What Big Emerging Markets Did the Euro Crisis Hit Hardest

8/13/2019 What Big Emerging Markets Did the Euro Crisis Hit Hardest

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hat big emerging marketsdid the euro crisis hithardest?

27/11/2012 | Emerging Markets

The crisis dealt a double blow of deleveraging and falling trade to small eastern

European economies, but big countries also suffered

The Paris-based OECD said the eurozone debt risis remained the biggest threat to the

g!oba! reo"er#$ %o!!o&ed b# the '( )%isa! !i%%*$ geo+o!itia! risk to oi! +ries$ high

unem+!o#ment undermining on%idene and emerging markets, transition to domesti soures

o% gro&th

.mong the !arge emerging markets that the OECD %o!!o&s$ (outh .%ria &as the most

a%%eted b# the eurozone risis$ udging b# a!u!ations o% the hanges in DP gro&th

ontribution due to diret e%%ets o% hanges in e+ort gro&th to the euro area in the %irst ha!%

o% 2012 om+ared to %irst ha!% o% 2011

n (outh .%ria$ this OECD indiator %e!! b# 03 +erentage +oints in the %irst ha!% o% 2012 %rom

the %irst ha!% o% the +re"ious #ear t &as %o!!o&ed b# 4ussia$ &here the ontribution %e!! b# 07

+erentage +oints$ then b# China and ndia$ &ith 05 +erentage +oints eah

ndonesia,s trade s+i!!o"er e%%et &as a!u!ated at 06 +erentage +oints &hereas %or razi!$ it

&as 02 +erentage +oints


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The a!u!ations took into aount on!# the trade s+i!!o"er e%%ets Man# ana!#sts ha"e argued

that the e%%ets &ere muh dee+er$ as the risis a!so made 8estern Euro+ean banks +u!!

mone# out o% ertain regions$ es+eia!!# eastern Euro+e$ 4ussia and the C(

HESITANT E!"#E$

ro&th has begun to +ik u+ in emerging markets but the g!oba! eonom#,s reo"er# &i!! be

)hesitant and une"en* o"er the net 2 #ears$ the OECD said in its out!ook +ub!ished on

Tuesda#

)The &or!d eonom# is %ar %rom being out o% the &oods$* OECD (eretar# enera! .nge!

urria said in a statement

Europe Crisis Threatens Emerging Markets, World

Bank Says

# (andrine 4aste!!o on 9une 12$ 2012

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9ohnn# :ootba!! and the ?C.. ;oo+ho!e

C E"erett @oo+ and the Troub!e &ith the (enate Con%irmation Proess

The euro regions debt crisis has increased risks for emerging markets from

Thailand to Turkey that also face domestic constraints, according to the World

Bank, which cut its outlook for 2013 global growth to 3 percent

The Washington!based lender predicts the worlds economy will e"pand 2#

percent this year, the same as a $anuary forecast, after gains earlier this year

were sapped by renewed market %olatility o%er &reece and 'pain (e"t years

prediction is down 01 percentage point from $anuary

)*n the immediate term, tensions emanating from the euro area are the most

serious potential risk for de%eloping countries,+ the World Bank said in its

twice!yearly report *n the 1!country euro region, )bond yields on the debt of

se%eral countries ha%e reached le%els that, in the past, ha%e been associated

with+ international rescue packages

'pain last week became the fourth nation sharing the euro to seek a bailout

since the start of the debt crisis more than two years ago, prompting a decline

in *talian bonds and e-uities yesterday on concern the nation may be the ne"t

to succumb (o region in the world would be spared if the situation in .urope

were to sharply deteriorate, according to the World Bank, which urged

emerging markets to build cushions for tougher times

Capital Flows

)The de%eloping countries in the case of a financial crisis will need all the

ammunition that they ha%e a%ailable to address that,+ /ans Timmer, the

director of the e%elopment rospects &roup at the bank, told reporters )ne
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of our concerns is that, at the moment, there are much fewer buffers, smaller

buffers in de%eloping countries than in 200+

They already feel the pain, according to the report, which says gross capital

flows to de%eloping countries shrank percent in 4ay from the month

before The -uantity of syndicated bank loans to 5ussia organi6ed and led by

.uropean banks fell by #0 percent in the si" months through 4arch 2012, the

World Bank said

*ndia last week outlined pro7ects including new ports and road to support aneconomy e"panding at the weakest pace in nearly a decade 8hina un%eiled its

first reduction in borrowing costs in more than three years

8apital outflows and increased risk a%ersion ha%e also led to currency

depreciation in many emerging markets and a drop in commodity prices,

according to the report

Remain Volatile

).%en if the current phase of tensions passes, the e"ternal en%ironment for

de%eloping countries is likely to remain %olatile and challenging,+ the World

Bank said )9oose monetary policies, and, as yet, unresol%ed fiscal and

banking! sector problems in high!income countries are likely to keep

international capital flows and business confidence %olatile+

The euro area is pro7ected to contract 03 percent this year, unchanged from

the World Banks $anuary forecast The euro area ne"t year may grow 0

percent from a pre%ious estimate of 11 percent

e%eloping economies are also facing domestic difficulties :fter leading the

world out of recession o%er the past two years, about ;0 percent of them are

operating close or abo%e their economic potential, Timmer said


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That )suggests that they will not be able to pro%ide as much an impetus to

