite navigation system, to be built by the EU and launched by the European Space Agency (ESA), and is to be operational by 2012. The Galileo project was launched partly to reduce the EU's dependency on the US-operated Global Positioning System, but also to give more complete global coverage and allow for far greater accuracy, given the aged nature of the GPS system. [170] It has been criticised

by some due to costs, delays, and their perception of redundancy given the existence of the GPS system.[171] [edit]Agriculture

Main article: Common Agricultural Policy

EU farms are supported by the CAP, the largest budgetary expenditure. (Vineyard in Spain)

The Common Agricultural Policy (CAP) is one of the oldest policies of the European Community, and was one of its core aims.[172] The policy has the objectives of increasing agricultural production, providing certainty in food supplies, ensuring a high quality of life for farmers, stabilising markets, and ensuring reasonable prices for consumers.[s] It was, until recently, operated by a system of subsidies and market intervention. Until the 1990s, the policy accounted for over 60% of the then European Community's annual budget, and still accounts for around 34%.[173] The policy's price controls and market interventions led to considerable overproduction, resulting in so-called butter mountains and wine lakes. These were intervention stores of produce bought up by the Community to maintain minimum price levels. In order to dispose of surplus stores, they were often sold on the world market at prices considerably below Community guaranteed prices, or farmers were offered subsidies (amounting to the difference between the Community and world prices) to export their produce outside the Community. This system has been criticised for undercutting farmers outside of Europe, especially those in the developing world.[174] The overproduction has also been criticised for encouraging environmentally unfriendly intensive farming methods.[174] Supporters of CAP say that the economic support which it gives to farmers provides them with a reasonable standard of living, in what would otherwise be an economically unviable way of life. However, the EU's small farmers receive only 8% of CAP's available subsidies.[174] Since the beginning of the 1990s, the CAP has been subject to a series of reforms. Initially these reforms included the introduction of set-aside in 1988, where a proportion of farm land was deliberately withdrawn from production, milk quotas (by the McSharry reforms in 1992) and, more recently, the 'de-coupling' (or disassociation) of the money farmers receive from the EU and the amount they produce (by the Fischler reforms in 2004). Agriculture expenditure will move away from subsidy payments linked to specific produce, toward direct payments based on farm size. This is intended to allow the market to dictate production levels, while maintaining agricultural income levels.[172] One of these reforms entailed the abolition of the EU's sugar regime, which previously divided the sugar market between member states and certain African-Caribbean nations with a privileged relationship with the EU. [142]

[edit]Education

and science

Main articles: Educational policies and initiatives of the European Union and Framework Programmes for Research and Technological Development

Renewable energy is one priority in transnational research activities such as the FP7

Education and science are areas where the EU's role is limited to supporting national governments. In education, the policy was mainly developed in the 1980s in programmes supporting exchanges and mobility. The most visible of these has been the Erasmus Programme, a university exchange programme which began in 1987. In its first 20 years it has supported international exchange opportunities for well over 1.5 million university and college students and has become a symbol of European student life.[175] There are now similar programmes for school pupils and teachers, for trainees in vocational education and training, and for adult learners in the Lifelong Learning Programme 20072013. These programmes are designed to encourage a wider knowledge of other countries and to spread good practices in the education and training fields across the EU. [176] Through its support of the Bologna process the EU is supporting comparable standards and compatible degrees across Europe. Scientific development is facilitated through the EU's Framework Programmes, the first of which started in 1984. The aims of EU policy in this area are to co-ordinate and stimulate research. The independent European Research Councilallocates EU funds to European or national research projects.[177] The Seventh Framework Programme (FP7) deals in a number of areas, for example energy where it aims to develop a diverse mix of renewable energy for the environment and to reduce dependence on imported fuels. [178] [edit]Health

care

European Health Insurance Card. (French version pictured)

Although the EU has no major competences in the field of health care, Article 35 of the Charter of Fundamental Rights of the European Union affirms that "A high level of human health protection shall be ensured in the definition and implementation of all Union policies and activities". All the member states have either publicly sponsored and regulated universal health care or publicly provided universal health care. The public plans in some countries provide basic or "sick" coverage only; their citizens can purchase supplemental insurance for additional coverage. The European Commission's Directorate-General for Health and Consumers seeks to align national laws on the protection of people's health, on the consumers' rights, on the safety of food and other products.[179][180][181] Health care in the EU is provided through a wide range of different systems run at the national level. The systems are primarily publicly funded through taxation (universal health care). Private funding for health care may represent personal contributions towards meeting the non-taxpayer refunded portion of health care or may reflect totally private (non-subsidised) health care either paid out of pocket or met by some form of personal or employer funded insurance. All EU and many other European countries offer their citizens a free European Health Insurance Card which, on a reciprocal basis, provides insurance for emergency medical treatment insurance when visiting other participating European countries.[182] A directive on cross-border healthcare aims at promoting cooperation on health care between member states and facilitating access to safe and high-quality cross-border healthcare for European patients.[183][184][185] [edit]Demographics

Main article: Demographics of the European Union

On 23 October 2010, the combined population of all 27 member states was forecast at 501,064,211 as of 1 January 2010.[5] Population of the 5 largest cities in the EU[186]

City

City limits(2006)

Density/km

Density /sq mi

Urban area(2005)

LUZ(2004)

Metropolitan Area[187](2011)

Berlin

3,410,000

3,815

9,880

3,761,000

4,971,331

4,325,000

London

7,512,400

4,761

12,330

9,332,000

11,917,000

12,500,000

Population of the 5 largest cities in the EU[186]

City

City limits(2006)

Density/km

Density /sq mi

Urban area(2005)

LUZ(2004)

Metropolitan Area[187](2011)

Madrid

3,228,359

5,198

13,460

4,990,000

5,804,829

6,500,000

Paris

2,153,600

24,672

63,900

9,928,000

11,089,124

12,089,098

Rome

2,708,395

2,105

5,450

2,867,000

3,457,690

3,300,000

The EU is home to more global cities than any other region in the world.[188] It contains 16 cities with populations of over one million, the largest being London. Besides many large cities, the EU also includes several densely populated regions that have no single core but have emerged from the connection of several cites and now encompass large metropolitan areas. The largest are Rhine-Ruhr having approximately 11.5 million inhabitants (Cologne, Dortmund, Dsseldorf et al.), Randstad approx. 7 million (Amsterdam, Rotterdam, The Hague, Utrecht et al.),Frankfurt/Rhine-Main approx. 5.8 million (Frankfurt, Wiesbaden et al.), the Flemish diamond approx. 5.5 million (urban area in betweenAntwerp, Brussels, Leuven and Ghent), the resund Region approx. 3.7 million (Copenhagen, Denmark and Malm, Sweden), and the Upper Silesian Industrial Region approx. 3.5 million (Katowice, Sosnowiec et al.)[189] In 2010, 47.3 million people lived in the EU, who were born outside their resident country. This corresponds to 9.4% of the total EU population. Of these, 31.4 million (6.3%) were born outside the EU and 16.0 million (3.2%) were born in another EU member state. The largest absolute numbers of people born outside the EU were in Germany (6.4 million), France (5.1 million), the United Kingdom (4.7 million), Spain (4.1 million), Italy (3.2 million), and the Netherlands (1.4 million). [190] [edit]Languages

Main article: Languages of the European Union

European official languages report (EU-251)

Language

Native Speakers

Total

European official languages report (EU-251)

Language

Native Speakers

Total

English

13%

51%

German

18%

32%

French

12%

26%

Italian

13%

16%

Spanish

9%

15%

Polish

9%

10%

Dutch

5%

6%

Greek

3%

3%

Czech

2%

3%

Swedish

2%

3%

Hungarian

2%

2%

Portuguese

2%

2%

European official languages report (EU-251)

Language

Native Speakers

Total

Slovak

1%

2%

Danish

1%

1%

Finnish

1%

1%

Lithuanian

1%

1%

Slovenian

1%

1%

Estonian

<1%

<1%

Irish

<1%

<1%

Latvian

<1%

<1%

Maltese

<1%

<1%

Published in 2006, before the

accession of Bulgaria and Romania. Survey conducted in 2005, based on population with a minimum age of 15. Native: Native language[191] Total: EU citizens able to hold a conversation in this language[192]

Among the many languages and dialects used in the EU, it has 23 official and working languages: Bulgarian, Czech, Danish, Dutch, English, Estonian, Finnish, French, German,Greek, Hunga rian, Italian, Irish, Latvian, Lithuanian, Maltese, Polish, Portuguese, Romanian,Slovak, Slovene, Spani sh, and Swedish.[193][194] Important documents, such as legislation, are translated into every official language. The European Parliament provides translation into all languages for documents and its plenary sessions.[195] Some institutions use only a handful of languages as internal working languages.[196] Catalan, Galician, Basque, Scottish Gaelic andWelsh are not official languages of the EU but have semi-official status in that official translations of the treaties are made into them and citizens of the EU have the right to correspond with the institutions using them. Language policy is the responsibility of member states, but EU institutions promote the learning of other languages.[t][197] English is the most spoken language in the EU and is spoken by 51% of the EU population counting both native and non-native speakers.[198] German is the most widely spoken mother tongue (about 88.7 million people as of 2006). 56% of EU citizens are able to engage in a conversation in a language other than their mother tongue. [199] Most official languages of the EU belong to the Indo-European language family, except Estonian, Finnish, and Hungarian, which belong to the Uralic language family, and Maltese, which is an Afroasiatic language. Most EU official languages are written in the Latin alphabet except Bulgarian, written in Cyrillic, and Greek, written in the Greek alphabet.[200] Besides the 23 official languages, there are about 150 regional and minority languages, spoken by up to 50 million people.[200] Of these, only the Spanish regional languages (that is, Catalan, Galician, and the non-Indo-European Basque), Scottish Gaelic, and Welsh[201] can be used by citizens in communication with the main European institutions.[202] Although EU programmes can support regional and minority languages, the protection of linguistic rights is a matter for the individual member states. The European Charter for Regional or Minority Languages ratified by most EU states provides general guidelines that states can follow to protect their linguistic heritage. [edit]Religion

Main article: Religion in the European Union

The percentage of Europeans in each member state who believe in "a God".[203]

The EU is a secular body with no formal connection with any religion, but Article 17 of the Treaty on the Functioning of the European Union recognises the "status under national law of churches and religious associations" as well as that of "philosophical and non-confessional organisations".[204] The preamble to the Treaty on European Union mentions the "cultural, religious and humanist inheritance of Europe".[204] Discussion over the draft texts of the European Constitution and later the Treaty of Lisbon included proposals to mention Christianity or "God" or both, in the preamble of the text, but the idea faced opposition and was dropped. [205] Christians in the EU are divided among followers of Roman Catholicism, numerous Protestantdenominations (especially in northern Europe), and Orthodoxy (in Greece, Cyprus, Bulgaria and Romania). Other religions, such as Islam and Judaism, are also represented in the EU population. As of 2009, the EU had an estimated Muslim population of 13 million,[206] and an estimatedJewish population of over a million.[207] Eurostat's Eurobarometer opinion polls showed in 2005 that 52% of EU citizens believed in a god, 27% in "some sort of spirit or life force", and 18% had no form of belief. [203] Many countries have experienced falling church attendance and membership in recent years. [208] The countries where the fewest people reported a religious belief were Estonia (16%) and the Czech Republic (19%).[203] The most religious countries are Malta (95%; predominantly Roman Catholic), and Cyprus and Romania both with about 90% of the citizens believing in God (both predominantly Orthodox). Across the EU, belief was higher among women, increased with age, those with religious upbringing, those who left school at 15 with a basic education, and those "positioning themselves on the right of the political scale (57%)."[203] [edit]Culture

and sport

Main articles: Cultural policies of the European Union and Sport policies of the European Union

Maribor in Slovenia (left) and Guimares in Portugal (right) are the European Capitals of Culture in 2012

Cultural co-operation between member states has been a concern of the EU since its inclusion as a community competency in the Maastricht Treaty.[209] Actions taken in the cultural area by the EU include the Culture 2000 7-year programme,[209] the European Cultural Month event,[210] the Media

Plus programme,[211]orchestras such as the European Union Youth Orchestra[212] and the European Capital of Culture programme where one or more cities in the EU are selected for one year to assist the cultural development of that city.[213] Sport is mainly the responsibility of an individual member states or other international organisations rather than that of the EU. However, there are some EU policies that have had an impact on sport, such as the free movement of workers which was at the core of theBosman ruling, which prohibited national football leagues from imposing quotas on foreign players with European citizenship.[214] The Treaty of Lisbon requires any application of economic rules to take into account the specific nature of sport and its structures based on voluntary activity. [215] This followed lobbying by governing organisations such as the International Olympic Committee and FIFA, due to objections over the applications of free market principles to sport which led to an increasing gap between rich and poor clubs.[216] The EU does fund a program for Israeli, Jordanian, Irish and British football coaches, as part of the Football 4 Peace project. [217]

Eurozone
The eurozone ( pronunciation (helpinfo)), officially called the euro area,[7] is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro () as their common currency and sole legal tender. The eurozone currently consists of Austria,Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Most other EU states are obliged to join once they meet the criteria to do so. No state has left and there are no provisions to do so or to be expelled. Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a president and a board of the heads of national central banks. The principal task of the ECB is to keep inflation under control. Though there is no common representation, governance or fiscal policy for the currency union, some co-operation does take place through the Euro Group, which makes political decisions regarding the eurozone and the euro. The Euro Group is composed of the finance ministers of eurozone states, however in emergencies, national leaders also form the Euro Group. Since the late-2000s financial crisis, the eurozone has established and used provisions for granting emergency loans to member states in return for the enactment of economic reforms. The eurozone has also enacted some limited fiscal integration, for example in peer review of each other's national budgets. The issue is highly political and in a state of flux as of 2011 in terms of what further provisions will be agreed for eurozone reform. On occasion the eurozone is taken to include non-EU members who use the euro as their official currency. Some of these countries, like San Marino, have concluded formal agreements with the EU to use the currency and mint their own coins.[8] Others, like Kosovo and Montenegro, have adopted the euro unilaterally. However, these countries do not formally form part of the eurozone and do not have representation in the ECB or the Euro Group.[9]

Contents
[hide]

1 Members

o o o

1.1 Enlargement 1.2 Non-member usage 1.3 Expulsion and secession

2 Administration and representation 3 Economy

o o o o o

3.1 Comparison table 3.2 Inflation 3.3 Interest rates 3.4 Public debt 3.5 Fiscal policies

4 Bailout provisions 5 Peer review 6 See also 7 Notes 8 References 9 External links

[edit]Members In 1998 eleven European Union member states had met the convergence criteria, and the eurozone came into existence with the official launch of the euro (alongside national currencies) on 1 January 1999. Greece qualified in 2000 and was admitted on 1 January 2001 before physical notes and coins were introduced on 1 January 2002 replacing all national currencies. Between 2007 and 2011, five new states acceded.

EU Eurozone (17) EU states obliged to join the Eurozone (8) EU states with an opt-out on Eurozone participation (2) States outside the EU with issuing rights (3) Other non-EU users of euro (4)

State

Adopted

Population
(Jan. 1, 2011)

Nominal GDP
World Bank, 2009

Exceptions

Austria

1 January 1999

8,404,252

384,908

Belgium

1 January 1999

10,918,405

468,522

Cyprus

1 January 2008

804,435

24,910

Northern Cyprus[note 1]

State

Adopted

Population
(Jan. 1, 2011)

Nominal GDP
World Bank, 2009

Exceptions

Estonia

1 January 2011

1,340,194

19,120

Finland

1 January 1999

5,375,276

237,512

New Caledonia[note 2]

France

1 January 1999

65,075,373

2,649,390

French Polynesia[note 2] Wallis and Futuna[note 2]

Germany

1 January 1999

81,751,602

3,330,032

Greece

1 January 2001

11,325,897

329,924

Ireland

1 January 1999

4,480,858

227,193

Italy

1 January 1999

60,626,442

2,112,780

Campione d'Italia[note 3]

Luxembourg 1 January 1999

511,840

52,449

Malta

1 January 2008

417,617

7,449

Aruba[note 4]

Netherlands 1 January 1999

16,655,799

792,128

Curaao[note 5] Sint Maarten[note 5] Caribbean Netherlands[note 6]

Portugal

1 January 1999

10,636,979

227,676

State

Adopted

Population
(Jan. 1, 2011)

Nominal GDP
World Bank, 2009

Exceptions

Slovakia

1 January 2009

5,435,273

87,642

Slovenia

1 January 2007

2,050,189

48,477

Spain

1 January 1999

46,152,926

1,460,250

Eurozone [edit]Enlargement

331,963,357

12,460,362

Main article: Enlargement of the eurozone

Ten countries (Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, and the United Kingdom) are EU members but do not use the euro. Before joining the eurozone, a state must spend two years in the European Exchange Rate Mechanism (ERM II). As of 2011, the National Central Banks (NCBs) of Latvia, Lithuania, and Denmark have participated in ERM II.

