Survival of Euro

SECTION-B Submited by:

Ashish Agarwal 70

Harshal Chichghare 73

Jasmeet Kaur 74

Krishna Kaushal 77

Kartikeya Sharma 78

Kumar Raunak 79

Teja Bandaru 80

Pratheesh CK 90

Suneet Chaudhary 100

 Road Map
 History Of European Union
 Importance of Euro
 Issues unresolved
 Introduction to Euro crisis
 Brief overview of Greek and Irish crisis
 Contagion effect
 Implication on survival of Euro
 Suggestions
 History Of EU
One of the foremost reasons- fear of large devastating effects of war made people turn to the idea of some form of unified Europe.

1954:International Authority for the Ruhr meant for control of Coal belt of Germany gave birth to the first institutions, such as the
High Authority and the Common Assembly. This was the first step towards EU.

After failed attempts at creating defence (European Defence Community) and political communities (European Political Community),
leaders met at the Messina Conference and established the Spaak Committee 

1956:The decision was taken to organize an Intergovernmental Conference on the Common Market which focused on economic unity,
leading to the Treaties of Rome being signed in 1957 which established the European Economic Community (EEC) .

1967:The institutions of the ECSC, EEC and Euratom were merged, with a single European Commission replacing the ECSC High
Authority, EEC Commission, Euratom Commission.

1979 :For the first time, Members of the European Parliament were elected directly by the people of all Member states .

1993:The European Union was established by the Maastricht Treaty which came into force in November 1993.
 Euro Zone

It is an economic and
monetary union (EMU) of 16 They have adopted the euro as
European Union (EU) member their sole trading currency.
states

It currently consists of Austria,

Belgium, Cyprus, Finland,
Euro became a reality on Jan 1,
France, Germany, Greece,
1998 , but came for the
Ireland, Italy, Luxembourg,
European consumers on Jan 1
Malta, the Netherlands,
2002.
Portugal, Slovakia, Slovenia
and Spain.
 Why Euro?
The single currency brings new strengths and
opportunities arising from the integration and scale of the
euro-area economy, making the single market more
efficient.
Benefits worldwide
Before the euro, • A single currency makes
the need to the euro area an attractive
The single region for third countries
exchange
currency brings to do business, thus
currencies meant Tourists won't promoting trade and
new strengths
extra costs, risks have to change investment.
and opportunities • Prudent economic
and a lack of money whenever
arising from the management makes the
transparency in they cross into Billing of services euro an attractive reserve
integration and
cross-border another country become cheaper currency for third
scale of the euro- countries, and gives the
transactions. anymore so
area economy, euro area a more powerful
With the single traveling will be voice in the global
making the single
currency, doing easier economy
market more
business in the
efficient.
euro area is more
cost-effective .
 Issues unresolved
In particular it is argued that Germany
joined the Euro at a rate that is too high
making its exports less competitive.

Inflexible Labour Markets. This is
frequently held up as a constraint on
economic growth. In particular rigidities
in the labour market discourage
investment from abroad
The ECB has been accused of giving too
much priority to the goal of low inflation.
It is argued they have sought to maintain
low inflation at the expense of lower
growth.

Growth and Stability Pact. This is a

constraint on expansionary fiscal policy
because in theory it limits governments
borrowing to 3% of GDP. Therefore in a
recession a government is unable to use
monetary policy.

Loss of autonomy over economic
policy. With the ECB setting a
common interest rate for the whole
area, countries have lost an
important part of their Monetary
policy.
An oil shock would affect net
importers like France .
ISSUES UNRESOLVED
Countries in different stage in the
business cycle. For instance in 2005,
Ireland and Spain were growing quite
fast and need higher interest rates to
control inflation than other countries
who need lower interest rates.
Therefore with low interest rate
Ireland might experience inflation.
Monetary Policy will have different
effects in different countries. For
example the France is sensitive to
changes in the interest rate because
many people have mortgages
Asymmetric Shocks. If one country
experienced an external shock it
might need a different response. But
this is not possible with a common
currency. E.g. German reunification
required higher interest rates in order
to help reduce inflation but this was
not good for many other countries.
The ECB is less transparent in their
decision making, for example they do
not produce monthly minutes, this
makes interest rate changes less
predictable
 Introduction to Euro Zone crisis
On 11 Oct 2008, a summit was
Due to global financial crisis that held in Paris by the Euro group
It is the biggest challenge began in 2007-08 the euro zone heads of state and govt, to
Europe has faced since 1990. entered its first official recession define a joint action plan for
in third quarter of 2008. euro zone and central banks of
Europe to stabilize the economy.

The result in Euro Zone was Its immediate causes lie with the Crisis Propelled in Oct 2009 by
Sovereign debt crisis. US crisis of 2007-09. Greece crisis

Spread to PIIGS: Portugal, Italy,

Ireland, Greece, Spain.
Euro volatility
Greek crisis-Background and indepth reasons

Greece: Sharp
Budget Deficit

the high debt

and rising rate of
interests a Large government
matter of and External Debts.
concern

Large borrowings
Need for external arranged through
aid from EU and investment banks
IMF like goldman sachs
to hide actual
borrowing in order
to meet EU norms.

