EUROZONE CRISIS

Agenda
Definitions
The World European Union

Eurozone
What Went Wrong Outcome

Analysis and Opinion

What Can Plausibly Happen Recovery

Solutions

Definitions
Crisis Any event that is, or expected to lead to, an unstable and dangerous situation affecting an individual, group, community and whole society; negative changes in the security, economic, political, societal or environmental affairs. Financial Crisis The term is applied broadly to the situations in which some financial institutions or assets suddenly lose a large part of their value Recession A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. Depression Persisting Recession

The World
7 Continent s
External Debt - $60.47 trillion (2010 )

Populatio n About 7 billion

195 Sovereign Nations 72 Dependent Areas 6 Disputed Territories

4.55 BILLION YEARS OLD WORLD

Total Area 510.072 million Sq. Km.

Size of econom y?

Land 29.1% Water 70.9

The 7 Continents
Asia

Africa
North America South America Antartica Europe Australia
A continent is one of the several landmasses on the Earth, generally identified by convention rather than any strict criteria.
SIZE

Europe
Second smallest

continent 47 member countries Population of 731 million (Less than that of India) First to industrialize GDP in 2010 - $19.92 trillion (32.4% of the World) Germany, France and UK are 4th, 5th and 6th largest economy in the World..

European Union (EU)

Unique economic

and political partnership between 27 European countries. Free movement of Capital, Goods, Services and labor. GDP - 12,268,387 million (2010 est.)

Member States of EU (Chronologically)

1952 Belgium, France, Germany, Italy,

Luxembourg, Netherlands formed EU 1981 Greece 1986 Portugal and Spain 1995 Austria, Finland and Sweden 1973 Denmark, Ireland and UK 2004 Cyprus, Czech, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia 2007 Bulgaria and Romania

Who Governs EU?

European Commission

Represents interests of the Union as a whole

Council of European Union

Represents the governments of the individual member countries; Presidency shared by member states on a rotating basis

European Parliament

Represents the EU`s citizens and is directly elected by them

Eurozone
A geographical and economic region consists of all

the EU countries that have fully incorporated euro as their national currency
17 Countries Also called Euro Area Monetary Policies ECB (Germany)

Fiscal Policies - Individual Countries

A Comparison

Population Eurozone EU (27) USA Japan 317 million 494 million 300 million 128 million

GDP 08.4 trillion 11.9 trillion 11.2 trillion 03.5 trillion

% of World GDP 14.6% 21.0% 19.7% 06.3%

What Went Wrong

Year 1997
Agree d! Each Country should not borrow more than 3% of its GDP It`s just a norm, right?

Offenders
Italy Worst offender; regular in breaking 3% limit

Germany and France followed

Almost everyone joined Greece never stuck to 3% target, manipulated its

borrowing statistics Heavy borrowings

Fiscal Deficit Basics

FD is shortfall of Government Revenue against its

spending FD is financed by
Borrowings Rise in interest rates

Monetization Inflation and currency Devaluation

Trade Deficit Basics

TD is shortfall of exports w.r.t to Imports

TD has to be financed
Forex Borrowings Rise in interest rates FDI/FII inflows

Trade Deficit has to be balanced by Surplus of

Capital flows Leads of Currency Devaluation

Cheaper exports and costlier imports
Tendency to close the Trade Deficit

Eurozone Crisis
In a nutshell
Portugal, Spain, Greece
Trade Deficit especially with Germany

High Fiscal Deficit

Common Currency & Monetary Union

Cannot devalue currency Cannot Monetize FD

The Results
German loans finance imports from Germany Borrowings to finance FD keep rising

Portugal and Greece

High Fiscal Deficits

Low growth economy

Low Tax revenues

High Government Spending

Govt Employment Pensions and Subsidies FD 9-10%

Ireland
Failure of 6 Major Banks
Property bubble

Irish Government Bailout

Protect Depositors and Shareholders Bill upto $ 100 bn

FD upto 32.4% of GDP

Outcome
Greece defaults Huge Sovereign debt of Eurozone

Countries Govt. and Banks in Eurozone have about $500 billion in outstanding bonds coming due in first quarter of 2012 Banks not in a position to issue corporate bonds at affordable rates Recession Everyone is sitting on their money Weakening of Euro Impacted growth in other parts of the

Analysis and Opinion

Mario Draghi, President, ECB

ECB loans could indirectly help some heavily indebted European countries if the banks use ECB loans to invest in govt. bonds. Many European banks are now facing possible losses on their holdings of bonds issued by cash-strapped governments and dont want to buy any more But the bankss might be willing to resume their purchases if they dont have to repay their loans to ECB for 3 years By then, region`s financial health might be resolved and governments restored to financial health

Uri Dadush
G20 must help manage Eurozone crisis: Build a firewall around Spain and Italy Impose demanding conditions on Europe Foster open international trade and reform the WTO Focus on the big pictire

What could plausibly happen?

Eurozone splits Deutschemark replaces Euro

More Liquidity

Catastrophe

Reform and recovery

Proposed long-term solutions

1. European fiscal union and revision of 2. 3.

4.
5. 6.

the Lisbon Treaty Eurobonds European Stability Mechanism (ESM) Address current account imbalances European Monetary Fund Speculation of the breakup of the Eurozone

Who can take Advantage of Eurozone Crisis.

Eurozone crisis is 'biggest threat to emerging Asia'

Solutions
Bailouts
Loan write downs upto 50%
Interest rate cuts Austerity measures to cut FD to 3%

European Financial Stability Facility

Created by 27 member countries Bonds from German market $ 440 bn can go upto 1 Tn

Other players IMF, ECB etc

Solutions
Liquidity delay the crisis

Eurozone countries want to funnel $200 billion

through IMF Closer budgetary cooperation among 17 eurozone countries A Govt. of bureaucrats is formed in Italy to tackle the situation