WHAT IS EUROPE ??

How many countries are there in

Europe ??
The Eurozone officially called the euro area

Is a monetary union of 19 of the 28 European Union (EU) member states

Which have adopted the euro (€) as their common currency and sole legal
tender.

The other nine members of the European Union continue to use their own
national currencies, although most of them are obliged to adopt the euro in
future.

The eurozone consists of:

Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland,

Italy, Latvia, Lithuania, Luxembourg, Malta,
the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Other EU states
(except for Denmark and the United Kingdom) are obliged to join once they
meet the criteria to do so.
 European Union
The European Union (EU) is a politico-economic union of 28 member states that
are located primarily in Europe
The European Union (EU) is an economic and political union of 27 member
states which are located primarily in Europe.

EU policies aim to ensure:

1.The free movement of people, goods, services, and capital within the internal
market

2.Enact legislation in justice and home affairs,

3.Maintain common policies on trade, agriculture, fisheries, and regional

development.

A monetary union was established in 1999 and came into full force in 2002, and
is composed of 19 EU member stateswhich use the euro currency.

The EU operates through a hybrid system

of supranational and intergovernmental decision-making
The Maastricht Treaty (formally, the Treaty on European Union or TEU)
undertaken to integrate Europe was signed on 7 February 1992 by the
members of the European Community in Maastricht, Netherlands.

entry into force on 1 November

1993, it created the European
Union and led to the creation of
the single European currency,
the euro

 Single currency in single market makes sense

 Price transparency
 Uncertainty caused by Exchange rate fluctuations eliminated
 Increased Trade and reduced costs to firms
 Strengthen the economies of euro zone members
 Borrow money from international financial markets and investors at
a much lower rate
 A tangible sign of a Europen identity
 Euro zone Crisis – What is it?

•This is also known as Euro zone sovereign debt crisis

•The term indicates the financial problems caused due to overspending by come
European countries
•When a nation lives beyond its means by borrowing heavily, a point comes
when it cannot manage its financial obligations.

When that country faces insolvency (unable to repay its debts and lenders start
demanding higher interest rates) that nation begins to get swallowed up by
what is known as the Sovereign Debt Crisis
•The EDC began in 2008 with the crash of Iceland’s banking system,
which spread to Greece.

•Greece had experienced corruption and spending as its government

continued borrowing money despite not being able to produce
sufficient income through work and goods.

•It was admitted that Greece's debts had reached 300bn euros, the
highest in modern history

•Spain, Portugal, and the other nations later followed Greece.

 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.
 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.
The never-ending crisis?

FINANCIAL
STRESSES
? FINANCIAL
CRISIS 2008
and
ECONOMY
SLOWING

SOVEREIGN ECONOMIC
DEBT CRISIS CRISIS
2009

POLICY
SURGE IN RESPONSE:
GOVERNMENT DEBT STIMULUS
 Euro zone Debt Crisis – History

GREECE
•November 5 2009 - Greece reveals that their budget deficit is 1207
percent of GDP

•December 8 2009- Greece's long-term debt to BBB+, from A-.

•March 3 2010- Greece tries to persuade the financial market that they
can repay their debts

•April 23 2010- Papandreou asks help from International Monetary

Fund after Greece is priced out of the international bond markets.
•May 2 2010- European finance ministers lend 110€bn which covers
until 2013. Greece pledges to bring its budget deficit into line, through
unprecedented budget cuts.

•April 17 2011- Greek borrowing costs start rising sharply again, on

fears that its austerity measures are failing to work. Greece is now
deep in recession.

•June 19 2011- Admits that they need to borrow money again

•June 29, 2011- EU leaders agree on €109bn bailout – which will see
private sector lenders take losses of 20%

•October 27 2011- Europe leaders agree new deals that slash Greek
debt and increase the power of the main bailout fund to around €1
trillion.

November 6 2011- Prime Minister resigns

Europe Debt to GDP (2007)
• Contagion Effect
IMPACT
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.

…but banks are not lending as they should

• An economy needs a functioning banking sector to support growth,

through bank lending to consumers and businesses

• Banks have tightened their “credit standards” and are lending out
less money. Less money in the economy means less economic
growth.

