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8/7/2019 EUROZONE CRISIS - FINAL
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European Union (EU) is an economic and political union of 27member states which are located primarily in Europe.
EU Generates 21% of the world GDP
The Treaty of Maastricht is formally known as the Treaty ofEuropean Union (TEU)
It was signed on 7th Feb,1992 & was enforced on 1st Nov,1993,inNetherlands
The European Union is composed of 27 sovereign Member States:Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark,Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland,Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and theUnited Kingdom.
Formation of European Union (EU)
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Formation of Eurozone
Eurozone established in 1999 and adopteda single currency by 11 EU memberstates EURO ()
Monaco, San Marino, and Vatican City arethree non-EU members which adopted theEURO
EU member states qualified, but not yetusing the Euro currency: Denmark,Sweden, United Kingdom
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Members of Eurozone
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Criteria to join Eurozone
Five criteria are required for countries toqualify for Eurozone :
Inflation rate below 2%
Long-Term Interest rates
Exchange rate Fluctuation
Budget Deficit, below 3% of GDP
Public Debt, < 60% of GDP
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Reasons for Introducing uro & Its
Administration
Majority of international trade with other EU members
An introduction of common currency has :Removed exchange rate risks
Cut the cost of transactions
Encouraged firms to trade across national borders
y Monetary Stability in Europe
y Forced EU states to adopt responsible economic policies
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Reasons for Introducing uro & Its
Administration (Contd)
Euro is managed by Frankfurt-based European CentralBank(ECB) & the Euro system
ECB has the sole authority to set monetary policy
Euro system participates in :
Printing & Minting of notes and coins
Distribution of the same in all member states
Operation of Euro zone payment systems
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Advantages & Disadvantages of Introducinguro
Advantages Disadvantages
Elimination of exchange-ratefluctuations
Price Transparency
Transaction Costs
Increased Trade Cross-borders Increased cross-border
employment
Expanding markets forbusiness
Financial market stability Macroeconomic stability
Lower interest rate
Structural reforms for Europeaneconomies
Unites Europe
Cost of transitioning 12countries currency over toa single currency
Training for employees,managers & consumers
Countries cannot adjustinterest rates
Countries cannot adjust
exchange rates Restricted government
spending
Political shock
Loss of cultural identity
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DEBT CRISIS
Lowering Euro valuation
Fear & Speculation Low market confidence
Downgrading of the sovereign debts
Increasing fiscal deficit
Large government debts
High Public Spending
Subprime crisis
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GDP
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Government Debt to GDP
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Inflation rate
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Current Account Balance
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Euro Dollar rate fluctuation
Start
of theSubprimecrisis
Fitch & S&P
downgrades
Greek bonds
Recovery fromSubprime crisis
S&P rates Greek
bonds as junk
Euro falls to a four
year low against
the dollar
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Country wise exposure -
Banks
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AUSTERITYMEASURES BYGREECE
On 5th March 2010, the Greek parliament passed theEconomy Protection Bill, expected to save 4.8bn-urostrough a number of measures including:
Public sector wage reductions Limit of pension reduced to 800 per month up to 13th & 14th
month pension installments
Extraordinary taxes imposed on company profits
A financial stability fund has been created
Average retirement increased to 65 from 61 for public sectoremployees
Public-owned companies to be reduced from 6000 to 2000
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REMEDIAL MEASURE BY EU & IMF
A Bailout plan by several of the international communitywere :
European governments & the IMF stunned the global stockmarkets with a 750bn-uro($975bn)package
27 EU nations will together contribute 500bn-uro which will bejoined by IMF with another 250bn-uros
Major contribution by 16-nation Euro zone block promising a440bn-uros in loan guarantees
The European commission is providing 60bn-uros immediately
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THE FUTURE OF uro
The future of uro has certain threats:
Differences among European countries
Investors increasingly shunning offerings
UBS advising investors to sell uro, after the GreekDebt Crisis
Strong growth in the US & a tepid recovery in Europehas led uro lose 9% in Dec09-10
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THE FUTURE OF uro (Contd)
Foreign central banks assessing the risk of a possiblecollapse of the Euro zone
Euro zone countries likely to abandon uro to gain backcontrol over interest & exchange rates
The estimated 2009 deficit rose from 5.1% to 12.1% as
reported to the European Commission
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THANK YOU
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