A clickable Euler diagram showing the relationships between various multinational European organisations.v d e

Denmark and the United Kingdom obtained special opt-outs in the original Maastricht Treaty. Both countries are legally exempt from joining the eurozone unless their governments decide otherwise, either by parliamentary vote or referendum. Sweden gained a de facto opt-out by using a legal

loophole. It is required to join the eurozone as soon as it fulfils the convergence criteria, which include being part of ERM II for two years; joining ERM II is voluntary. [10][11] Sweden has so far decided not to join ERM II. The 2008 financial crisis increased interest in Denmark and initially in Poland to join the eurozone, and in Iceland to join the European Union, a pre-condition for adopting the euro.[12] Since Latvia requested help from the International Monetary Fund (IMF), as a precondition, it may be forced to drop its currency peg. This would take Latvia out of ERM II and possibly move the euro adoption date even further from 2013 than currently planned. [13] However, by 2010, the debt crisis in the euro zone caused interest from Poland and the Czech Republic to cool. [14] [edit]Non-member

usage

Further information: International status and usage of the euro

The euro is also used in countries outside the EU. Three statesMonaco, San Marino, and Vatican City[15][16] have signed formal agreements with the EU to use the euro and mint their own coins. Nevertheless, they are not considered part of the eurozone by the ECB and do not have a seat in the ECB or Euro Group. Andorra reached a monetary agreement with the EU in June 2011 which will allow it to use the euro as its official currency when ratified. Under the agreement it is intended that Andorra should gain the right to mint its own euro coins as of 1 July 2013, provided that Andorra implements relevant EU legislation.[17] Some states (viz. Kosovo,[note 7] and Montenegro) officially adopted the euro as their sole currency without an agreement and, therefore, have no issuing rights. These states are not considered part of the eurozone by the ECB. However, in some usage, the term eurozone is applied to all territories that have adopted the euro as their sole currency.[18][19][20] Further unilateral adoption of the euro (euroisation), by both non-euro EU and non-EU members, is opposed by the ECB and EU.[21] [edit]Expulsion

and secession

While the eurozone is open to all EU member states to join once they meet the criteria, there is no provision in the EU treaties for a state to leave the eurozone without also leaving the EU as a whole. Likewise there is no provision for a state to be expelled from the euro. [22] Some, however, including the Dutch government, favour such a provision being created in the event that a heavily indebted state in the eurozone refuses to comply with an EU economic reform policy. [23] The benefits of leaving the euro would vary depending on the exact situations. If the replacement currency were expected to devalue, the state would experience a large scale exodus of money, whereas if the currency were expected to appreciate then more money would flow into the economy. Even so a rapidly appreciating currency would be detrimental to the country's exports. [24] [edit]Administration

and representation

Further information: European Central Bank, Euro Group, and Euro summit

Euro Group President Jean-Claude Juncker

The monetary policy of all countries in the eurozone is managed by the European Central Bank (ECB) and the Eurosystem which comprises the ECB and the central banks of the EU states who have joined the euro zone. Countries outside the eurozone are not represented in these institutions. Whereas all EU member states are part of the European System of Central Banks (ESCB). Non EU member states have no say in all three institutions, even those with monetary agreements such as Monaco. The ECB is entitled to authorise the design and printing of euro banknotes and the volume of euro coins minted, and its president is currently Mario Draghi. The eurozone is represented politically by its finance ministers, known collectively as the Euro Group, and is presided over by a president, currently Jean-Claude Juncker. The finance ministers of the EU member states that use the euro meet a day before a meeting of the Economic and Financial Affairs Council (Ecofin) of the Council of the European Union. The Group is not an official Council formation but when the full EcoFin council votes on matters only affecting the eurozone, only Euro Group members are permitted to vote on it.[25][26][27] Since the global financial crisis first began in 2008, the Euro Group has met irregularly not as finance ministers, but as heads of state and government (like the European Council). It is in this forum, the Euro summit, that many eurozone reforms have been agreed. French President Nicolas Sarkozy is pushing, as of 2011, for these summits to become regular and twice a year in order for it to be a 'true economic government'. On 15 April 2008 in Brussels, Juncker suggested that the eurozone should be represented at the International Monetary Fund as a bloc, rather than each member state separately: "It is absurd for those 15 countries not to agree to have a single representation at the IMF. It makes us look absolutely ridiculous. We are regarded as buffoons on the international scene." [28] However Finance Commissioner Joaqun Almunia stated that before there is common representation, a common political agenda should be agreed.[28] [edit]Economy

[edit]Comparison

table

Comparison of eurozone with other economies, 2006.[29]

Population

GDPa

% world

Exports

Imports

eurozone

317 million

8.4 trillion 14.6%

21.7% GDP 20.9% GDP

EU (27)

494 million

11.9 trillion 21.0%

14.3% GDP 15.0% GDP

United States 300 million

11.2 trillion 19.7%

10.8% GDP 16.6% GDP

Japan

128 million

3.5 trillion 6.3%

16.8% GDP 15.3% GDP

^a GDP in PPP, exports/imports as goods and services excluding intra-EU trade.

[edit]Inflation HICP figures from the ECB, taken from May of each year:[30] 1999: 1.0% 2000: 1.7% 2001: 3.1% 2002: 2.0% 2003: 1.8% [edit]Interest 2004: 2.5% 2005: 2.0% 2006: 2.5% 2007: 1.9% 2008: 3.7% 2009: 0.0% 2010: 1.7% 2011: 2.7%

rates

Interest rates for the eurozone, set by the ECB since 1999. Levels are in percentages per annum. Between to June 2000 and October 2008, the main refinancing operations were variable rate tenders, as opposed to fixed rate tenders. The figures indicated in the table from 2000 to 2008 refer to the minimum interest rate at which counterparties may place their bids. [3]

Date

Deposit facility Main refinancing operations Marginal lending facility

1 Jan 1999

2.00

3.00

4.50

4 Jan 1999[note 8] 2.75

3.00

3.25

22 Jan 1999

2.00

3.00

4.50

9 Apr 1999

1.50

2.50

3.50

5 Nov 1999

2.00

3.00

4.00

4 Feb 2000

2.25

3.25

4.25

17 Mar 2000

2.50

3.50

4.50

28 Apr 2000

2.75

3.75

4.75

9 Jun 2000

3.25

4.25

5.25

28 Jun 2000

3.25

4.25

5.25

1 Sep 2000

3.50

4.50

5.50

6 Oct 2000

3.75

4.75

5.75

11 May 2001

3.50

4.50

5.50

31 Aug 2001

3.25

4.25

5.25

18 Sep 2001

2.75

3.75

4.75

9 Nov 2001

2.25

3.25

4.25

6 Dec 2002

1.75

2.75

3.75

7 Mar 2003

1.50

2.50

3.50

6 Jun 2003

1.00

2.00

3.00

6 Dec 2005

1.25

2.25

3.25

8 Mar 2006

1.50

2.50

3.50

15 Jun 2006

1.75

2.75

3.75

9 Aug 2006

2.00

3.00

4.00

11 Oct 2006

2.25

3.25

4.25

13 Dec 2006

2.50

3.50

4.50

14 Mar 2007

2.75

3.75

4.75

13 Jun 2007

3.00

4.00

5.00

9 Jul 2008

3.25

4.25

5.25

8 Oct 2008

2.75

4.75

9 Oct 2008

3.25

4.25

15 Oct 2008

3.25

3.75

4.25

12 Nov 2008

2.75

3.25

3.75

10 Dec 2008

2.00

2.50

3.00

21 Jan 2009

1.00

2.00

3.00

11 Mar 2009

0.50

1.50

2.50

8 Apr 2009

0.25

1.25

2.25

13 May 2009

0.25

1.00

1.75

13 Apr 2011

0.50

1.25

2.00

13 Jul 2011

0.75

1.50

2.25

9 Nov 2011

0.50

1.25

2.00

14 Dec 2011 [edit]Public

0.25

1.00

1.75

debt

The following table states the ratio of public debt to GDP in percent for Eurozone countries. The euro convergence criterion is 60 %. CIA 2007[31] OECD 2009[32][33] IMF 2009[34] CIA 2009[35] EuroStat 2010[36]

Country

Austria

59.10

72.7

67.10[37]

66.40

72.3

Belgium

84.60

100.4

93.70[38]

101.00

96.8

Cyprus

59.60

56.20[39]

56.20

60.8

Estonia

3.40

7.10

6.6

Eurozone

86.0[40]

Finland

35.90

52.6

44.00[41]

40.30

48.4

France

63.90

87.1

78.10[42]

77.60

81.7

Germany

64.90

76.5

72.50[43]

77.20

83.2

Country

CIA 2007[31]

OECD 2009[32][33]

IMF 2009[34]

CIA 2009[35]

EuroStat 2010[36]

Greece

89.50

120.2

113.40

142.8

Ireland

24.90

72.7

64.00[44]

64.80

96.2

Italy

104.00

127.7

115.8[45]

115.80

119.0

Luxembourg 6.40

18.0

16.40[46]

14.60

18.4

Malta

69.00

68.0

Netherlands 45.50

69.4

58.90[47]

60.90

62.7

Portugal

63.60

86.3

75.80[48]

76.80

93.0

Slovakia

35.90

39.8

35.70[49]

35.70

41.0

Slovenia

23.60

44.1

31.30

38.0

Spain [edit]Fiscal

36.20

62.4

53.20[50]

53.20

60.1

policies

See also: European Fiscal Union

The primary means for fiscal coordination within the EU lies in the Broad Economic Policy Guidelines which are written for every member state, but with particular reference to the 17 current members of the eurozone. These guidelines are not binding, but are intended to represent policy coordination among the EU member states, so as to take into account the linked structures of their economies. For their mutual assurance and stability of the currency, members of the eurozone have to respect the Stability and Growth Pact, which sets agreed limits on deficits and national debt, with

associated sanctions for deviation. The Pact originally set a limit of 3% of GDP for the yearly deficit of all eurozone member states; with fines for any state which exceeded this amount. In 2005, Portugal, Germany, and France had all exceeded this amount, but the Council of Ministers had not voted to fine those states. Subsequently, reforms were adopted to provide more flexibility and ensure that the deficit criteria took into account the economic conditions of the member states, and additional factors. The Organisation for Economic Co-operation and Development downgraded its economic forecasts on 20 March 2008 for the eurozone for the first half of 2008. Europe does not have room to ease fiscal or monetary policy, the 30-nation group warned. For the euro zone, the OECD now forecasts first-quarter GDP growth of just 0.5%, with no improvement in the second quarter, which is expected to show just a 0.4% gain. The European Fiscal Union is a proposal for a treaty about fiscal integration described in a decision adopted on 9 December 2011 by the European Council. The participants are the Eurozone member states and all other EU members except for the United Kingdom. Treaty text is still to be drafted and participation approvals from national parliaments are still to be granted. [51] [edit]Bailout

provisions

See also: History of the euro#Recession era

The late-2000s financial crisis prompted a number of reforms in the eurozone. One was a u-turn on the eurozone's bailout policy that led to the creation of a specific fund to assist eurozone states in trouble. The European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM) were created in 2010 to provide, alongside the International Monetary Fund (IMF), a system and fund to bail out members. However the EFSF and EFSM were temporary, small and lacked a basis in the EU treaties. Therefore, it was agreed in 2011 to establish a European Stability Mechanism (ESM) which would be much larger, funded only by eurozone states (not the EU as a whole as the EFSF/EFSM were) and would have a permanent treaty basis. As a result of that its creation involved agreeing an amendment to TEFU Article 136 allowing for the ESM and a new ESM treaty to detail how the ESM would operate. If both are successfully ratified according to schedule, the ESM would be operational by the time the EFSF/EFSM expire in mid-2013. [edit]Peer

review

See also: Euro Plus Pact

Strong EU oversight in the fields of taxation and budgetary policy and the enforcement mechanisms that go with it have sometimes been described as potential infringements on the sovereignty of eurozone member states[52] However, in June 2010, a broad agreement was finally reached on a controversial proposal for member states to peer review each others' budgets prior to their presentation to national parliaments. Although showing the entire budget to each other was opposed by Germany, Sweden and the UK, each government would present to their peers and the Commission their estimates for growth, inflation, revenue and expenditure levels six months before they go to national parliaments. If a country was to run a deficit, they would have to justify it to the rest of the EU while countries with a debt more than 60% of GDP would face greater scrutiny.[53]

The plans would apply to all EU members, not just the eurozone, and have to be approved by EU leaders along with proposals for states to face sanctions before they reach the 3% limit in the Stability and Growth Pact. Poland has criticised the idea of withholding regional funding for those who break the deficit limits, as that would only impact the poorer states. [53] In June 2010 France agreed to back Germany's plan for suspending the voting rights of members who breach the rules.[54] In March 2011 was initiated a new reform of the Stability and Growth Pactaiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. [55][56]

European Central Bank

The European Central Bank (ECB) is the institution of the European Union (EU) that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. The current President of the ECB is Mario Draghi, former governor of the Bank of Italy. The primary objective of the European Central Bank is to maintain price stabilitywithin the Eurozone, which is the same as keeping inflation low. The Governing Council defined price stability as inflation (Harmonised Index of Consumer Prices) of around 2%. Unlike, for example, the United States Federal Reserve Bank, the ECB has only one primary objective with other objectives subordinate to it. The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the financial market infrastructure under the Target payments system and the technical platform (currently being developed) for settlement of securities in Europe (TARGET2 Securities). Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states could issue euro coins, but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins). On 9 May 2010, the 27 member states of the European Union agreed to incorporate the European Financial Stability Facility. The EFSFs mandate is to safeguard financial stability in Europe by providing financial assistance to Eurozone Member States. The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector. The latter can be seen, for example, in the bank's intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system. Although the ECB is governed by European law directly and thus not by corporate law applying to private law companies, its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euro which is held by the national central banks of the member states as shareholders. The initial capital allocation key was determined in

1998 on the basis of the states' population and GDP, but the key is adjustable. Shares in the ECB are not transferable and cannot be used as collateral. Throughout 2011 various member states of the European Union showed themselves to be increasingly unable to meet financial commitments. At its heart, the crisis of the European currency unit or ECU is similar to almost any other financial crisis, including the crisis of 2008. Key concepts to understanding the crisis include collateral, assets, and liabilities. The bank is based in Frankfurt, the largest financial centre in the Eurozone (although not the largest in the European Union). Its location in the city is fixed by the Amsterdam Treaty along with other major institutions. In the city, the bank currently occupies Frankfurt's Eurotoweruntil its purpose-built headquarters are built. The owners and shareholders of the European Central Bank are the central banks of the 27 member states of the EU.
Contents
[hide]

1 History

1.1 Future

2 Powers and objectives

o o

2.1 Authorities 2.2 Mandates

o o

2.2.1 European Financial Stability Facility

2.3 Powers and objectives during the European banking crisis 2.4 Independence

3 Organization

3.1 Decisions-making bodies of the ECB

4 European sovereign debt crisis

4.1 Causes

4.1.1 Regulatory reliance on credit ratings

4.2 Response to the crisis

4.2.1 Bond purchase 4.2.2 Long term refinancing operation

4.3 Foreign exchange operations

5 Location 6 See also 7 References

8 External links

[edit]History

Further information: History of the euro

The European Central Bank is the de facto successor of the European Monetary Institute (EMI).[1] The EMI was established at the start of the second stage of the EU's Economic and Monetary Union (EMU) to handle the transitional issues of states adopting the euro and prepare for the creation of the ECB and European System of Central Banks (ESCB).[1] The EMI itself took over from the earlier European Monetary Co-operation Fund (EMCF).[2]

Wim Duisenberg, first President of the ECB.