Interest rates
surged on Greece credit rating
government downgraded.
bonds.
 Reasons for rise in External and
internal debts

Recession that
Large current followed the
Rising
account deficit: global downturn
Weakening Unemployment:
High household • Excessive growth of 2007-08 badly
export Lower tax
indebtness. in domestic affecting major
competitiveness. returns, higher
demand. sectors of
budget deficits.
• Increase in wage tourism and
rates. shipping
 Some startling facts!

Debt-GDP ratio – Budget Deficit –

GDP - $360 billion
113% of GDP 12.9% of GDP

Current Account Total Outstanding

Net Foreign Debt –
Deficit- 11.0% of Public Debt- 290
70% of GDP
GDP billion euro
 IRISH CRISIS-Background

The Irish economy expanded rapidly during the  years (1995–

2007) due to a low corporate tax rate, low ECB interest rates,
and other factors.

Lead to expansion of credit and building up of property

bubble that petered out in 2007 following global downturn.

Irish banks being highly over-exposed to property market

came under severe pressure in the aftermath of global
downturn

Resulting downturn in industrial activity leading to high

unemployment and high government deficit and recession.
 The contagion effect

The effect of economic and financial crisis has

spilled over to other countries in the euro zone like
spain, portugal, romania and bulgaria.

Greek crisis has made investors nervous about

lending money to governments through buying
government bonds.

Reduced wealth as Take-home pay is likely to fall

as it is eroded by rising taxes.

Impact on private individuals

 Situation of other countries

Italy- has already taken austerity

measures. The lower house of
parliament has voted for 25 billion
Spain is experiencing the highest
Euros of cuts to reduce the country’s
unemployment rate of 20%.
deficit. The govt. aims to reduce
budget deficits down from 5.3% of
GDP to 2.7% by 2012.

Portugal is running high fiscal deficit

with growing unemployment
 COUNTRIES
AFFECTED

High Risk Moderate Risk Lower Risk

Bulgaria, Czech
Latvia , Hungary,
Republic, Lithuania, Estonia and Poland
Romania
Slovakia, Slovenia
 Euro crisis bail out plans

Euro-region ministers agreed to a 110

billion-euro ($146 billion) rescue
package for Greece( with Germany
being the biggest contributor) to
prevent a default and stop the worst Ireland was granted a €85 billion bail-
France agreed to pitch in with 17 billion
crisis in the currency’s 11-year history out package by European Union
euro.
from spreading through the rest of the ministers.
bloc. In return greece agreed to cut
wages and freeze pensions for three
years as well as increase the main sales
tax to 23 percent from 21 percent. 

Contribution was made from major

Ireland's bailout was formally countries like germany, uk, along with
announced on 28th November 2010 at European financials stability
85 billion Euros (113 billion dollars) mechanism and European financial
stability fund.
 Debate over Euro survival

Threat to Euro
Many
peripheral The resulting
nations like bailout
greece, packages
ireland acting as a
Shared
Each nation ,portugal and burden on all The entire
monetary
No common having its own greece EU countries cycle is
policy without
federal budget. sovereign fiscal spending in and they have weakening the
shared fiscal
policies. excess of begun to euro.
policies.
income and tolerate
high debt inflation to
making their reduce the real
economies value of debt.
unsustainable.
The problem of varying trade balances

A single currency Absence of an important

always under pressure tool of adjustment with
with some countries each country having fixed
having trade surpluses exchange rate system
and some deficit. with respect to other.

Trade surplus nations

No consensus on opposing currency
currency readjustments. devaluation to help
trade deficit countries.
 Attitude of bigger and core nations

Flip-Flops of nations like

Imposition of stringent
Germany to provide
austerity measures
bailout package to Greece
resulting in countries
has spread the crisis to
entering death spiral.
other weaker nations.

Feeling of resentment
among weaker nations
that core nations like
Germany have gained at
the expense of debt-
ridden nations.
 Still the euro can survive !

Political reasons

Bailout of greece and

Euro zone and resulting
A fragmented europe ireland has further
unity give european
would have no global entrenched the belief
countries a strategic
power and not in the that unity of european
depth while negotiating
best interest of nations can save any
with countries like U.S.
germany and france. individual country from
and china.
unforeseen crisis.
 Economic reasons

Stringent austerity
A low euro with measures imposed
countries like Flow of funds into
funds pouring out france, greece and U.S. equities would on debt-ridden
of euro equities will spain would see countries may
boost sentiments
ignite economic deter other
substantial in U.S. and this
growth as exports economic growth countries in the
would propel
would become euro zone to run
with U.S. coming tourists inflow in
more competitive. high fiscal deficit
out of recession. euro zone.
and this may ward
off any future crisis
 Suggestions

Full-fledged fiscal union of euro zone countries

with proper political agreement that binds
member countries with respect to fiscal
policies.

Enhanced flexiblity with respect to labour

movement.

Hightened co-operation among EU nations to

agree upon relinquishing certain degree of
fiscal sovereignty.