• There was too much (private sector) borrowing before the crisis hit,
but not enough now to support growth.
 Pre 2008 Era

 Availability of cheap debt

 Capital inflows were not used to
help the economy grow
 Beginning of the global financial
crisis
 Shipping and tourism industry
affected by the changes in
business cycle
 Debt began to pile up rapidly

2000 2004 2008

Post 2008 Era

Global financial crisis of 2008-09

strained public finances
Fear of European sovereign debt crisis
started in early 2010
Difficulty in raising funds
Bailout package requested from EU &
IMF
Debt rating downgraded to “Junk”
status.
Worldwide impact on stock markets

2008 2012
 GLOBAL FINANCIAL CRISIS 2008

The financial crisis triggered a global economic recession that resulted in more
than $4.1 trillion in losses.

Unemployment rates that climbed to more than 10 percent in the United States
and higher elsewhere.

Increased poverty.

Stock markets around the world crashed.

What is subprime lending?

Subprime lending means giving loans

to people who may have difficulty in
maintaining the repayment schedule.

Impacts of Subprime crisis

•Major banks suffered from huge losses.

•Lehman Brothers went out of business.
•Merrill Lynch had to sell itself to Bank of
America for a fraction of its former value
Global Impacts of the Crisis

•Investors lost confidence in the stock market.

•Consumer spending slowed down due to lack

of cash/ unwillingness.

•U.S.A’s economic condition affected the global

economy.

•World economy slipped into recession.

•Exports from China, Korea, Taiwan and India

decreased.

IMPACT ON INDIAN ECONOMY

The immediate impact of the US financial crisis has been felt when India’s
stock market started falling

Impact on India's handloom sector, jewelry export and tourism

With the outflow of FIIs, India’s rupee depreciated approximately by 20 per cent
against US dollar and stood at Rs. 49 per dollar at some point, creating panic
among the importers
 What does Brexit mean for the EU/Eurozone?
The UK accounts for more than
60 million of the EU's 500 million
people and boasts the world's
fifth-biggest economy.
No European government has
ever publicly announced that it
would favour a Brexit scenario
Theresa May said she will
respect the will of the people
and said: "Brexit means
Brexit and we're going to
make a success of it."

Why is Britain leaving the

European Union?

A referendum - a vote in which everyone (or nearly everyone) of voting age can
take part –
was held on Thursday 23 June, to decide whether the UK should leave or
remain in the European Union. Leave won by 52% to 48%. The referendum
turnout was 71.8%, with more than 30 million people voting.
 How Brexit will impact the Indian market

Brexit is a big, once-in-a-life kind of event. It's consequences will last longer
than we can think," says Motilal Oswal, CMD, Motilal Oswal Financial Services.

Brexit will have an impact on

India's GDP growth. "We have
lowered our aggregate 2016
GDP growth forecast for Asia
excluding Japan from 5.9% to
5.6% and India's 2016 GDP
growth forecast to 7.3% from
7.6%," said the Nomura
Report.

Uncertainty in new trade laws.

Deficit Balance of payment

The Euro
Who manages the Euro?

The European Central Bank:

•Ensures price stability

•Controls money supply and

decides interest rates

•Works independently from

governments

Eurobond

A Eurobond is an international bond that is denominated in a currency not

native to the country where it is issued

The Eurobond market is largely a wholesale, institutional market with bonds

held by large institutions

It can be categorized according to the currency in which it is issued. London is

one of the centers of the Eurobond market, with Luxembourg being the primary
listing center for these instruments
 European Central Bank

The European Central Bank (ECB) has taken a series of measures aimed at
reducing volatility in the financial markets and at improving liquidity

It began open market operations buying government and private debt securities,
reaching €219.5 billion in February 2012

The European Central Bank (ECB) is the central bank for the euro and
administers monetary policy of the Euro zone, which consists of 19 EU member
states
 European Financial Stability Facility(EFSF)

The European Financial Stability Facility (EFSF) is a special purpose

vehicle financed by members of the euro zone to address the European
sovereign-debt crisis.

It was agreed by the Council of the European Union on 9 May 2010, with the
objective of preserving financial stability in Europe by providing financial
assistance to euro zone states in economic difficulty

The EFSF is authorized to borrow up to €440 billion, of which €250 billion

remained available after the Irish and Portuguese bailout.

To provide loans to countries in financial difficulties (e.g. Greek bailout)

A legal instrument aiming at preserving financial stability in Europe by

providing financial assistance to euro zone states in difficulty.
 European Financial Stabilisation Mechanism (EFSM)

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.