The ECB formally replaced the EMI on 1 June 1998 by virtue of the Treaty on European Union (TEU, Treaty of Maastricht), however it did not exercise its full powers until the introduction of the euro on 1 January 1999, signalling the third stage of EMU.[1] The bank was the final institution needed for EMU, as outlined by the EMU reports of Pierre Werner and President Jacques Delors. It was established on 1 June 1998.[3] The first President of the Bank was Wim Duisenberg, the former president of the Dutch central bankand the European Monetary Institute.[3] While Duisenberg had been the head of the EMI (taking over from Alexandre Lamfalussy of Belgium) just before the ECB came into existence, [3] the French government wanted Jean-Claude Trichet, former head of the French central bank, to be the ECB's first president.[3] The French argued that since the ECB was to be located in Germany, its President should be French. This was opposed by the German, Dutch and Belgian governments who saw Duisenberg as a guarantor of a strong euro.[4] Tensions were abated by a gentleman's agreement in which

Duisenberg would stand down before the end of his mandate, to be replaced by Trichet, which occurred in November 2003.[5] There had also been tension over the ECB's Executive Board, with the United Kingdom demanding a seat even though it had not joined the Single Currency.[4] Under pressure from France, three seats were assigned to the largest members, France, Germany, and Italy; Spain also demanded and obtained a seat. Despite such a system of appointment the board asserted its independence early on in resisting calls for interest rates and future candidates to it. [4] When the ECB was created, it covered a Eurozone of eleven members. Since then, Greece joined in January 2001, Slovenia in January 2007, Cyprus and Malta in January 2008, Slovakia in January 2009, and Estonia in January 2011, enlarging the bank's scope and the membership of its Governing Council.[2] On 1 December 2009, the Treaty of Lisbon entered into force, ECB according to the article 13 of TEU, gained official status of an EU institution. In April 2011, the ECB raised interest rates for the first time since 2008 from 1% to 1.25%,[6] with a further increase to 1.50% in July 2011.[7] [edit]Future When German appointee to the Governing Council and Executive board, Jrgen Stark, resigned in protest of the ECB's bond buying programme, Financial Times Deutschland called it "the end of the ECB as we know it" referring to its perceived "hawkish" stance on inflation and its historical Bundesbank influence.[8] [edit]Powers

and objectives

Euro banknotes

The primary objective of the European Central Bank is to maintain price stability within theEurozone, which is the same as keeping inflation low. The Governing Council in October 1998[9]defined price stability as inflation of around 2%, a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2% and added that price stability was to be maintained over the medium term. (Harmonised Index of Consumer Prices)[10] Unlike for

example the United States Federal Reserve Bank, the ECB has only one primary objective with other objectives subordinate to it. The Governing Council confirmed this definition in May 2003 following a thorough evaluation of the ECBs monetary policy strategy. On that occasion, the Governing Council clarified that in the pursuit of price stability, it aims to maintain inflation rates below but close to 2% over the medium term.[9] All lending to credit institutions must be collateralised as required by Article 18 of the Statute of the ESCB. [11] [edit]Authorities The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the financial market infrastructure under the Target payments system[12] and being currently developed technical platform for settlement of securities in Europe (TARGET2 Securities). Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins).[12] In U.S. style central banking, liquidity is furnished to the economy primarily through the purchase of Treasury bonds by the Federal Reserve Bank. The Eurosystem uses a different method. There are about 1500 eligible banks which may bid for short term repo contracts of two weeks to three months duration.[13] The banks in effect borrow cash and must pay it back; the short durations allow interest rates to be adjusted continually. When the repo notes come due the participating banks bid again. An increase in the quantity of notes offered at auction allows an increase in liquidity in the economy. A decrease has the contrary effect. The contracts are carried on the asset side of the European Central Bank's balance sheet and the resulting deposits in member banks are carried as a liability. In lay terms, the liability of the central bank is money, and an increase in deposits in member banks, carried as a liability by the central bank, means that more money has been put into the economy.[14] [edit]Mandates To qualify for participation in the auctions, banks must be able to offer proof of appropriate collateral in the form of loans to other entities. These can be the public debt of member states, but a fairly wide range of private banking securities are also accepted. [15] The fairly stringent membership requirements for the European Union, especially with regard to sovereign debt as a percentage of each member state's gross domestic product, are designed to insure that assets offered to the bank as collateral are, at least in theory, all equally good, and all equally protected from the risk of inflation.[15] The economic and financial crisis that began in 2008 has revealed some relative weaknesses in the sovereign debt of such member countries as Portugal, Ireland, Greece and Spain. [16] These securities are not limited to the countries of issue, but held in many cases by banks in other member states.[15] To the extent that the banks authorized to borrow from the ECB have compromised collateral, their ability to borrow from the ECBand thus the liquidity of the economic systemis impaired.[15]

This threat has drawn the ECB into rescue operations.[15] But weak sovereign debt is not the only source of weakness in the ECB's operations, as the collapse of the market in U.S. dollar denominated collateralized debt obligations has also led to large scale interventions in cooperation with the Federal Reserve.[15] Rescue operations involving sovereign debt have included temporarily moving bad or weak assets off the balance sheets of the weak member banks into the balance sheets of the European Central Bank.[17] Such action is viewed as monetization and can be seen as an inflationary threat, whereby the strong member countries of the ECB shoulder the burden of monetary expansion (and potential inflation) in order to save the weak member countries. [17] Most central banks prefer to move weak assets off their balance sheets with some kind of agreement as to how the debt will continue to be serviced.[17] This preference has typically led the ECB to argue that the weaker member countries must: Allocate considerable national income to servicing debts.[17] scale back a wide range of national expenditures (such as education, infrastructure, and welfare transfer payments) in order to make their payments. [17]

Mario Draghi, the current President of the ECB.

[edit]European Financial Stability Facility On 9 May 2010, the 27 member states of the European Union agreed to incorporate the European Financial Stability Facility.[18] The EFSFs mandate is to safeguard financial stability in Europe by providing financial assistance to Eurozone Member States. [18] The European Financial Stability Facility is authorised to use the following instruments linked to appropriate conditionality: To provide loans to countries in financial difficulties (e.g. Greek Bailout).[18] To intervene in the primary and secondary debt markets. Intervention in the secondary debt market will be only on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability. [18] Act on the basis of a precautionary programme.[18] Finance recapitalisations of financial institutions through loans to governments [18]

The EFSF is backed by guarantee commitments from the Eurozone Member States for a total of 780 billion and has a lending capacity of 440 billion. [18] It has been assigned the best possible credit rating (AAA by Standard & Poors and Fitch Ratings, Aaa by Moodys) [18] [edit]Powers

and objectives during the European banking crisis

The European Central Bank had stepped up the buying of member nations debt. [19] In response to the crisis of 2010, some proposals have surfaced for a collective European bond issue that would allow the central bank to purchase a European version of U.S. Treasury Bills.[20][21]To make European sovereign debt assets more similar to a U.S. Treasury, a collective guarantee of the member states' solvency would be necessary.[22] But the German government has resisted this proposal, and other analyses indicate that "the sickness of the Euro" is due to the linkage between sovereign debt and failing national banking systems. If the European central bank were to deal directly with failing banking systems sovereign debt would not look as leveraged relative to national income in the financially weaker member states.[21] On 17 December 2010, the ECB announced that it was going to double its capitalization. [23] (The ECB's most recent balance sheet before the announcement listed capital and reserves at 2.03 trillion.)[24] The sixteen central banks of the member states would transfer assets to the ledger of the ECB. In banking, assets (loans) are used to offset liabilities (deposits and currency).[24] If some of the sovereign debt held as an asset by the ECB becomes non-performing, the asset is "bad" and the deposits, in this case, currency, are not appropriately backed. [24] This inequality means that liabilities exceed assets and therefore the bank is in trouble. [24] One response is to use the bank's capital to offset the losses.[24] The use of capital to offset a loss transfers the loss to the bank's shareholders: the member banks. [24] The increased capitalization of the ECB against potential sovereign debt default means that the sixteen member banks are also exposed to potential losses.[24] In 2011, the European member states may need to raise as much as US$2 trillion in debt.[23] Some of this will be new debt and some will be previous debt that is "rolled over" as older loans reach maturity. In either case, the ability to raise this money depends on the confidence of investors in the European financial system.[24] The ability of the European Union to guarantee its members' sovereign debt obligations have direct implications for the core assets of the banking system that support the Euro.[23] The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector.[25] The latter can be seen, for example, in the bank's intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system.[26] In December 2007, the ECB decided in conjunction with the Federal Reserve under a program called Term auction facility to improve dollar liquidity in the eurozone and to stabilise the money market.[27] [edit]Independence Furthermore, not only must the bank not seek influence, but EU institutions and national governments are bound by the treaties to respect the ECB's independence. For example, the minimum term of office for a national central bank governor is five years and members of the executive board have a non-renewable eight-year term.[28] To offer some accountability, the ECB is

bound to publish reports on its activities and has to address its annual report to the European Parliament, the European Commission, the Council of the European Union and theEuropean Council.[29] The European Parliament also gets to question and then issue its opinion on candidates to the executive board.[30] The bank's independence has notably come under intense criticism since the election of Nicolas Sarkozy as French President. Sarkozy has sought to make the ECB more susceptible to political influence, to extend its mandate to focus on growth and job creation (at cost ofinflation), and has frequently criticized the bank's policies on interest rates. [31] As result of pressure from France and Greece, independence of ECB has been limited. [31] [edit]Organization Although the ECB is governed by European law directly and thus not by corporate law applying to private law companies, its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euros[32] which is held by the national central banks of the member states as shareholders. The initial capital allocation key was determined in 1998 on the basis of the states' population and GDP,[33] but the key is adjustable.[34] Shares in the ECB are not transferable and cannot be used as collateral. [35]
European Union

This article is part of the series:

Politics and government of the European Union Parliament[show] Council of Ministers[show] European Council[show] Commission[show] Court of Justice[show] Other institutions[show] Policies and issues[show] Foreign relations[show] Elections[show] Law[show]

All National Central Banks (NCBs) that own a share of the ECB capital stock as of 1 January 2011 are listed below. Non-Euro area NCBs are required to pay up only a very small percentage of their subscribed capital, which accounts for the different magnitudes of Euro area and Non-Euro area total paid-up capital.[36] NCB Capital Key (%) Paid-up Capital ()

Nationale Bank van Belgi / Banque Nationale de Belgique

2.4256

180,157,051.35

Deutsche Bundesbank

18.9373

1,406,533,694.10

Eesti Pank

0.1790

13,294,901.14

Central Bank of Ireland

1.1107

82,495,232.91

(Bank of Greece)

1.9649

145,939,392.39

Banco de Espaa

8.3040

616,764,575.51

Banque de France

14.2212

1,056,253,899.48

Banca d'Italia

12.4966

928,162,354.81

K / Kbrs Merkez Bankas (Central Bank of Cyprus)

0.1369

10,167,999.81

Banque centrale du Luxembourg

0.1747

12,975,526.42

Bank entrali ta' Malta

0.0632

4,694,065.65

De Nederlandsche Bank

3.9882

296,216,339.12

sterreichische Nationalbank

1.9417

144,216,254.37

Banco de Portugal

1.7504

130,007,792.98

Banka Slovenije

0.3288

24,421,025.10

Nrodn banka Slovenska

0.6934

51,501,030.43

Suomen Pankki - Finlands Bank

1.2539

93,131,153.81

Total

69.9705 5,196,932,289.36

Non-Euro area:

(Bulgarian National Bank)

0.8686

3,505,013.50

esk nrodn banka

1.4472

5,839,806.06

Danmarks Nationalbank

1.4835

5,986,285.44

Latvijas Banka

0.2837

1,144,798.91

Lietuvos bankas

0.4256

1,717,400.12

Magyar Nemzeti Bank

1.3856

5,591,234.99

Narodowy Bank Polski

4.8954

19,754,136.66

Banca Naional a Romniei

2.4645

9,944,860.44

Sveriges Riksbank

2.2582

9,112,389.47

Bank of England

14.5172

58,580,453.65

Total [edit]Decisions-making

30.0295

121,176,379.25

bodies of the ECB

Jean-Claude Trichet, the second President of the European Central Bank.

The Governing Council comprises the members of the Executive Board of the ECB and the governors of the NCBs of the euro area countries. The Executive Board is responsible for the implementation of monetary policy defined by the Governing Council and the day-to-day running of the bank.[37] In this it can issue decisions to national central banks and may also exercise powers delegated to it by the Governing Council. [37] It is composed of the President of the Bank (currently Mario Draghi), a vice president (currently Vitor Constncio) and four other members.[37] They are all appointed for non-renewable terms of eight

years.[37] They are appointed "from among persons of recognised standing and professional experience in monetary or banking matters by common accord of the governments of the Member States at the level of Heads of State or Government, on a recommendation from the Council, after it has consulted the European Parliament and the Governing Council of the ECB".[cite this quote] The Executive Board normally meets every Tuesday. The General Council is a body dealing with transitional issues of euro adoption, for example fixing the exchange rates of currencies being replaced by the euro (continuing the tasks of the former EMI).[37]It will continue to exist until all EU member states adopt the euro, at which point it will be dissolved.[37] It is composed of the President and Vice President together with the governors of all of the EU's national central banks.[38][39] [edit]European

sovereign debt crisis

Main article: European sovereign debt crisis

From late 2009, fears of a sovereign debt crisis developed among fiscally conservative investors concerning some European states, with the situation becoming particularly tense in early 2010.[40][41] This included euro zone members Greece,[42] Ireland and Portugal and also someEU countries outside the area.[43] Iceland, the country which experienced the largest crisis in 2008 when its entire international banking system collapsed has emerged less affected by the sovereign debt crisis as the government was unable to bail the banks out. In the EU, especially in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.[44][45] To be included in the eurozone, the countries had to fulfill certain convergence criteria, but the meaningfulness of such criteria were diminished by the fact they have not been applied to different countries with the same strictness. [46] [edit]Causes The principal monetary policy tool of the European central bank is collateralized borrowing or repo agreements.[47] These tools are also used by the United States Federal Reserve Bank, but the Fed does more direct purchasing of financial assets than its European counterpart. [48]The collateral used by the ECB is typically high quality public and private sector debt.[47] The criteria for determining "high quality" for public debt have been preconditions for membership in the European Union: total debt must not be too large in relation to Gross Domestic Product, for example, and deficits in any given year must not become too large. [49] Though these criteria are fairly simple, a number of accounting techniques may hide the underlying reality of fiscal solvency or the lack of same.[49] In central banking, the privileged status of the central bank is that it can make as much money as it deems needed.[50] In the United States Federal Reserve Bank, the Federal Reserve buys assets: typically, bonds issued by the Federal government.[50] There is no limit on the bonds that it can buy and one of the tools at its disposal in a financial crisis is take such extraordinary measures as the purchase of large amounts of assets such as commercial paper.[50] The purpose of such operations is to ensure that adequate liquidity is available for functioning of the financial system. [50]

[edit]Regulatory reliance on credit ratings Think-tanks such as the World Pensions Council have also argued that European legislators have pushed somewhat dogmatically for the adoption of the Basel II recommendations, adopted in 2005, transposed in European Union law through the Capital Requirements Directive(CRD), effective since 2008. In essence, they forced European banks, and, more importantly, the European Central Bank itself e.g. when gauging the solvency of financial institutions, to rely more than ever on standardized assessments of credit risk marketed by two non-European private agencies- Moodys and S&P. [edit]Response

to the crisis

There are a variety of possible responses to the problem of bad debts in a banking system. One is to induce debtors to make a greater effort to make good on their debt. [47] With public debt this usually means getting governments to maintain debt payments while cutting back on other forms of expenditure.[47] Such policies often involve cutting back on popular social programs.[51] Stringent policies with regard to social expenditures and employment in the state sector have led to riots and political protests in Greece.[52]Another response is to shift losses from the central bank to private investors who are asked to "share the pain" of partial defaults that take the form of rescheduling debt payments.[47] However, if the debt rescheduling causes losses on loans held by European banks, it weakens the private banking system, which then puts pressure on the central bank to come to the aid of those banks. Private sector bond holders are an integral part of the public and private banking system. Another possible response is for wealthy member countries to guarantee or purchase the debt of countries that have defaulted or are likely to default. [47] This alternative requires that the tax revenues and credit of the wealthy member countries be used to refinance the previous borrowing of the weaker member countries, and is politically controversial. [53] Reluctance in Germany to take on the burden of financing or guaranteeing the debts of weaker countries has led to public reports that some elites in Germany would prefer to see Greece, Portugal, and even Italy leave the Euro zone "temporarily."[54] Until recently, Greek Euro zone exit was rejected by German Chancellor Angela Merkel.[55] The German government's current position is, to keep Greece within the euro zone, but not at any cost. If the worst comes to the worst, priority will be given to the euro's stability.[56] [edit]Bond purchase

