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Presented by:Akshat Solanki (04) Gagandeep Pahwa (14) Karabi Kachari (24) Nibish Baghel (34) Shamma Dhanwat (44)
The Euro zone is an economic and monetary union (EMU) of seventeen European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender: The euro zone currently consists of Austria, Belgium, Cyprus, Estonia, Finl and, France, Germany, Greece, Ireland, I taly, Luxembourg, Malta, The Netherlands, Portugal, Slovakia, Slovenia, and Spain. Monetary policy of the zone is the responsibility of the European Central Bank, though there is no common representation, governance or fiscal policy for the currency union.
If not. 2. 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. 4. The 4 main criteria are based on Article 121(1) of the European Community Treaty. it is at least required to reach a level close to 3%. 3. Government finance: 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. 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.The Maastricht Criteria The Maastricht criteria (also known as the convergence 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. 1. Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU. . Inflation rates: No more than 1.
whose policy is set by the European Central Bank or ECB. while government spending. to deal with a situation when one government gets into trouble ??? . Question raised: How is it possible for a group of countries joined monetarily. The Currency devaluing factor: In the global recession years of 2008-09. but NOT in government spending policy. The main job of the ECB is to set interest rates for the entire Euro zone. policy is managed by each country. While the UK was able to devalue the pound sterling as part of its policy response to this crisis. i. Euro zone members have been aware of a potential conflict between the fact that monetary policy is set by the ECB for the entire Euro-area. ie government budget – union. fiscal. such a move was not available to members of the common currency area.e.Problems faced by Euro zone countries The key fact about the Euro zone is that it represents a MONETARY – not a fiscal. Ever since its inception.
above all the socalled “mortgage backed securities” For Italy. Portugal and above all Greece. leading to massive unemployment. Italy.PIIGS and their inevitable problems PIIGS/PIGS refers to an unofficial group of countries including Portugal. Greece and Spain. and a stagnant economic dynamic. Problems for PIIGS The significant problems for Spain and Ireland are quite similar to the US – collapse of a bubbled housing market. Considered to be the weaker economical section of Eurozone. . Ireland. from which it had to be rescued by its oil-rich UAE brothers to the south in Abu Dhabi. aka “sovereign”. debt – not structurally dissimilar to the crisis that hit Dubai just a short while ago. the main problem is government. Still completely NON-transparent derivatives market.
called for in the European treaty that created the euro.Why the problem still persists… Challenged those relatively weak governments to raise taxes and impose harsh spending cuts on a restive populace to bring down their deficits from over 10 percent of G. The extremely high level of yields on Greek. The first chart shows the yield on 2-yr sovereign debt for each of the PIIGS countries.D. to the benchmark levels close to 3 percent of G.P.P.D. . Irish. and Portuguese bonds is the market's way of saying that a significant default is highly likely to occur.
is that lack of effective monitoring of government deficits within euro area countries and lack of enforcement of the rules on how much debt a country can have allowed excessive debt levels to accumulate. it was the recession that caused the government budget to collapse. The deficit problems were made worse by the fact that countries within the euro area do not have the ability to use independent monetary policy.What is the Source of the Problems? While such moves are highly unpopular politically. . e. Spain and perhaps even Italy will not be able to follow through on their commitments. the problem wasn’t irresponsible budget behaviour. enriching those who are betting that Greece. Portugal. The standard explanation for the problems in some of the countries.g. Greece. In other cases such as Spain. a failure to do so could send government borrowing costs soaring.
Now… THE STATISTICS… By PresenterMedia.com .
GDP of PIIGS 2500 2000 1500 2008 1000 500 0 2009 2010 .
GDP growth 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 2008 2009 2010 .
Fiscal Deficit as a percentage of GDP 16 14 12 10 8 6 4 2 0 2008 2009 Portugal Italy Ireland Greece Spain .
Debt to GDP Ratio 160 140 120 100 80 60 40 20 0 2008 2009 2010 .
Credit Ratings MOODY'S PORTUGAL IRELAND ITALY GREECE SPAIN FITCH S&P Baa1 BBBBBB- Baa1 BBB+ BBB+ Aa2 AA- A+ B1 BB+ BB- Aa2 AA+ AA .
France and other countries keep on bailing out the PIIGS countries until it becomes too hot to handle and ultimate breakdown of EMU .The Impact on the Euro Monetary Impact Fall of the status of Euro as a potential replacement for dollar The depreciation of Euro leading to • • • • • • Rising trade deficits Inflationary pressures Decreasing creditworthiness Volatility in stock markets Reduction in FDI and FII Increase in the interest rates for long term sovereign bonds Political impact • • Weaker countries thrown out/withdraw of the EMU (Economic and Monetary Union) Germany.
Monetary Impact • Monetary deflation incase there is decrease in money supply with no government intervention Euro • Monetary inflation incase there is money supply incase the government does Euro .
Fall of the Status of Euro “PRETTIEST among the UGLIEST!!” .
What Is Fiscal Deficit? Effects of the widening fiscal deficit WIDENING .
but in the case of low productivity it will lead to further downfall Austerity measures include: Salary cuts for public sector employees Increase in taxes on gas.Combating Fiscal Deficit Debt financing might temporarily stimulate the economy. . tobacco & alcohol etc.
Debt Financing DECREASING CREDIBILITY RISING DEBT CURRENCY DEPRECIATION .
even though exports become competitive due to Euro depreciation. are import dependent. there are not enough resources to produce those exports.Due to depreciation of the currency. Also. Since most of the countries (apart from Germany etc.6 Billion SourceFxstreet.$1. investors will sell Euro as fast as they can EU Trade deficit. it leads to a huge deficit) Huge loss to Euro Zone .com Euro will lose its credibility and the supply of euros will increase (inflationary pressures also) Consequently.
The inflow of FDIs and FIIs will fall sharply Stagnation of the economy (no growth prospects due to minimum capital formation) Credit rating of these countries will take a hit They will have to offer more interest on the long term sovereign bonds to attract investors .
or might give up their membership to take control of their monetary policy This might ultimately lead to the breakdown of EU as the goal of the common currency has been defeated. .At the helm of affairsPolitical effects Countries might be thrown out of EU.
Thank You… .