It runs under the supervision of the Commission and aims at preserving

financial stability in Europe by providing financial assistance to EU member
states in economic difficulty.

The Commission fund, backed by all 28 European Union members, has the
authority to raise up to €60 billion.

The EFSM is rated AAA by Fitch, Moody's and Standard & Poor's. The EFSM has
been operational since 10 May 2010.
 European Stability Mechanism(ESM)

It was established on 27 September 2012 as a permanent firewall for the euro

zone,

It safeguard and provide instant access to financial assistance programmes for

member states of the euro zone in financial difficulty, with a maximum lending
capacity of €500 billion.

It replaces two earlier temporary EU funding programmes: the European

Financial Stability Facility (EFSF) and the European Financial Stabilisation
Mechanism (EFSM).

All new bailouts for any eurozone member state will now be covered by ESM,
while the EFSF and EFSM will continue to handle money transfers and
programme monitoring for the previously approved bailout loans to Ireland,
Portugal and Greece.
 Outright Monetary Transactions (OMTs)

On 6 September 2012, the ECB announced to offer additional financial support

in the form of some yield-lowering bond purchases (OMT), for all eurozone
countries.

Transparency
Aggregate Outright Monetary Transaction holdings and their market values will
be published on a weekly basis

Unlimited:

The ECB says it will buy as many bonds as it takes for markets to get the
message that countries like Greece, Spain and Italy are not leaving the euro,
that the single currency is irreversible

Short term:
The OMT will only buy short-term bonds between one and three-year duration.
 Single Supervisory Mechanism (SSM)

The Single Supervisory Mechanism (SSM) is the name for the mechanism which
has granted the European Central Bank (ECB) a supervisory role to monitor the
financial stability of banks based in participating states, starting from 4
November 2014

The ECB's monitoring regime will including conducting stress tests on financial
institutions.

If problems are found, the ECB will have the ability to conduct early
intervention in the bank to rectify the situation, such as by setting capital or
risk limits or by requiring changes in management

However, if a bank is found to be in danger of failing, the responsibility for

resolving it will rest with the Single Resolution Mechanism
 PORTUGAL
 In the first quarter of 2010 Portugal had one of the best rates of
economic recovery in the EU

 Portuguese government public debt has increased due to mismanaged

structural and cohesion funds

 Bonuses and wages of head officers also resulted to their economic

situation

 On 16 May 2011- Euro zone leaders officially approved a €78 billion

bailout package for Portugal

 The country agreed to cut its budget deficit from 9.8% of GDP in 2010
to 5.9% in 2011, 4.5% in 2012 and 3% in 2013

 On 6 July 2011-Rating’s agency Moody had cut Portugal’s credit rating

to junk status
 IRELAND

 The Irish sovereign debt crisis arose not from 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, issued a

two-year guarantee to the banks depositors and bondholders

 Irish banks had lost an estimated €100 billion

 Unemployment rose from 4% in 2006 to 14% by 2010

 ITALY
 Italy’s deficit was 4.6% of GDP in 2010

 Italy even has a surplus in it’s primary budget, which excludes debt
interest payments. However it’s debt has increased to almost 120%
of GDP (US $2.4 trillion in 2010)

 Italian bonds more and more as a risky asset for investors

 On 15th July and 14th September 2011 government passed austerity

measures meant to save €124 Billion

 By 8 November 2011, the Italian bond yield was 6.74% For climbing
above the 7% level on 11 November 2011, Italian 10 year borrowing
costs fell sharply from 7.5% to 6.7% after Italian legislature
approved
 The measures include
 A pledge to raise €15 billion from real estate sales
 A 2 years increase in the retirement age to 67 by 2026
 Opening up closed professions within 12 months
 A gradual reduction in government ownership of local services
 SPAIN
 Spain has a comparatively low debt among advanced economy but
experienced highest unemployment rate of 20%

 Spain’s economy is of particular concern to international observers

and faced pressure from United States, The IMF, Other European
countries and the European commission to cut it’s deficit more
aggressively

 Announcement of the European Union's new ‘Emergency Fund’ in

early May 2010, Spain had to announce new austerity measures
designed to reduce budget deficit in order to signal financial market
that it is safe to invest in country