ECB Securities Markets Program (SMP) covering bond purchases since May 2010

The ECB could, and through the late summer of 2011 did, purchase bonds issued by the weaker states even though it assumes, in doing so, the risk of a deteriorating balance sheet. ECB buying focused primarily on Spanish and Italian debt.[57] Certain techniques can minimize the impact. Purchases of Italian bonds by the central bank, for example, were intended to dampen international speculation and strengthen portfolios in the private sector and also the central bank. [58] The assumption is that speculative activity will decrease over time and the value of the assets increase. Such a move is similar to what the U.S. federal reserve did in buying subprime mortgages in the crisis of 2008, except in the European crisis, the purchases are of member state debt. The risk of such a move is that it could diminish the value of the currency.[49] On the other hand, certain financial techniques can reduce the impact of such purchases on the currency.[49] One is sterilization, wherein highly valued assets are sold at the same time that the weaker assets are purchased, which keeps the money supply neutral. [49] Another technique is simply to accept the bad assets as long-term collateral (as opposed to short-term repo swaps) to be held until their market value stabilizes. This would imply, as a quid pro quo, adjustments in taxation and expenditure in the economies of the weaker states to improve the perceived value of the assets.[49] When the ECB buys bonds from other creditors such as European banks, the ECB does not disclose the transaction prices. Creditors profit of bargains with bonds sold at prices that exceed market's quotes. [edit]Long term refinancing operation Though the ECB's main refinancing operations (MRO) are from repo auctions with a (bi)weekly maturity and monthly maturation, the ECB now conducts Long Term Refinancing Operations (LTROs), maturing after three months, six months, 12 months and 36 months. In 2003, the longest tender offered was three months. Refinancing via LTROs amounted to 45 bln Euro which is about 20% of overall liquidity provided by the ECB. [59] The ECB's first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced March 2008.[60] The first tender was settled April 3, and was more than four times oversubscribed. The 25 billion auction drew bids amounting to 103.1 billion, from 177 banks. Another six-month tender was allotted on July 9, again to the amount of 25 billion. [60] The first 12 month LTRO in June 2009 had close to 1100 bidders. [61] On 21 December 2011 the bank instituted a programme of making low-interest loans with a term of 3 years (36 months) and 1% interest to European banks accepting loans from the portfolio of the banks as collateral. Loans totalling 489.2 billion ($640 billion) were announced. The loans were not offered to European states, but government securities issued by European states would be acceptable collateral as wouldmortgage securities and other commercial paper that can be demonstrated to be secure. The programme was announced on 8 December 2011 but observers were surprised by the volume of the loans made when it was implemented.[62][63][64] Under its LTRO it loaned 489 billionto 523 banks for an exceptionally long period of three years at a rate of just one percent.[65] The by far biggest amount of 325 billion was tapped by banks in Greece, Ireland, Italy and Spain.[66] This way the ECB tried to make sure that banks have enough cash to pay off200

billion of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis.[67] On 29 February 2012, the ECB held a second 36 month auction, LTRO2, providing eurozone banks with further 529.5 billion in low-interest loans.[68] This second long term refinancing operation auction saw 800 banks take part. This can be compared with the 523 banks that took part in the first auction on 21 December 2011.[69] Net new borrowing under the February auction was around 313 billion out of a total of 256bn existing ECB lending 215bn was rolled into LTRO2. [69] [edit]Foreign

exchange operations

On 22 September 2000, the ECB, together with the monetary authorities of the United States, Japan, the United Kingdom and Canada, initiated concerted intervention in the foreign exchange markets; the ECB intervened again in early November 2000. [70] [edit]Location

Main article: European Central Bank Headquarters

Model of the ECB's new headquarters, which is due to be completed in 2014.

The bank is based in Frankfurt, the largest financial centre in the Eurozone. Its location in the city is fixed by the Amsterdam Treaty along with other major institutions.[71] In the city, the bank currently occupies Frankfurt's Eurotower until its purpose-built headquarters are built.[72] In 1999 an international architectural competition was launched by the bank to design a new building.[73] It was won by a Vienna-based architectural office named Coop Himmelbau.[73] The building will be approximately 180 metres (591 ft) tall (the present building is 148 m/486 ft high.) and will be accompanied with other secondary buildings on a landscaped site on the site of theformer wholesale market in the eastern part of Frankfurt am Main. The main construction began in October 2008, with completion scheduled during 2014. [73][74] It is expected that the building will become an architectural symbol for Europe and is designed to accommodate double the number of staff who operate in the Eurotower.[72]

European Financial Stability Facility

The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of theeurozone to address the European sovereign debt crisis. It was agreed by the 27 member states[1] of theEuropean Union on 9 May 2010, with the objective of preserving financial stability in Europe by providing financial assistance to eurozone states in economic difficulty.[2] The Facility's headquarters are in Luxembourg City.[3] Treasury management services and administrative support are provided to the Facility by the European Investment Bank through a service level contract.[4] The EFSF is authorized to borrow up to 440 billion,[5] of which 250 billion remained available after the Irish and Portuguese bailout.[6] A separate entity, the European Financial Stabilisation Mechanism (EFSM), a programme reliant upon funds raised on the financial markets and guaranteed by the European Commissionusing the budget of the European Union as collateral, has the authority to raise up to 60 billion.
Contents
[hide]

1 Function

o o o

1.1 Lending 1.2 Guarantee commitments 1.3 Management

2 Developments and implementation

o o o o o

2.1 Irish bailout 2.2 Portuguese bailout 2.3 Enlargement 2.4 Greek bailout 2.5 Rating

3 Controversies 4 Operations 5 See also 6 References 7 External links

[edit]Function The mandate of the EFSF is to "safeguard financial stability in Europe by providing financial assistance" to euro area states.[7] The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalize banks or buy sovereign debt. [8] Emissions of bonds would be backed

by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank (ECB). The 440 billion lending capacity of the Facility may be combined with loans up to 60 billion from the European Financial Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to 250 billion from theInternational Monetary Fund (IMF) to obtain a financial safety net up to 750 billion.[9] Had there been no financial operations undertaken, the EFSF would have closed down after three years, on 30 June 2013. However, since the EFSF was activated in 2011 to lend money to Ireland and Portugal, the Facility will exist until its last obligation has been fully repaid. [10] [edit]Lending The Facility can only act after a support request is made by a euro area member state and a country programme has been negotiated with the European Commission and the IMF and after such a programme has been unanimously accepted by the Eurogroup (euro area finance ministers) and a memorandum of understanding is signed. This would only occur when the country is unable to borrow on markets at acceptable rates. If there is a request from a euro area member state for financial assistance, it will take three to four weeks to draw up a support programme including sending experts from the Commission, the IMF and the ECB to the country in difficulty. Once the Eurogroup have approved the country programme, the EFSF would need several working days to raise the necessary funds and disburse the loan.[10] [edit]Guarantee

commitments

The table below shows the current maximum level of joint and several guarantees for capital given by the Eurozone countries. The amounts are based on the European Central Bank capital key weightings. EU requested the Eurozone countries to approve an increase of the guarantee amounts to 780 billion. The majority of the risk of the increase from original 440 billion falls on the AAA rated countries and ultimately their taxpayers, in a possible event of default of the investments of EFSF. The guarantee increases were approved by all Eurozone countries by October 13, 2011. [11] The 110 billion bailout to Greece of 2010 is not part of the EFSF guarantees and not managed by EFSF, but a separate bilateral commitment by the Eurozone countries (excluding Slovakia, who opted out, and Estonia, which was not in Eurozone in 2010) and IMF. In addition to the capital guarantees shown in the table, the enlarged EFSF agreement holds the guarantor countries responsible for all interest costs of the issued EFSF bonds, in contrast to the original EFSF structure, significantly expanding the potential taxpayer liabilities.[12] These additional guarantee amounts increase if the coupon payments of the issued EFSF bonds are high. On 29 November 2011, European finance ministers decided that EFSF can guarantee 20 to 30% of the bonds of struggling peripheral economies.[13] Enlarged contributions (see enlargement section)

Country

Initial contributions

Guarantee Commitments (EUR) Millions

Percentage

per capita
[citation

needed]

Guarantee Commitments (EUR) Millions

Percentage

Austria

12,241.43

2.78%

1,464.86 21,639.19

2.7750%

Belgium

15,292.18

3.48%

1,423.71 27,031.99

3.4666%

Cyprus

863.09

0.20%

1,076.68 1,525.68

0.1957%

Estonia

1,994.86

0.2558%

Finland

7,905.20

1.80%

1,484.51 13,974.03

1.7920%

France

89,657.45

20.38%

1,398.60 158,487.53

20.3246%

Germany

119,390.07

27.13%

1,454.87 211,045.90

27.0647%

Greece

12,387.70

2.82%

1,099.90 21,897.74

2.8082%

Ireland

7,002.40

1.59%

1,549.97 12,378.15

1.5874%

Italy

78,784.72

17.91%

1,311.10

139,267.81

17.8598%

Luxembourg

1,101.39

0.25%

2,239.95 1,946.94

0.2497%

Malta

398.44

0.09%

965.65

704.33

0.0903%

Initial contributions

Enlarged contributions (see enlargement section)

Country Guarantee Commitments (EUR) Millions Percentage

per capita
[citation

needed]

Guarantee Commitments (EUR) Millions

Percentage

Netherlands

25,143.58

5.71%

1,525.60 44,446.32

5.6998%

Portugal

11,035.38

2.51%

1,037.96 19,507.26

2.5016%

Slovakia

4,371.54

0.99%

807.89

7,727.57

0.9910%

Slovenia

2,072.92

0.47%

1,009.51 3,664.30

0.4699%

Spain

52,352.51

11.90%

1,141.75

92,543.56

11.8679%

Eurozone (16) 440,000.00 without Estonia ()

100%

1,339.02

Eurozone (17) with Estonia

779,783.14

100%

( Estonia entered eurozone on 1 January 2011, i.e. after the creation of the European Financial Stability Facility in 2010). Greece, Ireland and Portugal are "stepping out guarantors", except where they have liabilities before getting that status. Estonia is a stepping out guarantor with respect to liabilities before it joined the eurozone.

[edit]Management The Chief Executive Officer of the EFSF is Klaus Regling, a former Director General of the European Commissions Directorate General for Economic and Financial Affairs, having previously worked at the IMF and the German Ministry of Finance. The Board of the European Financial Stability Facility comprise high level representatives of the 17 euro area member states, including Deputy Ministers or Secretaries of State or Director Generals

of the Treasury. The European Commission and the European Central Bankcan each appoint an observer to the EFSF Board. Chairman of the Board is Thomas Wieser, who is also Chairman of EU's Economic and Financial Committee.[14] Although there is no specific statutory requirement for accountability to the European Parliament, the Facility is expected to operate a close relationship with relevant committees within the EU.[15][16] [edit]Developments

and implementation

On 7 June 2010 the euro area member states entrusted the European Commission, where appropriate in liaison with the European Central Bank, with the task of: negotiating and signing on their behalf after their approval the memoranda of understanding related to this support; providing proposals to them on the loan facility agreements to be signed with the beneficiary member state(s); assessing the fulfilment of the conditionality laid down in the memoranda of understanding; providing input, together with the European Investment Bank, to further discussions and decisions in the Eurogroup on EFSF related matters and, in a transitional phase, in which the European Financial Stability Facility is not yet fully operational, on building up its administrative and operational capacities.[17]

On the same day the European Financial Stability Facility was established as a limited liability company under Luxembourg law (Socit Anonyme),[18] while Klaus Regling was appointed as chief executive officer of the EFSF on 9 June 2010[19] and took office on 1 July 2010.[20]The Facility became fully operational on 4 August 2010.[21][22] On 29 September 2011, the German Bundestag voted 523 to 85 to approve the increase in the EFSF's available funds to 440 billion(Germany's share 211bn). Mid-October Slovakia became the last country to give approval, though not before parliament speaker Richard Sulk registered strong questions as to how "a poor but rule-abiding euro-zone state must bail out a serial violator with twice the per capita income, and triple the level of the pensions a country which is in any case irretrievably bankrupt? How can it be that the no-bail clause of the Lisbon treaty has been ripped up?"[23] [edit]Irish

bailout

The Eurogroup and the EU's Council of Economics and Finance Ministers decided on 28 November 2010 to grant financial assistance in response to the Irish authorities request. The financial package will cover financing needs up to 85 billion. The EU will provide up to 22.5 billion through European Financial Stabilisation Mechanism and the EFSF up to 17.7 billion over 2011 and 2012. The first bonds of the European Financial Stability Facility were issued on 25 January 2011. The EFSF placed its inaugural five-year bonds for an amount of 5 billion as part of the EU/IMF financial support package agreed for Ireland. [24] The issuance spread was fixed at mid-swap plus 6 basis points. This implies borrowing costs for EFSF of 2.89%. Investor interest was exceptionally strong, with a record breaking order book of 44.5 billion, i.e. about nine times the supply. Investor

demand came from around the world and from all types of institutions. [25] The Facility chose three banks (Citibank, HSBC and Socit Gnrale) to organise the inaugural bonds issue. [26] [edit]Portuguese

bailout

The second Eurozone country to request and receive aid from EFSF is Portugal. Following the formal request for financial assistance made on 7 April 2011 by the Portuguese authorities, the terms and conditions of the financial assistance package were agreed by the Eurogroup and the EUs Council of Economics and Finance Ministers on 17 May 2011. The financial package will cover Portugals financing needs of up to 78 billion. The European Union, through the European Financial Stabilisation Mechanism and the EFSF will each provide up to 26 billion to be disbursed over 3 years. Further support will be made available through the IMF for up to 26 billion, as approved by the IMF Executive Board on 20 May 2011.[27] EFSF was activated for Portuguese lending in June 2011, and issued 5 billion of 10-year bonds on 15 June 2011, and 3 billion on June 22, 2011 through BNP Paribas, Goldman Sachs International and Royal Bank of Scotland. [28] [edit]Enlargement On 21 July 2011, the eurozone leaders agreed to amend the EFSF to enlarge its capital guarantee from 440 billion to 780 billion.[29][30] The increase expanded the effective lending capacity of the EFSF to 440 billion. This required ratifications by all eurozone parliaments, which were completed on 13 October 2011.[31][32] The EFSF enlargement agreement also modified the EFSF structure, removing the cash buffer held by EFSF for any new issues and replacing it with +65% overguarantee by the guaranteeing countries. The increase of 165% to the capital guarantee corresponds to the need to have 440 billion of AAA-rated guarantor countries behind the maximum EFSF issued debt capital (Greece, Ireland, and Portugal do not guarantee new EFSF issues as they are recipients of Euroland support, reducing the total maximum guarantees to 726 billion).[33] Once the capacity of EFSF to extend new loans to distressed Euroland countries expires in 2013, it and the EFSM will be replaced by theEuropean Stability Mechanism (once it is ratified, see Treaties of the European Union#Eurozone reform). However, the outstanding guarantees given to EFSF bondholders to fund bailouts will survive ESM. On 27 October 2011 the European Council announced that the member states had reached agreement to further increase the effective capacity of the EFSF to 1 trillion by offering insurance to purchasers of eurozone members' debt. [34] European leaders have also agreed to create one or several funds, possibly placed under IMF supervision. The funds would be seeded with EFSF money and contributions from outside investors. [35] [edit]Greek

bailout

As part of the second bailout for Greece, the loan is shifted to the EFSF, amounting to 164 billion (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014. [36] [edit]Rating

The Facility aimed for ratings agencies to assign a AAA rating to its bonds, which would be eligible for European Central Bank refinancing operations.[37] It achieved this in September 2010 when Fitch, and Standard & Poor's awarded it AAA and Moody's awarded it Aaa [38], making it easier for it to raise money. The rating outlook was qualified as stable. [39] On 16 January 2012 the Standard and Poors (S&P) lowered its rating on the European Financial Stability Facility to AA+ from AAA; the downgrade followed the 13 January 2012 downgrade of France and eight other eurozone nations which has sparked worries that EFSF will have further difficulties raising funds. [40] [edit]Controversies The EFSF enlargement process of 2011 proved to be challenging to several Eurozone member states, who objected against assuming sovereign liabilities in potential violation of the Maastricht Treaty of no bailout provisions. On 13 October 2011, Slovakia approved EFSF expansion 2.0 after failed first approval vote. In exchange, the Slovakian government was forced to resign and call new elections. On 19 October 2011, Helsingin Sanomat reported that the Finnish parliament passed the EFSF guarantee expansion without quantifying the total potential liability to Finland. It turned out that several members of the parliament did not understand that in addition to increasing the capital guarantee from 7.9 billion to 14.0 billion, the Government of Finland would be guaranteeing all of the interest and capital raising costs of EFSF in addition to the issued capital, assuming theoretically uncapped liability. Helsingin Sanomat estimated that in an adverse situation this liability could reach 28.7 billion, adding interest rate of 3.5% for 30-year loans to capital guarantee. For this reason the parliamentary approval process on 28 September 2011 was misleading, and may require a new Government proposal.

