Euro Zone Crisis

DIV A:
 CONTENTS

• What is Euro Zone?

• What is Euro Zone Crisis?
• Countries affected and impact on them(PIIGS).
• Effect on Greece.
• Present condition.
• Solution.
• Conclusion.
EUROZONE Countries
• The eurozone officially the euro area,is an economic and
monetary union (EMU) of 17 European Union (EU)
member states that have adopted the euro currency as
their sole legal tender. It currently consists of Austria,
Belgium, Cyprus, Estonia, Finland, France, Germany,
Greece, the Republic of Ireland, Italy, Luxembourg,
Malta, the Netherlands, Portugal, Slovakia, Slovenia, and
Spain. Seven (not including Sweden, which has a de facto
opt out) other states are obliged to join the zone once
they fulfil the strict entry criteria.
• Blue: Eurozone
• Green : Oblized to join Eurozone(8)
• Brown: EU state with an opt-out on Eurozone
participation and no plan to join (1 - UK)
• Red: EU state with an opt-out on Eurozone participation
but planning a referendum to join (1 - Denmark)
• Yellow: States outside the EU with issuing rights (3)
Monaco, San Marino, and Vatican City
• Purple: Other Non EU user(Andorra, Kosovo,
Montenegro,Turkish Republic of Northern Cyprus
 Euro Zone
• It is an economic and monetary union
(EMU) of 17 European Union (EU) member
states
• They have adopted the euro as their sole
trading currency.
• Euro became a reality on Jan 1, 1998 , but
came for the European consumers on Jan 1
2002.
• 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.
• Denmark and the United Kingdom obtained
special opt-outs
• Sweden gained a de facto opt-out by using a
legal loophole
Who All and Why?
• 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 on 1 January 1999. Greece
qualified in 2000 and was admitted on 1 January
2001. Physical coins and banknotes were
introduced on 1 January 2002. Slovenia
qualified in 2006 and was admitted on 1 January
2007.
• Cyprus and Malta qualified in 2007 and were
admitted on 1 January 2008. Slovakia qualified
in 2008 and joined on 1 January 2009. Estonia
qualified in 2010 and joined on 1 January 2011.
That makes 17 member states with 329 million
people in the eurozone.
Euro Zone Criteria
• The euro convergence criteria (also known
as the Maastricht criteria) are the criteria for
European Union member states to enter the
third stage of European Economic and Monetary
Union (EMU) and adopt the euro as their
currency. The 4 main criteria are based on
Article 121(1) of the European Community
Treaty.
•.
Euro Zone Criteria
• In 2009 the IMF floated a suggestion that
countries should be allowed to "partially adopt"
the euro - adopting the currency but not
qualifying for a seat on the European Central
Bank. Monaco, San Marino and the Vatican City
State are in a similar situation: they have
adopted the euro and mint their own coins, but
they do not have ECB seats
Euro Zone Criteria ?????(Explained)
• 1. Inflation rates: No more than 1.5
percentage points higher than the
average of the three best performing
(lowest inflation, which may be
negative) member states of the EU.
• 2. Government finance:
• a) Annual government deficit: The ratio of
the annual government deficit to gross domestic
product (GDP) must not exceed 3% at the end of
the preceding fiscal year. If not, it is at least
required to reach a level close to 3%. Only
exceptional and temporary excesses would be
granted for exceptional cases.
• b) Government debt: The ratio of gross
government debt to GDP must not exceed 60%
at the end of the preceding fiscal year. Even if
the target cannot be achieved due to the specific
conditions, the ratio must have sufficiently
diminished and must be approaching the
reference value at a satisfactory pace.
• 3. Exchange rate: Applicant countries should
have joined the exchange-rate mechanism (ERM
II) under the European Monetary System (EMS)
for two consecutive years and should not have
devalued its currency during the period.
• 4. Long-term interest rates: The nominal
long-term interest rate must not be more than 2
percentage points higher than in the three lowest
inflation member states.
• Fulfilment of criteria
• Country[nb 6] Inflation rate[nb 7] (HICP)[11] annual government deficit to GDP[
citation needed] gross government debt to GDP ERM II membership Long-term