global growth as before,+ the bank said

*nflation is abo%e long!term a%erage in nations from :rgentina to Thailand

and monetary policy remains )%ery loose+ in countries including 8hina and

*ndonesia, according to the report


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The Bank also updated a study on the impact on the rest of the world of a

more se%ere .uropean crisis *t estimates that world growth would be #

percent lower than currently e"pected ne"t year if two large countries,

accounting for 30 percent of the euro regions economy, faced a credit free6e

To contact the reporter on this story@ 'andrine 5astello in Washington at

srastelloAbloombergnet

To contact the editor responsible for this story@ 8hris Wellis6 at

cwellis6Abloombergnet

Dominique Moisi


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Dominique Moisi is Senior Adviser at IFRI (The French Institute for International

Affairs) and a professor at L'Institut d!tudes politiques de "aris (Sciences "o)# $e is

the author of The %eopo&

Full profile

Suscrie to ne articles Dominique Moisi

*un# +,- +.,+ /mail 0 "rint

/n1lish

Araic

2hinese

%erman

"ortu1uese

Spanish

/mer1in1 Mar3ets /urope "rolem

+4

4

5

55

2omments 6ie72reate comment on this para1raph "ARIS 8 From $on1 9on1 to

S:o "aulo- and all points eteen- one ord dominates all others amon1 i1

investors; %reece#

Illustration "aul Lachine

2omments6ie72reate comment on this para1raph ?ntil recentl- /urope as a sortof mirror that confirmed for the ma@or emer1in1 economies the spectacular nature of

their on success# The could contrast their hi1h 1roth rates ith /uropes hi1h

levels of det# The could oppose their positive ener1B ith the pessimism

dominatin1 /uropean minds# The ere onl too illin1 to advise /urope to or3

harder and spend less- as le1itimate pride min1led ith an understandale desire to


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settle historical scores and attenuate their le1acies of colonial sumission and

humiliation#

2omments6ie72reate comment on this para1raphCut- toda- emer1in1 countries are

1roin1 ver concerned ith hat the ri1htl perceive as the serious ris3s to their

on economies implied ecessive ea3ness in /urope- hich remains the orlds

trade leader# Moreover- /uropes malaise threatens man of these countries political

stailit as ell- 1iven the close connection 8 especiall in 2hina 8 eteen the

le1itimac of eistin1 arran1ements and the continuation of rapid economic 1roth#

2omments6ie72reate comment on this para1raphIf the crisis in /urope ere to

cause annual %D" 1roth to fall elo E in 2hina- G in India- and H in Cra=il-

these countries most vulnerale citi=ens ould e hardest hit# The ere never part

of the culture of hope-B ased lar1el on material success- that plaed a 3e role in

these countries success# If social inequalities ere to reach ne hei1hts- their

frustration and resentment could manifest itself full#

2omments6ie72reate comment on this para1raphIn that case- /urope could

suddenl ecome a ver different mirror for emer1in1 countries- revealin1- if not

accentuatin1- their on structural ea3nesses# And that is h- @ust as /urope must

save the %ree3 econom or Spains an3s at all costs- emer1in1 countries must do

hatever the can to contriute to the rescue of the /uropean econom# As /urope

has learned- the lon1er one aits- the hi1her the cost 8 and the loer the chance of

success#

2omments 6ie72reate comment on this para1raph?nfortunatel- a 1roup of

countries that are united aove all a common denial of their 1loal responsiilities

is unli3el to reach such a conclusion# Indeed- most emer1in1 countries ould al3 atthe idea of comin1 to /uropes financial rescue for several reasons#

2omments6ie72reate comment on this para1raphFirst- there is no such thin1 as a

loc of emer1in1 countries# The are not united a common vision of their future- or

a common political ideal- such as democrac in the


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importance# /urope and the ?nited States ill remain allies even if Carac3 ama-

li3e Jicolas Sar3o= in France- turns out to e a oneKterm president#

2omments6ie72reate comment on this para1raphSecond- emer1in1 countries are

more /uropes rivals than its partners# The are united onl their shared suspicion

of 2hina# In such a contet- a common lon1Kterm strate1 is etremel difficult to

conceive#

2omments 6ie72reate comment on this para1raphThe 2hinese ma proclaim that

the tend to thin3 over a lon1erB term than Americans- ho thin3 more roadl-B

and /uropeans- ho thin3 more deepl-B as a ellK3non 2hinese international

relations epert has put it# Cut- hen it comes to the /uropean financial crisis-

2hinas ehavior seems to e determined purel shortKterm tactical considerations-

even as 2hinese investments in /urope tripled in +.,,# To u half of the "iraeus

haror at a 3noc3don price ma seem more advanta1eous than investin1 in the lon1K

term consolidation of the %ree3 econom and its finances- ut is that reall the case>