European sovereign-debt crisis

The European sovereign debt crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to re-finance their government debt without the assistance of third parties. From late 2009, fears of a sovereign debt crisis developed among investors as a result of the risinggovernment debt levels around the world together with a wave of downgrading of government debt in some European states. Concerns intensified in early 2010 and thereafter,[3][4] leading Europe's finance ministers on 9 May 2010 to approve a rescue package worth 750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF).[5] In October 2011 and February 2012, the eurozone leaders agreed on more measures designed to prevent the collapse of member economies. This included an agreement whereby banks would accept a 53.5% write-off of Greek debt owed to private creditors,[6] increasing the EFSF to about 1 trillion, and requiring European banks to achieve 9% capitalisation.[7] To restore confidence in Europe, EU leaders also agreed to create a common fiscal union including the commitment of each participating country to introduce a balanced budget amendment.[8][9]

While sovereign debt has risen substantially in only a few eurozone countries, it has become a perceived problem for the area as a whole.[10] Nevertheless, the European currency has remained stable.[11] As of mid-November 2011, the euro was even trading slightly higher against the bloc's major trading partners than at the beginning of the crisis. [12][13] The three countries most affected, Greece, Ireland and Portugal, collectively account for six percent of the eurozone's gross domestic product(GDP).[14]
Contents
[hide]

1 Causes

o o o o

1.1 Rising government debt levels 1.2 Trade imbalances 1.3 Monetary policy inflexibility 1.4 Loss of confidence

2 Evolution of the crisis

o o o o o

2.1 Greece 2.2 Ireland 2.3 Portugal 2.4 Cyprus 2.5 Possible spread to other countries

3 Solutions

2.5.1 Italy 2.5.2 Spain 2.5.3 Belgium 2.5.4 France 2.5.5 United Kingdom

3.1 EU emergency measures

o o

3.1.1 European Financial Stability Facility (EFSF) 3.1.2 European Financial Stabilisation Mechanism (EFSM) 3.1.3 Brussels agreement and aftermath

3.2 ECB interventions 3.3 Economic reforms and recovery

3.3.1 Increase competitiveness 3.3.2 Increase investment

4 Proposed long-term solutions

o o o o o o o

4.1 European fiscal union and revision of the Lisbon Treaty 4.2 Eurobonds 4.3 European Stability Mechanism (ESM) 4.4 Address current account imbalances 4.5 European Monetary Fund 4.6 Drastic debt write-off financed by wealth tax 4.7 Speculation about the breakup of the eurozone

5 Controversies

o o

5.1 EU treaty violations 5.2 Actors fueling the crisis

o o o

5.2.1 Credit rating agencies 5.2.2 Media 5.2.3 Speculators

5.3 Odious debt 5.4 National statistics 5.5 Collateral for Finland

6 Political impact 7 See also 8 References 9 External links

[edit]Causes

Public debt $ and %GDP (2010) for selected European countries

The European sovereign debt crisis has resulted from a combination of complex factors, including the globalization of finance; easy credit conditions during the 20022008 period that encouraged high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; slow economic growth in 2008 and thereafter; fiscal policy choices related to government revenues and expenses, particularly high entitlement spending, see welfare state; and approaches used by nations to bailout troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.[15][16] One narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 20002007 period when the global pool of fixed income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This "Giant Pool of Money" increased as savings from high-growth developing nations entered global capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds sought alternatives globally.[17]The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country as global fixed income investors searched for yield, generating bubble after bubble across the globe. While these bubbles have burst causing asset prices (e.g., housing and commercial property) to decline, the liabilities owed to global investors remain at full price, generating questions regarding the solvency of governments and their banking systems.[16] How each European country involved in this crisis borrowed and invested the money varies. For example, Ireland's banks lent the money to property developers, generating a massive property bubble. When the bubble burst, Ireland's government and taxpayers assumed private debts. In Greece, the government increased its commitments to public workers in the form of extremely generous pay and pension benefits. Iceland's banking system grew enormously, creating debts to global investors ("external debts") several times GDP. [16] The interconnection in the global financial system means that if one nation defaults on its sovereign debt or enters into recession putting some of the external private debt at risk, the banking systems of creditor nations face losses. For example, in October 2011 Italian borrowers owed French banks $366 billion (net). Should Italy be unable to finance itself, the French banking system and economy could come under significant pressure, which in turn would affect France's creditors and so on. This is referred to as financial contagion.[18][19] Another factor contributing to interconnection is the concept of debt protection. Institutions entered into contracts called credit default swaps (CDS) that result in payment should default occur on a particular debt instrument (including government issued bonds). But, since multiple CDS's can be purchased on the same security, it is unclear what exposure each country's banking system now has to CDS. [20] Some politicians, notably Angela Merkel, have sought to attribute some of the blame for the crisis to hedge funds and other speculators stating that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere". [21][22][23][24][25] Although some financial institutions clearly profited from the growing Greek government debt in the short run, [26] there was a long lead up to the crisis. [edit]Rising

government debt levels

Government debt of Eurozone, Germany and crisis countries compared to Eurozone GDP

Government deficit of Eurozone compared to USA and UK

In 1992, members of the European Union signed the Maastricht Treaty, under which they pledged to limit theirdeficit spending and debt levels. However, a number of EU member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures.[27][28] The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protection for derivatives counterparties.[27]

Public debt as a percent of GDP (2010)

A number of "appalled economists" have condemned the popular notion in the media that rising debt levels of European countries were caused by excess government spending. According to their analysis, increased debt levels are due to the large bailout packages provided to the financial sector during the late-2000s financial crisis, and the global economic slowdown thereafter. The average fiscal deficit in the euro area in 2007 was only 0.6% before it grew to 7% during the financial crisis. In the same period the average government debt rose from 66% to 84% of GDP. The authors also stressed that fiscal deficits in the euro area were stable or even shrinking since the early 1990s.[29] US economist Paul Krugman named Greece as the only country where fiscal irresponsibility is at the heart of the crisis.[30] Either way, high debt levels alone may not explain the crisis. According to The Economist Intelligence Unit, the position of the euro area looked "no worse and in some respects, rather better than that of the US or the UK." The budget deficit for the euro area as a whole (see graph) is much lower and the euro area's government debt/GDP ratio of 86% in 2010 was about the same

level as that of the US. Moreover, private-sector indebtedness across the euro area is markedly lower than in the highly leveraged Anglo-Saxon economies.[31] [edit]Trade

imbalances

Current account balances relative to GDP (2010)

Commentators such as Financial Times journalist Martin Wolf have asserted that the root of the crisis was growing trade imbalances. He notes in the run-up to the crisis, from 1999 to 2007, Germany had a considerably better public debt and fiscal deficit relative to GDP than the most affected eurozone members. In the same period, these countries (Portugal, Ireland, Italy and Spain) had far worse balance of payments positions. [32] Whereas German trade surpluses increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all worsened. More recently, Greece's trading position has improved;[33] in the period November 2010 to October 2011 imports dropped 12% while exports grew 15% (40% to non-EU countries in comparison to October 2010).[33] [edit]Monetary

policy inflexibility

Since membership of the eurozone establishesable to "print money" in order to pay creditors and ease their risk of default. (Such an option is not available to a state such as France.) By "printing money" a country's currency is devalued relative to its (eurozone) trading partners, making its exports cheaper, in principle leading to an improving balance of trade, increased GDP and higher tax revenues in nominal terms.[34] In the reverse direction moreover, assets held in a currency which has devalued suffer losses on the part of those holding them. For example by the end of 2011, following a 25 percent fall in the rate of exchange and 5 percent rise in inflation, eurozone investors in Sterling, locked in to euro exchanges rates, had suffered an approximate 30 percent cut in the repayment value of this debt.[35] [edit]Loss

of confidence

Sovereign CDS prices of selected European countries (20102011). The left axis is in basis points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years.

Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the eurozone was safe. Banks had substantial holdings of bonds from weaker economies such as Greece which offered a small premium and seemingly were equally sound. As the crisis developed it became obvious that Greek, and possibly other countries', bonds offered substantially more risk. Contributing to lack of information about the risk of European sovereign debt wasconflict of interest by banks that were earning substantial sums underwriting the bonds.[36] The loss of confidence is marked by rising sovereign CDS prices, indicating market expectations about countries' creditworthiness (see graph). Furthermore, investors have doubts about the possibilities of policy makers to quickly contain the crisis. Since countries that use the euro as their currency have fewer monetary policy choices (e.g., they cannot print money in their own currencies to pay debt holders), certain solutions require multi-national cooperation. Further, the European Central Bank has an inflation control mandate but not an employment mandate, as opposed to the U.S. Federal Reserve, which has a dual mandate. According to the Economist, the crisis "is as much political as economic" and the result of the fact that the euro area is not supported by the institutional paraphernalia (and mutual bonds of solidarity) of a state.[31] Rating agency views On December 5, 2011 S&P placed its long-term sovereign ratings on 15 members of the eurozone on "CreditWatch" with negative implications; S&P wrote this was due to "systemic stresses from five interrelated factors: 1) Tightening credit conditions across the eurozone; 2) Markedly higher risk premiums on a growing number of eurozone sovereigns including some that are currently rated 'AAA'; 3) Continuing disagreements among European policy makers on how to tackle the immediate

market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members; 4) High levels of government and household indebtedness across a large area of the eurozone; and 5) The rising risk of economic recession in the eurozone as a whole in 2012. Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the eurozone as a whole."[37] [edit]Evolution

of the crisis

See also: 2000s European sovereign debt crisis timeline

In the first few weeks of 2010, there was renewed anxiety about excessive national debt. Frightened investors demanded ever higher interest rates from several governments with higher debt levels, deficits and current account deficits. This in turn made it difficult for some governments to finance further budget deficits and service existing debt, particularly when economic growth rates were low, and when a high percentage of debt was in the hands of foreign creditors, as in the case of Greece and Portugal.[38] Elected officials have focused on austerity measures (e.g., higher taxes and lower expenses) contributing to social unrest and significant debate among economists, many of whom advocate greater deficits when economies are struggling. Especially in countries where government budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on CDS between these countries and other EU member states, most importantly Germany.[39][40] By the end of 2011, Germany was estimated to have made more than 9 billion out of the crisis as investors flocked to safer but near zero interest rate German federal government bonds (bunds).[41] While Switzerland equally benefited from lower interest rates, the crisis also harmed its export sector due to a substantial influx of foreign capital and the resulting rise of the Swiss franc. In September 2011 the Swiss National Bank surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs", effectively weakening the Swiss franc. This is the biggest Swiss intervention since 1978.[42] [edit]Greece

Main article: Greek government debt crisis

Greece's debt percentage since 1999 compared to the average of the eurozone

In the early mid 2000s, Greece's economy was one of the fastest growing in the eurozone and the government took advantage of it by running a large structural deficit,[43] partly due to high defense spending amid historic enmity to Turkey. As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industries shipping and tourism were especially sensitive to changes in the business cycle. As a result, the country's debt began to increase rapidly.

100,000 people protest against the harsh austerity measures in front of parliament building in Athens (29 May 2011)

On 23 April 2010, the Greek government requested an initial loan of 45 billion from the EU and International Monetary Fund (IMF), to cover its financial needs for the remaining part of 2010.[44][45] A few days later Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "junk" status amid fears of default,[46] in which case investors were liable to lose 3050% of their money.[46]Stock markets worldwide and the Euro currency declined in response to this announcement.[47] On 1 May 2010, the Greek government announced a series of austeritymeasures[48] to secure a three year 110 billion loan.[49] This was met with great anger by the Greek public, leading to massive protests, riots and social unrest throughout Greece.[50] The Troika (EU, ECB and IMF), offered Greece a second bailout loan worth 130 billion in October 2011, but with the activation being conditional on implementation of further austerity measures and a debt restructure agreement. A bit surprisingly, the Greek prime minister George Papandreou first answered that call, by announcing a December 2011 referendum on the new bailout plan,[51][52] but had to back down amidst strong pressure from EU partners, who threatened to withhold an overdue 6 billion loan payment that Greece needed by mid-December.[51][53] On 10 November 2011 Papandreou instead opted to resign, following an agreement with the New Democracy party and the Popular Orthodox Rally, to appoint non-MP technocrat Lucas Papademos as new prime minister of an interim national union government, with responsibility for implementing the needed austerity measures to pave the way for the second bailout loan.[54][55] All the implemented austerity measures, have so far helped Greece bring down its primary deficit before interest payments, from 24.7bn (10.6% of GDP) in 2009 to just 5.2bn (2.4% of GDP) in 2011[56][57], but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011. [58] Overall the Greek GDP had its worst decline in 2011 with -6.9%,[59] a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005,[60][61] and with 111,000 Greek companies going bankrupt (27% higher than in 2010).[62][63] As a result, the seasonal adjusted unemployment rate also grew from 7.5% in September 2008 to a record high of 19.9% in November 2011, while the Youth unemployment rate

during the same time rose from 22.0% to as high as 48.1%. [64][65] Overall the share of the population living at "risk of poverty or social exclusion" did not increase noteworthy during the first 2 year of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010 (only being slightly worse than the EU27-average at 23.4%),[66] but for 2011 the figure was now estimated to have risen sharply above 33%.[67] In February 2012, an IMF official negotiating Greek austerity measures admitted that excessive spending cuts were harming Greece. [56] Some economic experts argue that the best option for Greece and the rest of the EU, would be to engineer an orderly default, allowing Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate. [68][69] However, if Greece were to leave the euro, the economic and political impact would be devastating. According to Japanese financial company Nomura an exit would lead to a 60 percent devaluation of the new drachma. UBS warned of "hyperinflation, military coups and possible civil war that could afflict a departing country".[70][71] To prevent this from happening, the troika (EU, IMF and ECB) eventually agreed in February 2012 to provide a second bailout package worth 130 billion,[72] conditional on the implementation of another harsh austerity package (reducing the Greek spendings with 3.3bn in 2012 and another 10bn in 2013 and 2014).[57] For the first time, the bailout deal also included a debt restructure agreement with the private holders of Greek government bonds (banks, insurers and investment funds), to "voluntarily" accept a bond swap with a 53.5% nominal write-off along with lower interest rates and the maturity prolonged to 11-30 years (depending on the previous maturity). [6] It is the world's biggest debt restructuring deal ever done, affecting some 206 billion of Greek government bonds.[73] The debt write-off had a seize of 107 billion, and caused the Greek debt level to fall from roughly 350bn to 240bn in March 2012, with the predicted debt burden now showing a more sustainable size equal to 117% of GDP,[74] somewhat lower than the originally expected 120.5%.[75][76] On 9 March 2012 the International Swaps and Derivatives Association (ISDA) issued a communique calling the PSI/debt restructuring deal a "Restructuring Credit Event" which will cause credit default swaps. According to Forbes magazine Greeces restructuring represents a default. [77] [78] [edit]Ireland