interest rate [nb 8] Reference value[12] max. 1% max. 3% max. 60% min. 2 years
max. 6% EU Member States  Bulgaria 1.7% 2.8% 17.4% 6.9%  Czech Republic
0.3% 5.7% 39.8% 4.7%  Denmark 2.1% −3.9%[nb 9] 41.6% since 1 January 1999
3.4%  Hungary 4.8% 4.1% 78.9% 8.4%  Latvia 0.1% 8.6% 48.5% since 2 May
2005 12.7%  Lithuania 2.0% 8.4% 38.6% since 28 June 2004 12.1%  Poland
3.9% 7.3% 53.9% 6.1%  Romania 5.0% 8.0% 30.5% 9.4%  Sweden 2.1% 2.1%
42.6% 3.3%  United Kingdom 3.0% 7.1% 68.1% 3.98% non-EU Member States  
Albania 3.0%[13] 0.04% 55.9%  Bosnia and Herzegovina 1.5% 0.35% 34%  
Croatia 1.4%[14] 2.2% 40.8%  Iceland 3.3%[15] −5.19%[nb 9] 103%  Macedonia
3.2% 0.6% 39.5%  Montenegro 0.6%[16] 38%  Norway[17] 2%[18] −17.27%[nb 9] 53%
 Serbia 8.9%[19] 0.48% 37%  Switzerland[17] 0.9% −1.0%[nb 9][20] 41.3%[21] 1.46%[22]
 Turkey 5.08% −1.3%[nb 9] 38.8%   criterion fulfilled
 Introduction to Euro Zone
crisis
• It is the biggest challenge Europe has faced since 1990.

• Due to global financial crisis that began in 2007-08 the

euro zone entered its first official recession in third
quarter of 2008.

• The official figures were released in 2009 Jan.

• On 11 Oct 2008, a summit was held in Paris by the Euro
group heads of state and govt, to define a joint action
plan for euro zone and central banks of Europe to
stabilize the economy.
 Beginning of Crisis
• Started in – Oct 2009 in Greece
• Its immediate causes lie with the US crisis of 2007-
09.
• The result in Euro Zone was Sovereign debt crisis.
PIIGS: Portugal, Italy, Ireland, Greece,
Spain.
STORY IN GREECE
• The Greek economy was one of the fastest
growing in the eurozone during the 2000s; from
2000 to 2007 it grew at an annual rate of 4.2%
as foreign capital flooded the country. A strong
economy and falling bond yields allowed the
government of Greece to run large structural
deficits.
Greece: Start from where?
• The global financial crisis that began in 2008
had a particularly large effect on Greece. Two of
the country's largest industries are tourism and
shipping, and both were badly affected by the
downturn with revenues falling 15% in 2009
What wrong Greece did?
• To keep within the monetary union guidelines,
the government of Greece has been found to
have consistently and deliberately misreported
the country's official economic statistics
Alarms!!!!!
• On 27 April 2010, the Greek debt rating was
decreased to the first levels of 'junk' status by
Standard & Poor's amidst fears of default by the
Greek government.

• Yields on Greek government two-year bonds

rose to 15.3% following the downgrading
Saving the ship
• On 3 May 2010, the European Central Bank
suspended its minimum threshold for Greek
debt "until further notice",meaning the bonds
will remain eligible as collateral even with junk
status.
Further Saving
• On 23 April 2010, the Greek government
requested that the EU/IMF bailout package be
activated.The IMF had said it was "prepared to
move expeditiously on this request".

• Greece needed money before 19 May, or it would

face a debt roll over of $11.3bn.

