Nitesh D. Bhele

(PGDM,SIESCOMS)

• The European Union (EU) is an economic and political union of 27 member states which are located primarily in Europe.

• The euro (sign: €; code: EUR) is the official currency of the eurozone: 17 of the 27 member states of the European Union (EU).

• What is a debt crisis? It can be defined as the situation where the government

has failed to pay back its debt in full. The 2010 European Debt Crisis is the most recent

and the only crisis to have its affect on the European economy on a large scale.

EUROPEAN UNION

Causes Of European Debt Crisis

• The globalization of finance• Easy credit conditions during the 2002–2008 period

that encouraged high-risk lending and borrowing practices

• The 2007–2012 global financial crisis• International trade imbalances• Real-estate bubbles that have since burst• The 2008–2012 global recession

• Fiscal policy choices related to government revenues and expenses

• Approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

EUROPEAN DEBT CRISES- PORTUGAL

History • In the period between the Carnation Revolution in 1974

and 2010, the democratic Portuguese Republic governments encouraged over-expenditure and investment bubbles through Public–private partnership.

• Funding of numerous ineffective and unnecessary external consultancy and advisory of committees and firms. This allowed considerable slippage in state-managed public work and inflated top management and head officer bonuses and wages

• Persistent and lasting recruitment policies • Risky credit, public debt creation, and European structural

and cohesion funds were mismanaged across almost four decades

Crisis

• The Gross Domestic Product (GDP) in Portugal contracted 3.30 percent in the second quarter of 2012 over the same quarter of the previous year

Portugal till 2011

The Portuguese economy

• Portugal’s economy has been weak ever since the financial crisis began in 2008, and the country has actually been in recession for more than a year.

• Portuguese government projected that the country’s economy would contract by 3.3% in 2012.

• Fiscal deficit from 3.1% to 10%• Public debt deteriorated from 68 % of GDP (in

2007) to 83 % (in 2009)• As Portuguese companies struggle to pay off their

own massive debt, it’s hard to imagine that they will be able to help pull the country out of recession

• Portugal have far more private-sector debt

Bailout

• Eurozone leaders officially approved a €78 billion bailout package for Portugal, which became the third eurozone country, after Ireland and Greece

• As part of the deal, the country agreed to cut its budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013

Other measures

• Average wage cut of 20% relative to their 2010 baseline, with cuts reaching 25% for those earning more than 1,500 euro per month

• Cuts in budget and rise in taxation• In December 2011, it was reported that

Portugal's estimated budget deficit of 4.5 percent in 2011 would be substantially lower than expected, due to a one-off transfer of pension funds

France Facts

• 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 remains at the centre of EU politics. For example, the country is the largest beneficiary of the EU's controversial Common Agricultural Policy (CAP), which costs 41% of the annual EU budget. 

• France is also very influential in the EU.

• It has 29 votes in the Council of the European Union (the same number as the UK, Germany and Italy).

• France held the Presidency of the Council of the European Union for six months from 1 July 2008.

• France is the world's fifth biggest economy.

Debt Crisis In France

• 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.

• On 1 December 2011, France's bond yield had retreated and the country auctioned €4.3 billion worth of 10 year bonds at an average yield of 3.18%, well below the perceived critical level of 7%.By early February 2012, yields on French 10 year bonds had fallen to 2.84%

• In April and May, 2012, France held a presidential election in which the winner François Hollande had opposed austerity measures, promising to eliminate France's budget deficit by 2017 by canceling recently enacted tax cuts and exemptions for the wealthy

• Raising the top tax bracket rate to 75% on incomes over a million euros

• Restoring the retirement age to 60 with a full pension for those who have worked 42 years

• Restoring 60,000 jobs recently cut from public education, regulating rent increases And building additional public housing for the poor.

• In June, Hollande's Socialist Party won a supermajority in legislative elections capable of amending the French Constitution and enabling the immediate enactment of the promised reforms.

• French government bond interest rates fell 30% to record lows, less than 50 basis points above German government bond rates.

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.

• Germany's GDP per capitawas $37,900 -- lower than in the U.S.

• Germany's growth was usually less than 1% per year.

• In 2011, GDP percentage share 27%.

for three reasons……

• Modernization of Eastern Germany, which initially cost $70 billion per year, and still ran $12 billion in 2008.

• High unemployment(9.5%) and an aging population (20% age 65+) means Germany depletes Social Security faster than can be added via payroll taxes.

• Germany managed to get its budget deficit below 3% of GDP, as mandated by the EU. It lowered fiscal spending, which it what it advocates to solve theGreece debt crisis.

Germany's Economy Benefits From Its Eurozone Membership:

• Germany benefited from its membership in the EU, and its adoption of the euro.

• Like many other eurozone members, the power of the euro meant interest rates stayed low, which spurred investment.

• In fact, many say Germany profited the most from its membership.

• This gave German companies a competitive advantage, which only improved over time.

• The resultant prosperity meant that German consumers had more money to buy more locally.

• As a result, the domestic market has recently become a more significant driver of economic growth.

• Its strong manufacturing base meant it had plenty to export to other members of the eurozone, and could do so more cheaply.

• During european greece does not have much money to payback which we have borrowed.

• Germany proposed european commissioner be appointed to supplant the Greek government .

• This indicate to suspend greek soverity and the democratic procee as the price of financial aid to Greece

• German initialy rejected raising ceiling fund of 440bn euro to but later on agreed for 500bn euros.

• German have decided to bailout gerrce by 22.4bn euros for 3 years in the ceiling fund

WHY IS GERMANY IN A DOMINANT POSITION

• Germany encouraged demand for its exports by facilitating irresponsible lending practices.

• Stagnant labor costs and relative high prices in euro countries helped more German exports

• Without these exports,Germany would plunge into depression.

• About 40 percent of German gross domestic product comes from exports, much of them to the EU..

Policy Reactions

European Financial Stability Facility (EFSF)

On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalize banks or buy sovereign debt.

European Financial Stabilization 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 27 European Union members

Brussels Agreement And Aftermath

On 26 October 2011, leaders of the 17 eurozone countries met in Brussels and agreed on a 50% write-off of Greek sovereign debt held by banks, a fourfold increase (to about €1 trillion) in bail-out funds held under the European Financial Stability Facility, an increased mandatory level of 9% for bank capitalisation within the EU and a set of commitments from Italy to take measures to reduce its national debt. Also pledged was €35 billion in "credit enhancement" to mitigate losses likely to be suffered by European banks.

CONCLUSION

•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.