Main article: 20082012 Irish financial crisis

Irish government deficit compared to other European countries and the United States (20002013)

The Irish sovereign debt crisis was not based on government over-spending, but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. On 29 September 2008, Finance Minister Brian Lenihan, Jnr issued a one-year guarantee to the banks' depositors and bond-holders. He renewed it for another year in September 2009 soon after the launch of the National Asset Management Agency (NAMA), a body designed to remove bad loans from the six banks. Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble, which burst around 2007. The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by 2010, while the federal budget went from a surplus in 2007 to a deficit of 32% GDP in 2010, the highest in the history of the eurozone, despite draconian austerity measures. [16][79] Ireland could have guaranteed bank deposits and let private bondholders who had invested in the banks face losses, but instead borrowed money from the ECB to pay these bondholders, shifting the losses and debt to its taxpayers, with severe negative impact on Ireland's creditworthiness. As a result, the government started negotiations with the EU, the IMF and three nations: the United Kingdom, Denmark and Sweden, resulting in a67.5 billion "bailout" agreement of 29 November 2010[80][81] Together with additional 17.5 billioncoming from Ireland's own reserves and pensions, the government received 85 billion,[82] of which34 billion were used to support the country's ailing financial sector.[83] In return the government agreed to reduce its budget deficit to below three percent by 2015.[83] In April 2011, despite all the measures taken, Moody's downgraded the banks' debt to junk status.[84] In July 2011 European leaders agreed to cut the interest rate that Ireland was paying on its EU/IMF bailout loan from around 6% to between 3.5% and 4% and to double the loan time to 15 years. The move was expected to save the country between 600700 million euros per year.[85] On 14 September 2011, in a move to further ease Ireland's difficult financial situation, the European Commission announced it would cut the interest rate on its 22.5

billion loan coming from the European Financial Stability Mechanism, down to 2.59 per cent which is the interest rate the EU itself pays to borrow from financial markets. [86] The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in dealing with its financial crisis, expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards. [87] According to the Centre for Economics and Business Research Ireland's export-led recovery "will gradually pull its economy out of its trough". As a result of the improved economic outlook, the cost of 10-year government bonds, which has already fallen substantially since mid July 2011 (see the graph "Long-term Interest Rates"), is expected to fall further to 4 per cent by 2015. [88] [edit]Portugal A report released in January 2011 by the Dirio de Notcias[89] and published in Portugal by Gradiva, demonstrated that in the period between the Carnation Revolution in 1974 and 2010, the democratic Portuguese Republic governments have encouraged over-expenditure and investment bubbles through unclear public-private partnerships and funding of numerous ineffective and unnecessary external consultancy and advisory of committees and firms. This allowed considerable slippage in state-managed public works and inflated top management and head officer bonuses and wages. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky credit, public debt creation, and European structural and cohesion funds were mismanaged across almost four decades. Prime Minister Scrates's cabinet was not able to forecast or prevent this in 2005, and later it was incapable of doing anything to improve the situation when the country was on the verge of bankruptcy by 2011. [90] Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points out that Portugal fell victim to successive waves of speculation by pressure from bond traders, rating agencies and speculators.[91] In the first quarter of 2010, before pressure from the markets, Portugal had one of the best rates of economic recovery in the EU. From the perspective of Portugal's industrial orders, exports, entrepreneurial innovation and high-school achievement, the country matched or even surpassed its neighbors in Western Europe.[91] On 16 May 2011, the eurozone leaders officially approved a 78 billion bailout package for Portugal, which became the third eurozone country, after Ireland and Greece, to receive emergency funds. The bailout loan was equally split between the European Financial Stabilisation Mechanism, the European Financial Stability Facility, and the International Monetary Fund.[92] According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1 percent.[93] As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013.[94] The Portuguese government also agreed to eliminate its golden share in Portugal Telecom to pave the way for privatization.[95][96] In 2012, all public servants had already seen an average wage cut of 20% relative to their 2010 baseline, with cuts reaching 25% for those earning more than 1,500 euro[quantify]. This led to a flood of specialized technicians and top officials leaving the public service, many looking for better positions in the private sector or in other European countries.[citation needed] On 6 July 2011, the ratings agency Moody's had cut Portugal's credit rating to junk status, Moody's also launched speculation that Portugal could follow Greece in requesting a second bailout. [97]

In December 2011, it was reported that Portugal's estimated budget deficit of 4.5 percent in 2011 would be substantially lower than expected, due to a one-off transfer of pension funds. The country would therefore meet its 2012 target a year earlier than expected. [94] Despite the fact that the economy is expected to contract by 3 percent in 2011 the IMF expects the country to be able to return to medium and long-term debt sovereign markets by late 2013.[98] [edit]Cyprus In September 2011, yields on Cyprus long-term bonds have risen above 12%, since the small island of 840,000 people was downgraded by all major credit ratings agencies following a devastating explosion at a power plant in July and slow progress with fiscal and structural reforms. Since January 2012, Cyprus is relying on a 2.5bn emergency loan from Russia to cover its budget deficit and re-finance maturing debt. The loan has an interest rate of 4.5% and it is valid for 4.5 years[99] though it is expected that Cyprus will be able to fund itself again by the first quarter of 2013.[100] On 13 March 2012 Moody's has slashed Cyprus's credit rating into Junk status, warning that the Cyprus government will have to inject fresh capital into its banks to cover losses incurred through Greece's debt swap. Cyprus's banks were highly exposed to Greek debt and so are disproportionately hit by the haircut taken by creditors.[101] [edit]Possible

spread to other countries

Total financing needs of selected countries in % of GDP (20112013)

Economic data from Portugal, Italy, Ireland, Greece, United Kingdom, Spain, Germany, the EU and the eurozone for 2009

The 2010 annual budget deficit and public debt, both relative to GDP for selected European countries

Long-term interest rates of selected European countries.[1] Note that weak non-eurozone countries (Hungary, Romania) lack the sharp rise in interest rates characteristic of weak eurozone countries.

One of the central concerns prior to the bailout was that the crisis could spread to several other countries after reducing confidence in other European economies. According to the UK Financial Policy Committee "Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems."[102] Besides Ireland, with a government deficit in 2010 of 32.4% of GDP, and Portugal at 9.1%, other countries such as Spain with 9.2% are also at risk.[103] For 2010, the OECD forecast $16 trillion would be raised in government bonds among its 30 member countries. Financing needs for the eurozone come to a total of 1.6 trillion, while the U.S. is expected to issue US$1.7 trillion more Treasury securities in this period,[104] and Japan has 213 trillion of government bonds to roll over.[105] Greece has been the notable example of an industrialised country that has faced difficulties in the markets because of rising debt levels but even countries such as the U.S., Germany and the UK, have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy. [106] [edit]Italy

Italy's deficit of 4.6 percent of GDP in 2010 was similar to Germanys at 4.3 percent and less than that of the U.K. and France. Italy even has a surplus in its primary budget, which excludes debt interest payments. However, its debt has increased to almost 120 percent of GDP (U.S. $2.4 trillion in 2010) and economic growth was lower than the EU average for over a decade. [107] This has led investors to view Italian bonds more and more as a risky asset. [108] On the other hand, the public debt of Italy has a longer maturity and a substantial share of it is held domestically. Overall this makes the country more resilient to financial shocks, ranking better than France and Belgium.[109] About 300 billion euros of Italy's 1.9 trillion euro debt matures in 2012. It will therefore have to go to the capital markets for significant refinancing in the near-term.[110] On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save124 billion.[111][112] Nonetheless, by 8 November 2011 the Italian bond yield was 6.74 percent for 10-year bonds, climbing above the 7 percent level where the country is thought to lose access to financial markets.[113] On 11 November 2011, Italian 10-year borrowing costs fell sharply from 7.5 to 6.7 percent after Italian legislature approved further austerity measures and the formation of an emergency government to replace that of Prime Minister Silvio Berlusconi.[114] The measures include a pledge to raise 15 billion from real-estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and a gradual reduction in government ownership of local services. [108] The interim government expected to put the new laws into practice is led by former European Union Competition Commissioner Mario Monti.[108] As in other countries, the social effects have been severe, with the re-emergence of even child labour in poorer areas.[115] [edit]Spain

See also: 20082011 Spanish financial crisis

Spain has a comparatively low debt among advanced economies. [116] The country's public debt relative to GDP in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece. [117][118] Like Italy, Spain has most of its debt controlled internally, and both countries are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe.[119] As one of the largest eurozone economies the condition of Spain's economy is of particular concern to international observers, and has faced pressure from the United States, the IMF, other European countries and the European Commission to cut its deficit more aggressively. [120][121] Spain's public debt was approximately U.S. $820 billion in 2010, roughly the level of Greece, Portugal, and Ireland combined.[122] Rumors raised by speculators about a Spanish bail-out were dismissed by then Spanish Prime Minister Jos Luis Rodrguez Zapatero as "complete insanity" and "intolerable". [123] Nevertheless, shortly after the announcement of the EU's new "emergency fund" for eurozone countries in early May 2010, Spain had to announce new austerity measures designed to further reduce the country's budget deficit, in order to signal financial markets that it was safe to invest in the country.[124] The Spanish government had hoped to avoid such deep cuts, but weak economic growth as well as domestic and international pressure forced the government to expand on cuts already announced in January.

Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010 [125] and 8.5% in 2011.[126] Due to the European crisis and over spending by regional governments the latest figure is higher than the original target of 6%.[127][128] To build up additional trust in the financial markets, the government amended the Spanish Constitution in 2011 to require a balanced budget at both the national and regional level by 2020. The amendment states that public debt can not exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession or other emergencies.[129][130] Under pressure from the EU the new conservative Spanish government led by Mariano Rajoy aims to cut the deficit further to 5.3 percent in 2012 and 3 percent in 2013.[131] [edit]Belgium In 2010, Belgium's public debt was 100% of its GDPthe third highest in the eurozone after Greece and Italy[132] and there were doubts about the financial stability of the banks, [133] following the country's major financial crisis in 20082009. After inconclusive elections in June 2010, by November 2011[134] the country still had only a caretaker government as parties from the two main language groups in the country (Flemish and Walloon) were unable to reach agreement on how to form a majority government.[132] In November 2010 financial analysts forecast that Belgium would be the next country to be hit by the financial crisis as Belgium's borrowing costs rose. [133] However the government deficit of 5% was relatively modest and Belgian government 10-year bond yields in November 2010 of 3.7% were still below those of Ireland (9.2%), Portugal (7%) and Spain (5.2%).[133] Furthermore, thanks to Belgium's high personal savings rate, the Belgian Government financed the deficit from mainly domestic savings, making it less prone to fluctuations of international credit markets.[135]Nevertheless on 25 November 2011, Belgium's long-term sovereign credit rating was downgraded from AA+ to AA by Standard and Poor [136]and 10-year bond yields reached 5.66%.[134] Shortly after, Belgian negotiating parties reached an agreement to form a new government. The deal includes spending cuts and tax rises worth about 11 billion, which should bring the budget deficit down to 2.8% of GDP by 2012, and to balance the books in 2015.[137] Following the announcement Belgium 10-year bond yields fell sharply to 4.6%. [138] [edit]France France's public debt in 2010 was approximately U.S. $2.1 trillion and 83% GDP, with a 2010 budget deficit of 7% GDP.[139] By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July, 2011.[140] France's C.D.S. contract value rose 300% in the same period. [141] On 1 December 2011, France's bond yield had retreated and the country successfully auctioned 4.3 billion worth of 10 year bonds at an average yield of 3.18%, well below the perceived critical level of 7%.[142] By early February 2012, yields on French 10 year bonds had fallen to 2.84%.[143] [edit]United Kingdom According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill over to UK banks."[102] Bank of England governor Mervyn King declared that the UK is very much at risk from a domino-fall of defaults and called on banks to build up more capital when financial conditions allowed. This is because the UK has the highest gross foreign debt of any European country (7.3 trillion; 117,580 per person) due in large part to its highly leveraged financial industry, which is closely connected with both the United States and the eurozone.[144]

[edit]Solutions [edit]EU

emergency measures

[edit]European Financial Stability Facility (EFSF)

Main article: European Financial Stability Facility

On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal instrument[145] aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalize banks or buy sovereign debt.[146] Emissions of bonds are backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank. The 440 billion lending capacity of the facility is jointly and severally guaranteed by the eurozone countries' governments and may be combined with loans up to 60 billion from the European Financial Stabilisation Mechanism (reliant on funds raised by the European Commission using the EU budget as collateral) and up to 250 billion from the International Monetary Fund (IMF) to obtain a financial safety net up to 750 billion. [147] The EFSF issued 5 billion of five-year bonds in its inaugural benchmark issue January 25 2011, attracting an order book of 44.5 billion. This amount is a record for any sovereign bond in Europe, and 24.5 billion more than the European Financial Stabilisation Mechanism (EFSM), a separate European Union funding vehicle, with a 5 billion issue in the first week of January 2011. [148] On 29 November 2011, the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments, and to create investment vehicles that would boost the EFSFs firepower to intervene in primary and secondary bond markets. [149] Reception by financial markets Stocks surged worldwide after the EU announced the EFSF's creation. The facility eased fears that the Greek debt crisis would spread,[150]and this led to some stocks rising to the highest level in a year or more.[151] The euro made its biggest gain in 18 months, [152] before falling to a new four-year low a week later.[153] Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency.[154] Commodity prices also rose following the announcement.[155] The dollar Libor held at a nine-month high.[156] Default swaps also fell.[157] The VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout.[158] The agreement is interpreted as allowing the ECB to start buying government debt from the secondary marketwhich is expected to reduce bond yields.[159] As a result Greek bond yields fell sharply from over 10% to just over 5%. [160] Asian bonds yields also fell with the EU bailout.[161]) Usage of EFSF funds

Debt profile of Eurozone countries

The EFSF only raises funds after an aid request is made by a country.[162] As of the end of December 2011, it has been activated two times. In November 2010, it financed 17.7 billion of the total67.5 billion rescue package for Ireland (the rest was loaned from individual European countries, the European Commission and the IMF). In May 2011 it contributed one third of the 78 billion package for Portugal. As part of the second bailout for Greece, the loan was shifted to the EFSF, amounting to164 billion (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014.[163] This leaves the EFSF with 250 billion or an equivalent of 750 billion in leveraged firepower.[164] According to German newspaper Sueddeutsche, this is more than enough to finance the debt rollovers of all flagging European countries until end of 2012, in case necessary. [164] The EFSF is set to expire in 2013, running one year parallel to the permanent 500 billion rescue funding program called the European Stability Mechanism (ESM), which will start operating as soon as member states representing 90% of the capital commitments have ratified it. This is expected to be in July 2012.[165][166] On 13 January 2012, Standard & Poors downgraded France and Austria from AAA rating, lowered Spain, Italy (and five other[167]) euro members further, and maintained the top credit rating for Finland, Germany, Luxembourg, and the Netherlands; shortly after, S&P also downgraded the EFSF from AAA to AA+.[167][168] [edit]European Financial Stabilisation Mechanism (EFSM)

Main article: European Financial Stabilisation Mechanism

On 5 January 2011, the European Union created the European Financial Stabilisation Mechanism (EFSM), an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral.[169] It runs under the supervision of the Commission[170] and aims at preserving financial stability in Europe by providing financial assistance to EU member states in economic difficulty.[171] The Commission fund, backed by all 27 European Union members, has the authority to raise up to 60 billion[172] and is rated AAA by Fitch, Moody's and Standard & Poor's.[173][174] Under the EFSM, the EU successfully placed in the capital markets a 5 billion issue of bonds as part of the financial support package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%.[175]