• A total of €110 billion has been agreed

Tango of Greece
• Because Greece is a member of the eurozone, it
cannot unilaterally stimulate its economy with
monetary policy.
Self Discipline
• The government of Greece agreed to impose a
fourth and final round of austerity measures.
• Public sector limit of €1,000 introduced to bi-
annual bonus, abolished entirely for those
earning over €3,000 a month.
• An 8% cut on public sector allowances and a 3%
pay cut for DEKO (public sector utilities)
employees.
• Limit of €800 per month to 13th and 14th
month pension installments; abolished for
pensioners receiving over €2,500 a month.
• Return of a special tax on high pensions.
• Changes were planned to the laws governing lay-
offs and overtime pay.
• Extraordinary taxes imposed on company profits.
• Increases in VAT to 23%, 11% and 5.5%.
• 10% rise in luxury taxes and taxes on alcohol,
cigarettes, and fuel.
• Equalization of men's and women's pension age
limits.
• General pension age has not changed, but a
mechanism has been introduced to scale them to life
expectancy changes.
• A financial stability fund has been created.
• Average retirement age for public sector workers has
increased from 61 to 65.[51]
• Public-owned companies to be reduced from 6,000
to 2,000
If not, what would have happen?
• Without a bailout agreement, there was a
possibility that Greece would have been forced to
default on some of its debt.
• This would effectively remove Greece from the
euro, as it would no longer have collateral with
the European Central Bank. It would also
destabilise the Euro Interbank Offered Rate,
which is backed by government securities
 What Happened and Why?
• Greece: Sharp Budget Deficit
• Large government and External Debts in PIIGS.
• Greece credit rating downgraded.
• Interest rates surged on government bonds.
• Need for external aid from EU and IMF
• The high debts and rising rate of interests was a
matter of concern.
Iceland
• Reasons for rise in External Debts
• High household indebtness.
• Large current account deficit:
 Excessive growth in domestic demand.
 Increase in wage rates.
 Lower exchange rate risk.
• Weakening export competitiveness.
• Reasons for rise in Internal Debts:
• Rising Unemployment: Lower tax returns,
higher budget deficits.
 • SPREAD BEYOND
BOUNDARIES OF GREECE
PIIGGS SURPLUS 2002-2009
PIIGGS BALANCE SHEET 2009
ICELAND
• Before the crash of the three largest banks in
Iceland, with Glitnir, Landsbanki and
Kaupthing, jointly owing about €14 billion ($19
billion)or 6 times Iceland's.
• The Financial Supervisory Authority of Iceland
used permission granted by the emergency
legislation to take over the domestic operations
of the three largest banks
Means???????
• The crisis has reduced confidence in other
European economies.
• Ireland, with a government deficit of 14.3% of
GDP,
• the U.K. with 12.6%,
• Spain with 11.2%, and
• Portugal at 9.4% are most at risk.
• Financing needs for the Eurozone in 2010 come
to a total of €1.6 trillion
Slovenia
• In May 2010 Slovenia went heavily into debt
paying for its part of the €110 billion ($145
billion) rescue package for Greece
U.K.
• On Friday 14 September 2008, the first day
branches opened following the news, many
customers queued outside branches to withdraw
their savings (a run on the bank).
• It was estimated that £1 billion was withdrawn
by customers that day, about 5% of the total
bank deposits held
Latvia, Lithuania, and Estonia

• The Baltic States have been amongst the worst

hit by the global financial crisis. In December
2008, the Latvian unemployment rate stood at
7%.
• By December 2009, the figure had risen to
22.8%.The number of unemployed has more
than tripled since the onset of the crisis, giving
Latvia the highest rate of unemployment growth
in the EU
Belgium

• In 2010, Belgium's public debt was 100% of its

GDP - the third highest in the Euro zone after
Greece and Italy and there were doubts about the
financial stability of the banks. After inconclusive
elections in June, by November the country still
had no government and no budget for 2011 as
parties from the two main language groups in the
country (Flemish and Walloon) were unable
reach agreement on how to deal with the
economy
Ireland germany,etc
PRESENT SITUATION
 GREEK DEBT CRISIS