 Spain succeed in trimming it’s deficit from 11.2% of GDP in 2009 to

9.2% in 2010 and originally expected 6% in 2011 but due to European
crisis and over spending by regional government the deficit
overshoot target and reached between 6.6% to 8%
 The government amended Spanish Constitution in 2011 to require
balanced budget by 2020

 The amendment states that public debt can’t exceed 60% of GDP,
Though exceptions would be made in case of natural calamities,
economic recession or other emergencies
 FRANCE
 France was one of the six founding members of
the European Community in 1957

 Since the foundation of the European Union, France has

been a driving force behind many European projects

 France participates in all of the most far-reaching EU

projects, including Economic and Monetary Union

 France's public debt in 2010 was approximately U.S. $2.1

trillion and 83% GDP, with a 2010 budget deficit of 7% GDP

 By 16 November 2011, France's bond yield spreads had

widened 450% since July, 2011

 France's C.D.S. contract value rose 300% in the same

period
BELGIUM
 In 2010 Belgium's public debt was 100% it’s GDP

 The government deficit of 5% was relatively modest and Belgium

government 10 years bond yields in November 2010 of 3.7% were
still below of these of Ireland (9.2%), Portugal (7%) and Spain
(5.2%)

 High personal saving rate in Belgium and making it less prone to

fluctuations of international market

 On 25 November 2011, Belgium’s long term sovereign credit rating was

down graded from AA+ to AA by Standard and Poor

 10 year bond yields reached 5.66% shortly after Belgian

negotiating parties reached on 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 balanced the book in 2015

 Following the announcement Belgium 10 year bond yields fall

sharply to 4.6%
GERMANY
 In 2011, Germany's economy as measured
by GDP produced $3.085 trillion. This makes it the sixth
largest economy, after the European Union (EU), the
U.S, China, Japan, and India

 Its GDP growth rate was 2.7%, slightly less than the 3.5%
rate in 2010, but better than the 4.7% decline in 2009

 Its strong manufacturing base meant it had plenty to

export to other members of the euro zone, and could do so
more cheaply

 About 40 percent of German gross domestic product

comes from exports, much of them to the EU
 PROBLEMS
 It combines efficient and indiscipline economies.

 Too high debts.

 Political problems.
• Low Growth
• High Unemployment
• Slow Decision Making
 SOLUTIONS
Countries affected must:
Grind down Wages
Raise Productivity
Slash Spending
Raise taxes
Transparent Banking system
Endure such Austerity Drives for many years
 Impact on India:

European debt crisis and fragile US recovery have contributed to the growth
slowdown of the Indian economy by hurting our exports and affecting capital
inflows into India.

The capital outflows have resulted in crash in our stock markets that have
affected investment sentiments of the corporate world.

The rupee’s depreciation, while aggravated by domestic speculative activity, is

primarily traceable to the ongoing sovereign debt crisis in Europe

The value of rupee which was around 44.50 rupees to a US dollar in August
2011 fell to as low as 54 rupees to a dollar on December 15, 2011 and was
around Rs. 54.8 to a US dollar in the first week of April 2013.

However, we think that current slowdown in economic growth is partly a result

as pointed out above, of Eurozone debt crisis and overall global environment,
especially slow recovery in the United States and stagnation in the European
countries.
Besides, increase in interest rates by RBI to fight inflation has led the
corporate sector to defer investment has resulted in the drastic fall in output
of capital goods

However, in our view, the Indian economy will soon recover once these short-
run problems are resolved. Once inflation is brought under control RBI will cut
its interest rates which will give a push to investment that will boost industrial
growth.

If investment in infrastructure increases, as is expected now, this will lead to

the expansion in domestic demand for capital goods.

his will ensure a higher growth rate in the next year, 2013-14. Besides, we still
have the ability to achieve 8% per cent growth rate even on the basis of our
domestic market.
 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.
 Conclusion

•Emergency loans have been extended as bailouts mainly by stronger

economies like France and Germany, as also by the IMF.

•The EU member states have also created the European Financial

Stability Facility (EFSF) to provide emergency loans.

•Restructuring of the debt

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.
•The crisis wont stop for a period of time till all debt obligations in
eurozone are not cleared.

• The situation is because the euro countries are dependent on each

other.

• Hence the countries are not able to repay the debt to countries they
borrowed from and hence the lender is in threat of going into debt
crisis.

• Policy reactions are made to come out from the debt crisis.