Like the EFSF, the EFSM will also be replaced by the permanent rescue funding programme ESM, which is due to be launched in July 2012.[165] [edit]Brussels agreement and aftermath On 26 October 2011, leaders of the 17 eurozone countries met in Brussels and agreed on a 50% write-off of Greek sovereign debt held by banks, a fourfold increase (to about 1 trillion) in bailout funds held under the European Financial Stability Facility, an increased mandatory level of 9% for bank capitalisation within the EU and a set of commitments from Italy to take measures to reduce its national debt. Also pledged was 35 billion in "credit enhancement" to mitigate losses likely to be suffered by European banks. Jos Manuel Barroso characterised the package as a set of "exceptional measures for exceptional times". [7][176] The package's acceptance was put into doubt on 31 October when Greek Prime Minister George Papandreou announced that a referendumwould be held so that the Greek people would have the final say on the bailout, upsetting financial markets.[177] On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou. In late 2011, Landon Thomas in the New York Times noted that some, at least, European banks were maintaining high dividend payout rates and none were getting capital injections from their governments even while being required to improve capital ratios. Thomas quoted Richard Koo, an economist based in Japan, an expert on that country's banking crisis, and specialist in balance sheet recessions, as saying: I do not think Europeans understand the implications of a systemic banking crisis.... When all banks are forced to raise capital at the same time, the result is going to be even weaker banks and an even longer recession if not depression.... Government intervention should be the first resort, not the last resort. Beyond equity issuance and debt-to-equity conversion, then, one analyst "said that as banks find it more difficult to raise funds, they will move faster to cut down on loans and unload lagging assets" as they work to improve capital ratios. This latter contraction of balance sheets "could lead to a depression, the analyst said.[178] Reduced lending was a circumstance already at the time being seen in a "deepen[ing] crisis" in commodities trade finance in western Europe.[179] Final agreement on the second bailout package In a marathon meeting on 20/21 February 2012 the Eurogroup agreed with the IMF and the Institute of International Finance on the final conditions of the second bailout package worth 130 billion. The lenders agreed to increase the nominal haircut from 50% to 53.5%. EU Member States agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility to a level of just 150 basis pointsabove the Euribor. Furthermore, governments of Member States where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income until 2020. Altogether this should bring down Greece's debt to between 117%[180] and 120.5% of GDP by 2020.[75] [edit]ECB

interventions

ECB Securities Markets Program (SMP) covering bond purchases from May 2010 till March 2012

The European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity.[181] In May 2010 it took the following actions: It began open market operations buying government and private debt securities,[182]reaching 219.5 billion by February of 2012,[183] though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation. [184] According to Rabobankeconomist Elwin de Groot, there is a natural limit of 300 billion the ECB can sterilize.[185] It reactivated the dollar swap lines[186] with Federal Reserve support.[187] It changed its policy regarding the necessary credit rating for loan deposits, accepting as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating.

The move took some pressure off Greek government bonds, which had just been downgraded to junk status, making it difficult for the government to raise money on capital markets. [188] On 30 November 2011, the European Central Bank, the U.S. Federal Reserve, the central banks of Canada, Japan, Britain and the Swiss National Bank provided global financial markets with additional liquidity to ward off the debt crisis and to support the real economy. The central banks agreed to lower the cost of dollar currency swaps by 50 basis points to come into effect on 5 December 2011. They also agreed to provide each other with abundant liquidity to make sure that commercial banks stay liquid in other currencies. [189] Long Term Refinancing Operation (LTRO) The ECB conducts repo auctions as weekly main refinancing operations (MRO with a (bi)weekly maturity and monthly Long Term Refinancing Operations (LTROs) maturing after three months. In 2003, refinancing via LTROs amounted to 45 bln Euro which is about 20% of overall liquidity provided by the ECB. [190] The ECB's first supplementary longer-term refinancing operation (LTRO) with a six-month maturity was announced March 2008.[191]Previously the longest tender offered was three months. It

announced two 3-month and one 6-month full allotment of Long Term Refinancing Operations (LTROs). The first tender was settled April 3, and was more than four times oversubscribed. The 25 billion auction drew bids amounting to 103.1 billion, from 177 banks. Another six-month tender was allotted on July 9, again to the amount of 25 billion. [192] The first 1y LTRO in June 2009 had close to 1100 bidders. [193] On 22 December 2011, the ECB [194] started the biggest infusion of credit into the European banking system in the euro's 13 year history. Under its LTRO it loaned 489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent.[195] The by far biggest amount of 325 billion was tapped by banks in Greece, Ireland, Italy and Spain.[196] This way the ECB tried to make sure that banks have enough cash to pay off 200 billion of their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis. [197] On 29 February 2012, the ECB held a second auction, LTRO2, providing 800 Eurozone banks with further 529.5 billion in cheap loans. [198] Net new borrowing under the 529.5 billion February auction was around 313 billion; out of a total of 256 billion existing ECB lending (MRO + 3m&6m LTROs), 215 billion was rolled into LTRO2. [199] Resignations In September 2011, Jrgen Stark became the second German after Axel A. Weber to resign from the ECB Governing Council in 2011. Weber, the former Deutsche Bundesbank president, was once thought to be a likely successor to Jean-Claude Trichet as bank president. He and Stark were both thought to have resigned due to "unhappiness with the ECBs bond purchases, which critics say erode the banks independence". Stark was "probably the most hawkish" member of the council when he resigned. Weber was replaced by his Bundesbank successor Jens Weidmann, while Belgium's Peter Praet took Stark's original position, heading the ECB's economics department. [200] [edit]Economic

reforms and recovery

[edit]Increase competitiveness

See also: Euro Plus Pact

Change in unit labour costs (2000-2010)

Eurozone economic health and adjustment progress 2011 (Source: Euro Plus Monitor)[201]

Slow GDP growth rates correspond to slower growth in tax revenues and higher safety net spending, increasing deficits and debt levels. Fareed Zakaria described the factors slowing growth in the eurozone, writing in November 2011: "Europe's core problem [is] a lack of growth... Italy's economy has not grown for an entire decade. No debt restructuring will work if it stays stagnant for another decade... The fact is that Western economies - with high wages, generous middle-class subsidies and complex regulations and taxes - have become sclerotic. Now they face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalization (which has allowed manufacturing and services to locate across the world)." He advocated lower wages and steps to bring in more foreign capital investment.[202]British economic historian Robert Skidelsky disagreed saying it was excessive lending by banks, not deficit spending that created this crisis. Government's mounting debts are a response to the economic downturn as spending rises and tax revenues fall, not its cause. [203] To improve the situation, crisis countries must significantly increase their international competitiveness. Typically this is done by depreciating the currency, as in the case of Iceland, which suffered the largest financial crisis in 2008-2011 in economic history but has since vastly improved its position. Since eurozone countries cannot devalue their currency, policy makers try to restore competitiveness through internal devaluation, a painful economic adjustment process, where a country aims to reduce its unit labour costs.[204] German economist Hans-Werner Sinn noted in 2012 that Ireland was the only country that had implemented relative wage moderation in the last five year, which helped decrease its relative price/wage levels by 16%. Greece would need to bring this figure down by 31%, effectively reaching the level of Turkey. [205][206] Other economists argue that no matter how much Greece and Portugal drive down their wages, they could never compete with low-cost developing countries such as China or India. Instead weak European countries must shift their economies to higher quality products and services, though this is a long-term process and may not bring immediate relief. [207] Progress On 15 November 2011, the Lisbon Council published the Euro Plus Monitor 2011. According to the report most critical eurozone member countries are in the process of rapid reforms. The authors note that "Many of those countries most in need to adjust [...] are now making the greatest progress towards restoring their fiscal balance and external competitiveness". Greece, Ireland and Spain are among the top five reformers and Portugal is ranked seventh among 17 countries included in the report (see graph).[201]

[edit]Increase investment There has been substantial criticism over the austerity measures implemented by most European nations to counter this debt crisis. Some argue that an abrupt return to "non-Keynesian" financial policies is not a viable solution[208] and predict that deflationary policies now being imposed on countries such as Greece and Spain might prolong and deepen their recessions.[209] In a 2003 study that analyzed 133 IMF austerity programmes, the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth.[210][211] In early 2012 an IMF official, who negotiated Greek austerity measures, admitted that spending cuts were harming Greece.[56][56] Nouriel Roubini adds that the new credit available to the heavily indebted countries did not equate to an immediate revival of economic fortunes: "While money is available now on the table, all this money is conditional on all these countries doing fiscal adjustment and structural reform."[212] According to Keynesian economists "growth-friendly austerity" relies on the false argument that public cuts would be compensated for by more spending from consumers and businesses, a theoretical claim that has not materialized. The case of Greece shows that excessive levels of private indebtedness and a collapse of public confidence (over 90% of Greeks fear unemployment, poverty and the closure of businesses)[213] led the private sector to decrease spending in an attempt to save up for rainy days ahead. This led to even lower demand for both products and labor, which further deepened the recession and made it ever more difficult to generate tax revenues and fight public indebtedness.[214] Instead of austerity, Keynes suggested increasing investment and cutting income tax for low earners to kick-start the economy and boost growth and employment. [215] Since struggling European countries lack the funds to engage in deficit spending, German economist and member of the German Council of Economic Experts Peter Bofinger and Sony Kapoor from global think tank "re-define" suggest financing additional public investments by growth-friendly taxes on "property, land, wealth, carbon emissions and the under-taxed financial sector". They also called on EU countries to renegotiate the EU savings tax directive and to sign an agreement to help each other crack down on tax evasion and avoidance. Currently authorities capture less than 1% in annual tax revenue on untaxed wealth transferred to other EU members. Furthermore they suggest providing 40 billion in additional funds to the European Investment Bank, which could then lend ten times that amount to the employment-intensive smaller business sector.[214] Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a macroeconomic solution,[216] union leaders have also argued that the working population is being unjustly held responsible for the economic mismanagement errors of economists, investors, and bankers. Over 23 million EU workers have become unemployed as a consequence of the global economic crisis of 20072010, and this has led many to call for additional regulation of the banking sector across not only Europe, but the entire world.[217] [edit]Proposed [edit]European

long-term solutions
fiscal union and revision of the Lisbon Treaty

Main article: European Fiscal Union

In March 2011 a new reform of the Stability and Growth Pact was initiated, aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules.[218][219] By the end of the year, Germany, France and some other smaller EU countries went a step further and vowed to create a fiscal union across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties.[8][9] On 9 December 2011 at the European Council meeting, all 17 members of the eurozone and six countries that aspire to join agreed on a new intergovernmental treaty to put strict caps on government spending and borrowing, with penalties for those countries who violate the limits. [220] All other non-eurozone countries apart from the UK are also prepared to join in, subject to parliamentary vote.[165] Originally EU leaders planned to change existing EU treaties but this was blocked by British prime minister David Cameron, who demanded that the City of London be excluded from future financial regulations, including the proposed EU financial transaction tax.[221][222] By the end of the day, 26 countries had agreed to the plan, leaving the United Kingdom as the only country not willing to join.[223] Cameron subsequently conceded that his action had failed to secure any safeguards for the UK.[224] Britain's refusal to be part of the Franco-German fiscal compact to safeguard the eurozone constituted a de facto refusal (PM David Cameron vetoed the project) to engage in any radical revision of theLisbon Treaty at the expense of British sovereignty: centrist analysts such as John Rentoul of The Independent (a generally Europhile newspaper) concluded that "Any Prime Minister

would have done as Cameron did".[225]

[edit]Eurobonds

Main article: Eurobonds

A growing number of investors and economists say Eurobonds would be the best way of solving a debt crisis,[226] though their introduction matched by tight financial and budgetary coordination may well require changes in EU treaties. [226] On 21 November 2011, the European Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis. Using the term "stability bonds", Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public finances. [227][228] However, Germany remains opposed (at least in the short term) to take over the debt and interest risk of states that have run excessive budget deficits and borrowed excessively over the past years, saying this could substantially raise the country's liabilities. [229] [edit]European

Stability Mechanism (ESM)

Main article: European Stability Mechanism

The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism in July 2012.[165] On 16 December 2010 the European Council agreed a two line amendment to the EU Lisbon Treaty to allow for a permanent bail-out mechanism to be established[230] including stronger sanctions. In March 2011, the European Parliament approved the treaty amendment after receiving assurances that the European Commission, rather than EU states, would play 'a central role' in

running the ESM.[231][232]According to this treaty, the ESM will be an intergovernmental organisation under public international law and will be located inLuxembourg.[233][234] Such a mechanism serves as a "financial firewall." Instead of a default by one country rippling through the entire interconnected financial system, the firewall mechanism can ensure that downstream nations and banking systems are protected by guaranteeing some or all of their obligations. Then the single default can be managed while limiting financial contagion. [edit]Address

current account imbalances

Current account imbalances (1997-2013)

Regardless of the corrective measures chosen to solve the current predicament, as long as cross border capital flows remain unregulated in the euro area, [235] current account imbalances are likely to continue. A country that runs a large current account or trade deficit (i.e., importing more than it exports) must ultimately be a net importer of capital; this is a mathematical identity called thebalance of payments. In other words, a country that imports more than it exports must either decrease its savings reserves or borrow to pay for those imports. Conversely, Germany's large trade surplus (net export position) means that it must either increase its savings reserves or be a net exporter of capital, lending money to other countries to allow them to buy German goods. [236] The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be $42.96 billion, $75.31bn and $35.97bn, and $25.6bn respectively, while Germany's trade surplus was $188.6bn.[237]A similar imbalance exists in the U.S., which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad. Ben Bernanke warned of the risks of such imbalances in 2005, arguing that a "savings glut" in one country with a trade surplus can drive capital into other countries with trade deficits, artificially lowering interest rates and creating asset bubbles.[238][239][240] A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies, which would reduce the imbalance as the relative price of its exports increases. This currency appreciation occurs as the importing country sells its currency to buy the

exporting country's currency used to purchase the goods. Alternatively, trade imbalances can be reduced if a country encouraged domestic saving by restricting or penalizing the flow of capital across borders, or by raising interest rates, although this benefit is likely offset by slowing down the economy and increasing government interest payments.[241] Either way, many of the countries involved in the crisis are on the euro, so devaluation, individual interest rates and capital controls are not available. The only solution left to raise a country's level of saving is to reduce budget deficits and to change consumption and savings habits. For example, if a country's citizens saved more instead of consuming imports, this would reduce its trade deficit.[241] It has therefore been suggested that countries with large trade deficits (e.g. Greece) consume less and improve their exporting industries. On the other hand, export driven countries with a large trade surplus, such as Germany, Austria and the Netherlands would need to shift their economies more towards domestic services and increase wages to support domestic consumption.[32][242] [edit]European

Monetary Fund

On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests transforming the EFSF into a European Monetary Fund (EMF), which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). These bonds would not be tradable but could be held by investors with the EMF and liquidated at any time. Given the backing of all the eurozone countries and the ECB "the EMU would achieve a similarly strong position vis-a-vis financial investors as the US where the Fed backs government bonds to an unlimited extent." To ensure fiscal discipline despite the lack of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet fiscal and macroeconomic criteria. Governments lacking sound financial policies would be forced to rely on traditional (national) governmental bonds with less favorable market rates. [243] The econometric analysis suggests that "If the short-term and long- term interest rates in the euro area were stabilized at 1.5 % and 3 %, respectively, aggregate output (GDP) in the euro area would be 5 percentage points above baseline in 2015". At the same time sovereign debt levels would be significantly lower with e.g. Greece's debt level falling below 110% of GDP, more than 40 percentage points below the baseline scenario with market based interest levels. Furthermore, banks would no longer be able to unduly benefit from intermediary profits by borrowing from the ECB at low rates and investing in government bonds at high rates. [243] [edit]Drastic

debt write-off financed by wealth tax

Overall debt levels in 2009 and write-offs necessary in the Eurozone, UK and U.S. to reach sustainable grounds

According to the Bank for International Settlements, the combined private and public debt of 18 OECD countries nearly quadrupled between 1980 and 2010, and will likely continue to grow, reaching between 250% (for Italy) and about 600% (for Japan) by 2040.[244] The same authors also found in a previous study that increased financial burden imposed by aging populations and lower growth makes it unlikely that indebted economies can grow out of their debt problem if only one of the following three conditions is met:[245] government debt is more than 80 to 100 percent of GDP; non-financial corporate debt is more than 90 percent; private household debt is more than 85 percent of GDP.