• In the first quarter of 2010, the national debt of

Greece was put at €300 billion ($413.6 billion),
which is bigger than the country's economy.
• Greece has the worst combination of high debt
level, large budget deficit and large external debt
GDP - $360 billion
Debt-GDP ratio – 113% of GDP
Budget Deficit – 12.9% of GDP
Current Account Deficit- 11.0% of GDP
Net Foreign Debt – 70% of GDP
Total Outstanding Public Debt- 290 billion euro
Countries Affected By Greek Crisis
• South-eastern Europe
• Neighboring Serbia, Albania, Macedonia,
Romania, Bulgaria and Turkey
IMPACT
• Contagion Effect
Greek crisis has made investors nervous about
lending money to governments through buying
government bonds.
• Reduced wealth:
Take-home pay is likely to fall as it is eroded by
rising taxes.
• Impact on private individuals
Why this happened in EU???

• EU countries find themselves in is the result of a

decade of debt-fueled macroeconomic policies
pursued by local policy makers and complacent
EU central bankers
• “Social contract," which involves "buying" social
peace through public sector jobs, pensions, and
other social benefits, will have to be changed to
one predicated more on price stability and
government restraint if the euro is to survive
 Resolutions
• European governments and the International
Monetary Fund (IMF) have stunned global stock
markets with a 750bn-euro.
• France agrees to pitch in with 17 billion euro.
 Situation of other countries
• Spain is experiencing the highest unemployment
rate of 20%.
• Italy- has already taken austerity measures. The
lower house of parliament has voted for 25 billion
Euros of cuts to reduce the country’s deficit. The
govt. aims to reduce budget deficits down from
5.3% of GDP to 2.7% by 2012.
 Effect on India
• India’s exports to Europe could witness a slump
close to 10%.
• Export driven sectors such as textiles and
softwares are likely to bear the brunt.
• About 22-28 percent of revenues of India’s top
tech majors come from Europe whose revenues
will definitely be affected.
• Government’s overall target of $200 billion for the
fiscal could be at stake.
 FUTURE PREDICTED
• Either the euro zone should go for integrating
their economic policies.
OR
• It collapses, and the Greeks and other profligate
,
countries devalue and the banks (German,
French, British and American) lose hundreds of
billions.
 PROBLEMS
• It combines efficient and indiscipline economies.
• Too high debts.
• Political problems.
Analysis:
• Regardless of the corrective measures chosen to
solve the current predicament, as long as cross
border capital flows remain unregulated in the
Euro Area, asset bubbles and current account
imbalances are likely to continue.
Contd.
• A country that runs a large current account or
trade deficit (i.e., it imports more than it
exports) must also be a net importer of capital
Contd.
• The 2009 trade deficits for Spain, Greece, and
Portugal were estimated to be $69.5 billion,
$34.4B and $18.6B, respectively ($122.5B total),
while Germany's trade surplus was $109.7B.[115]
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.
Contd.
• 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
This means:
• 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. However, many of the
countries involved in the crisis are on the Euro,
so this is not an available solution at present.
OPTION
• Alternatively, trade imbalances might be
addressed by changing consumption and savings
habits.
Means:
• If a country's citizens saved more instead of
consuming imports, this would reduce its trade
deficit. Likewise, reducing budget deficits is
another method of raising a country's level of
saving.
Other options:
• Capital controls that restrict or penalize the flow
of capital across borders is another method that
can reduce trade imbalances. Interest rates can
also be raised to encourage domestic saving,
although this benefit is offset by slowing down
an economy
Right on wrong side:
• The international credit rating agencies –
Moody's, S&P and Fitch – have played a central
and controversial role in the current European
bond market crisis
 SOLUTIONS
Countries affected must:
Grind down Wages
Raise Productivity
Slash Spending
Raise taxes
Transparent Banking system
Endure such Austerity Drives for many years
 CONCLUSION
• The US crisis led to Global financial crisis, which
further spread to Euro zone and caused Euro
zone crisis, as these countries were most
affected.
• Hence the Big Brothers should help the
countries in problem to come out from the crisis.
Hurrayyyyy
Class over