EUROZONE CRISIS - FINAL

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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EUROZONE CRISIS - FINAL