The Boston Consulting Group (BCG) adds that if the overall debt load continues to grow faster than the economy, then large-scale debt restructuring becomes inevitable. To prevent a vicious upward debt spiral from gaining momentum the authors urge policy makers to "act quickly and decisively" and aim for an overall debt level well below 180 percent for the private and government sector. This number is based on the assumption that governments, nonfinancial corporations, and private households can each sustain a debt load of 60 percent of GDP, at an interest rate of 5 percent and a nominal economic growth rate of 3 percent per year. Lower interest rates and/or higher growth would help reduce the debt burden further.[246] To reach sustainable levels the Eurozone must reduce its overall debt level by 6.1 trillion. According to BCG this could be financed by a one-time wealth tax of between 11 and 30 percent for most countries, apart from the crisis countries (particularly Ireland) where a write-off would have to be substantially higher. The authors admit that such programs would be "drastic", "unpopular" and "require broad political coordination and leadership" but they maintain that the longer politicians and central bankers wait, the more necessary such a step will be. [246] Instead of a one-time write-off, German economist Harald Spehl has called for a 30 year debtreduction plan, similar to the one Germany used after the Second World War to share the burden of reconstruction and development.[247] Similar calls have been made by political parties in Germany including the Greens and The Left.[248][249] [edit]Speculation

about the breakup of the eurozone

Economists, mostly from outside Europe and associated with Modern Monetary Theory and other post-Keynesian schools, condemned the design of the euro currency system from the beginning because it ceded national monetary and economic sovereignty but lacked a central fiscal authority. When faced with economic problems, they maintained, "Without such an institution, EMU would prevent effective action by individual countries and put nothing in its place."[250][251] Some non-Keynesian economists, such as Luca A. Ricci of the IMF, contend the eurozone does not fulfill the necessary criteria for an optimum currency area, though it is moving in that direction.[201][252] As the debt crisis expanded beyond Greece, these economists continued to advocate, albeit more forcefully, the disbandment of the eurozone. If this was not immediately feasible, they

recommended that Greece and the other debtor nations unilaterally leave the eurozone, default on their debts, regain their fiscal sovereignty, and re-adopt national currencies.[253][254] Bloomberg suggested in June 2011 that, if the Greek and Irish bailouts should fail, an alternative would be for Germany to leave the eurozone in order to save the currency throughdepreciation[255] instead of austerity. The likely substantial fall in the euro against a newly reconstituted Deutsche Mark would give a "huge boost" to its members' competitiveness.[256] Also The Wall Street Journal conjectured that Germany could return to the Deutsche Mark,[257]or create another currency union[258] with the Netherlands, Austria, Finland, Luxembourg and other European countries such as Denmark, Norway, Sweden, Switzerland and the Baltics.[259] A monetary union of these countries with current account surpluses would create the world's largest creditor bloc, bigger than China[260] or Japan. The Wall Street Journal added that without the German-led bloc, a residual euro would have the flexibility to keep interest rates low[261] and engage in quantitative easing or fiscal stimulus in support of a job-targeting economic policy[262] instead of inflation targeting in the current configuration. German Chancellor Angela Merkel and French President Nicolas Sarkozy have, however, on numerous occasions publicly said that they would not allow the eurozone to disintegrate, linking the survival of the euro with that of the entire European Union.[263][264] In September 2011, EU commissioner Joaqun Almunia shared this view, saying that expelling weaker countries from the euro was not an option.[265]Furthermore, former ECB president Jean-Claude Trichet also denounced the possibility of a return of the Deutsche Mark.[266] [edit]Controversies [edit]EU

treaty violations
Wikisource has original text related to this article: Consolidated version of the Treaty on the Functioning of the European Union

No bail-out clause The EU's Maastricht Treaty contains juridical language which appears to rule out intra-EU bailouts. First, the no bail-out clause (Article 125 TFEU) ensures that the responsibility for repaying public debt remains national and prevents risk premiums caused by unsound fiscal policies from spilling over to partner countries. The clause thus encourages prudent fiscal policies at the national level. The European Central Bank's purchase of distressed country bonds can be viewed as violating the prohibition of monetary financing of budget deficits (Article 123 TFEU). The creation of further leverage in EFSF with access to ECB lending would also appear to violate the terms of this article. Articles 125 and 123 were meant to create disincentives for EU member states to run excessive deficits and state debt, and prevent themoral hazard of over-spending and lending in good times. They were also meant to protect the taxpayers of the other more prudent member states. By

issuing bail-out aid guaranteed by prudent eurozone taxpayers to rule-breaking eurozone countries such as Greece, the EU and eurozone countries also encourage moral hazard in the future. [267] While the no bail-out clause remains in place, the "no bail-out doctrine" seems to be a thing of the past.[268] Convergence criteria The EU treaties contain so called convergence criteria. Concerning government finance the states have agreed that the annual government budget deficit should not exceed 3% of the gross domestic product (GDP) and that the gross government debt to GDP should not exceed 60% of the GDP. For eurozone members there is the Stability and Growth Pact which contains the same requirements for budget deficit and debt limitation but with a much stricter regime. Nevertheless the main crisis states Greece and Italy (status November 2011) have substantially exceeded these criteria over a long period of time. [edit]Actors

fueling the crisis

[edit]Credit rating agencies

Standard & Poor's Headquarters in Lower Manhattan, New York City

The international U.S.-based credit rating agenciesMoody's, Standard & Poor's and Fitchwhich have already been under fire during the housing bubble[269][270] and the Icelandic crisis[271][272]have also played a central and controversial role[273] in the current European bond market crisis.[274] On the one hand, the agencies have been accused of giving overly generous ratings due to conflicts of interest.[275] On the other hand, ratings agencies have a tendency to act conservatively, and to take some time to adjust when a firm or country is in trouble. [276] In the case of Greece, the market responded to the crisis before the downgrades, with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such.[43] European policy makers have criticized ratings agencies for acting politically, accusing the Big Three of bias towards European assets and fueling speculation. [277] Particularly Moody's decision to downgrade Portugal's foreign debt to the category Ba2 "junk" has infuriated officials from the EU and Portugal alike.[277] State owned utility and infrastructure companies like ANA Aeroportos de Portugal, Energias de Portugal, Redes Energticas Nacionais, and Brisa Auto-estradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue.[278][279][280][281] France too has shown its anger at its downgrade. French central bank chief Christian Noyercriticized the decision of Standard & Poor's to lower the rating of France but not that of the United Kingdom, which "has more deficits, as much debt, more inflation,

less growth than us". Similar comments were made by high ranking politicians in Germany. Michael Fuchs, deputy leader of the leading Christian Democrats, said: "Standard and Poor's must stop playing politics. Why doesn't it act on the highly indebted United States or highly indebted Britain?", adding that the latter's collective private and public sector debts are the largest in Europe. He further added: "If the agency downgrades France, it should also downgrade Britain in order to be consistent."[282] Credit rating agencies were also accused of bullying politicians by systematically downgrading eurozone countries just before important European Council meetings. As one EU source put it: "It is interesting to look at the downgradings and the timings of the downgradings ... It is strange that we have so many downgrades in the weeks of summits." [283] Regulatory reliance on credit ratings Think-tanks such as the World Pensions Council have criticized European powers such as France and Germany for pushing for the adoption of the Basel II recommendations, adopted in 2005 and transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, this forced European banks and more importantly the European Central Bank, e.g. when gauging thesolvency of EU-based financial institutions, to rely heavily on the standardized assessments of credit risk marketed by only two private US agencies- Moodys and S&P.[284] Counter measures Due to the failures of the ratings agencies, European regulators obtained new powers to supervise ratings agencies.[273] With the creation of the European Supervisory Authority in January 2011 the EU set up a whole range of new financial regulatory institutions,[285] including theEuropean Securities and Markets Authority (ESMA),[286] which became the EUs single credit-ratings firm regulator.[287] Credit-ratings companies have to comply with the new standards or will be denied operation on EU territory, says ESMA Chief Steven Maijoor. [288] Germany's foreign minister Guido Westerwelle has called for an "independent" European ratings agency, which could avoid the conflicts of interest that he claimed US-based agencies faced.[289] European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private U.S.-based ratings agencies have less influence on developments in European financial markets in the future.[290][291] According to German consultant company Roland Berger, setting up a new ratings agency would cost 300 million. On 30 January 2012, the company said it was already collecting funds from financial institutions and business intelligence agencies to set up an independent non-profit ratings agency by mid 2012, which could provide its first country ratings by the end of the year.[292] But attempts to regulate more strictly credit rating agencies in the wake of the European sovereign debt crisis have been rather unsuccessful. Some European financial law and regulation experts have argued that the hastily drafted, unevenly transposed in national law, and poorly enforced EU rule on ratings agencies (Regulation EC N 1060/2009) has had little effect on the way financial analysts and economists interpret data or on the potential for conflicts of interests created by the complex contractual arrangements between credit rating agencies and their clients"[293] [edit]Media

There has been considerable controversy about the role of the English-language press in regard to the bond market crisis.[294][295] Greek Prime Minister Papandreou is quoted as saying that there was no question of Greece leaving the euro and suggested that the crisis was politically as well as financially motivated. "This is an attack on the eurozone by certain other interests, political or financial". [296] The Spanish Prime Minister Jos Luis Rodrguez Zapatero has also suggested that the recent financial market crisis in Europe is an attempt to undermine the euro.[297][298] He ordered the Centro Nacional de Inteligencia intelligence service (National Intelligence Center, CNI in Spanish) to investigate the role of the "Anglo-Saxon media" in fomenting the crisis.[299][300] [301] [302] [303] [304] [305] So far no results have been reported from this investigation. Other commentators believe that the euro is under attack so that countries, such as the U.K. and the U.S., can continue to fund their largeexternal deficits and government deficits,[306] and to avoid the collapse of the US dollar.[307][308][309] The U.S. and U.K. do not have large domestic savings pools to draw on and therefore are dependent on external savings e.g. from China. [310] [311] This is not the case in the eurozone which is self funding.[312] [313] [edit]Speculators Both the Spanish and Greek Prime Ministers have accused financial speculators and hedge funds of worsening the crisis by short sellingeuros.[314] [315] German chancellor Merkel has stated that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere."[316] According to The Wall Street Journal several hedge-fund managers launched "large bearish bets" against the euro in early 2010.[317] On February 8, the boutique research and brokerage firm Monness, Crespi, Hardt & Co. hosted an exclusive "idea dinner" at a private townhouse in Manhattan, where a small group of hedge-fund managers from SAC Capital Advisors LP, Soros Fund Management LLC, Green Light Capital Inc., Brigade Capital Management LLC and others argued that the euro was likely to fall to parity with the US dollar and were of the opinion that Greek government bonds represented the weakest link of the euro and that Greek contagion could soon spread to infect all sovereign debt in the world. Three days later the euro was hit with a wave of selling, triggering a decline that brought the currency below $1.36. [317] There was no suggestion by regulators that there was any collusion or other improper action. [317] On 8 June, exactly four months after the dinner, the Euro hit a four year low at $1.19 before it started to rise again.[318] Traders estimate that bets for and against the euro account for a huge part of the daily three trillion dollar global currency market.[317] The role of Goldman Sachs[319] in Greek bond yield increases is also under scrutiny. [320] It is not yet clear to what extent this bank has been involved in the unfolding of the crisis or if they have made a profit as a result of the sell-off on the Greek government debt market. In response to accusations that speculators were worsening the problem, some markets banned naked short selling for a few months.[321] [edit]Odious

debt

Main article: Odious debt

Some protesters, commentators such as Libration correspondent Jean Quatremer and the Lige based NGO Committee for the Abolition of the Third World Debt (CADTM) allege that the debt should be characterized as odious debt.[322] The Greek documentary Debtocracyexamines whether the recent Siemens scandal and uncommercial ECB loans which were conditional on the purchase of military aircraft and submarines are evidence that the loans amount to odious debt and that an audit would result in invalidation of a large amount of the debt. [edit]National

statistics

In 1992, members of the European Union signed an agreement known as the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, a number of EU member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures.[27][28] The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties. [27] Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivativesincluding greater access to government guaranteeswhile minimizing disclosure to broader financial markets.[323] The revision of Greeces 2009 budget deficit from a forecast of "68% of GDP" to 12.7% by the new Pasok Government in late 2009 (a number which, after reclassification of expenses under IMF/EU supervision was further raised to 15.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis. This added a new dimension in the world financial turmoil, as the issues of "creative accounting" and manipulation of statistics by several nations came into focus, potentially undermining investor confidence. The focus has naturally remained on Greece due to its debt crisis. There has however been a growing number of reports about manipulated statistics by EU and other nations aiming, as was the case for Greece, to mask the sizes of public debts and deficits. These have included analyses of examples in several countries [324] [325] [326] [327] or have focused on Italy, [328] the United Kingdom, [329] [330] [331] [332] [333] [334][335] [336] Spain, [337] the United States, [338] [339] [340] and even Germany. [341] [342] [edit]Collateral

for Finland

On 18 August 2011, as requested by the Finnish parliament as a condition for any further bailouts, it became apparent that Finland would receive collateral from Greece, enabling it to participate in the potential new 109 billion support package for the Greek economy. [343] Austria, the Netherlands, Slovenia, and Slovakia responded with irritation over this special guarantee for Finland and demanded equal treatment across the eurozone, or a similar deal with Greece, so as not to increase the risk level over their participation in the bailout. [344] The main point of contention was that the collateral is aimed to be a cash deposit, a collateral the Greeks can only give by recycling part of the funds loaned by Finland for the bailout, which means Finland and the other eurozone countries guarantee the Finnish loans in the event of a Greek default. [345]

After extensive negotiations to implement a collateral structure open to all eurozone countries, on 4 October 2011, a modified escrow collateral agreement was reached. The expectation is that only Finland will utilise it, due to i.a. requirement to contribute initial capital toEuropean Stability Mechanism in one installment instead of five installments over time. Finland, as one of the strongest AAA countries, can raise the required capital with relative ease. [346] At the beginning of October, Slovakia and Netherlands were the last countries to vote on the EFSF expansion, which was the immediate issue behind the collateral discussion, with a mid-October vote.[347] On 13 October 2011 Slovakia approved euro bailout expansion, but the government has been forced to call new elections in exchange. In February 2012, the four largest Greek banks agreed to provide the 880 million in collateral to Finland in order to secure the second bailout program. [348] [edit]Political

impact

Handling of the ongoing crisis has led to the premature end of a number of European national governments and impacted the outcome of many elections: Finland April 2011 The approach to the Portuguese bailout and the EFSF dominated the April 2011 election debate and formation of the subsequent government. Greece November 2011 Following widespread criticism of a referendum proposal on austerity and bailout measures, from within his party, the opposition and other EU governments, PM George Papandreou announced plans for his resignation in favour of a national unity government between three parties, of which only two remain in the coalition. Meanwhile the popularity of Papandreou's PASOK party dropped from 42.5% in 2010 to as low as 7% in some polls in 2012. Following protests from within their parties, Papandreou and Antonis Samaras removed a total of 44 MPs from their respective parliamentary groups, leading to PASOK losing its parliamentary majority. Early elections are likely to be held in 2012. Ireland November 2010 In return for its support for the IMF bailout and consequent austerity budget, the junior party in the coalition government, the Green Party set a time-limit on its support for the Cowen Government which set the path to early elections in Feb 2011. Italy November 2011 Following market pressure on government bond prices in response to concerns about levels of debt, the Government of Silvio Berlusconi lost its majority, resigned and was replaced by the Government of Mario Monti. Portugal March 2011 Following the failure of parliament to adopt the government austerity measures, PM Jos Scrates and his government resigned, bringing about early elections in June 2011. Slovakia October 2011 In return for the approval of the EFSF by her coalition partners, PM Iveta Radiov had to concede early elections in March 2012. Slovenia September 2011 Following the failure of June referendums on measures to combat the economic crisis and the departure of coalition partners, the Borut Pahor government lost a motion of confidence and December 2011 early elections were set, following whichJanez Jana became PM. Spain July 2011 Following the failure of the Spanish government to handle the economic situation, PM Jos Luis Rodrguez Zapateroannounced early elections in November. "It is

convenient to hold elections this fall so a new government can take charge of the economy in 2012, fresh from the balloting" he said. Following the elections, Mariano Rajoy became PM.