2omments6ie72reate comment on this para1raphThird- emer1in1 countries shortK

term opportunism is ased on a doule distrust; toards /urope- of course- ut also-

paradoicall- toards themselves# That is- the lac3 confidence in their ailit to do

their part to save the sic3 man of the 1loal econom that /urope has ecome#

2omments6ie72reate comment on this para1raphTo e sure- this runs counter to the

triumphalism emanatin1 from Asia- in particular# 9ishore Mahuani- a leadin1

forei1nKpolic thin3er from Sin1apore- recentl proclaimed in 6ienna- at a conference

or1ani=ed m institute- that the net millennium ould e Asian# And et one

senses amon1 elites from emer1in1 countries somethin1 a3in to eistential dout-hich the /uropean crisis has served to reinforce# This insecurit manifests itself in

man as; from the accumulation of liquid ealth as insurance a1ainst forei1n and

domestic uncertainties to the choice of man- if not most- to educate their children

aroad#

2omments6ie72reate comment on this para1raphIn fact- the sic3 man 8 undenial

/uropean- if not


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stren1th of his on natural defenses; democrac and the rule of la# That is h the

current /uropean crisis ma ell prove to e a crucial test for emer1in1 countries that

are more dnamic than /urope economicall- ut ultimatel more fra1ile politicall#

Read more at http;77#pro@ectKsndicate#or17commentar7emer1in1Kmar3etsKK

europeKprolemTC?l4DN?C=*aE#OO

The Euro Crisis: A summary

NOTE* If you are using Google Chrome you can install Google Dictionary in the

'herramientas-extensiones' to look up words very simply.

By now, its highly unlikelythat you have not heard something of the European debtcrisis. For most people it may be difficult to comprehend exactly what is going on,

when it started, who could be to blame and what, if anything, can be done? Here,

well try to answer those questions in laymans terms(non-technical terms).

-Highly unlikely,muy improbable- -debt crisis, crisis de deuda - -to blame, culpable-

The Euro Zone

On January 1, 1999, the euro was introduced as the new currency for use in the

European Union. To join the currency, member states had to qualifyby meeting the

terms of the treaty in terms of budget deficits, inflation, interest rates and other


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monetary requirements. Of the 27 member states of the EU, currently the euro is

a shared currencyused by 17 of them. These 17 countries are referred to as the

euro zone. In early stages, the euro was used only inthe stock markets, forfinancial transactions between banks and for cashless shopping (using checks or

credit cards). The euro notes and coins were introduced in January of 2002.

-qualify, clasificar-budget deficits, dficit presupuestario- a shared currency, moneda

comunitario- the stock markets, mercado burstil/accionario-

Benefits of a shared currency

The collective thinking between euro zone governments was that a shared currency

would be beneficial for trade ties and tostrengthenthe economies of euro zone

members. Specifically, the euro zone would make it easier for small economiesto

borrowmoney from international financial markets and investors at a much lower rate

than had been possible for them in the past. Initial guidelinesrestriced governmentsfrom borrowing more than 3% of their economiesoutputannually in an effort to

prevent euro zone members from accumulating too much debt, and based on the

assumption that all members were capable of repaying such debt.

strengthen, fortalecer-borrow, tomar prestamo-guidelines, pautas--

input/output, aportacin/ producin-

So, what happened?

First of all, many euro zone members did not adhere/stickto the guidelines for

borrowing which were in place. Italy and Germany were the first to break the 3%

borrowing rule, with France not far behind. Of the largest economies in the euro

zone, only Spain kept to the guidelines until the financial crisis of 2008. And what

about Greece?

Greece

Greece has been to the forefront of the headlinesof late. Not only did

Greece neverstick to the 3% borrowing limit, but they also adjusted their economic

data, which enabled them to get into euro zone in the first place. With access to

borrowed money at low interest rates, it is said that Greece went too far spending

money on such major projects as the 2004 Olympic games in Athens. When the

financial crisis hit in 2008, Greeces high rate of unemployment resulted in lost tax

revenuesand increased public spending on benefits. By 2009, Greece admitted that

their debt amounted to 113% of their GDP, which is almost double the euro zone limit

of 60%.

-headlines,los titulares-tax revenues, ingresos de impuestos-

Bailouts

By 2010, the euro zone members and the International Monetary Fund agreed to a

100 billion eurobailout packageto help Greece. In return for this, the Greek

government planned tax increases and deep cuts in pensions and public service

pay. It is reported that Greece has not implemented the planned changes.

Therefore, the need for obligatory terms is under greater demand.


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Because of the falling euro and as a result of the financial crisis, other weak

members of the euro zone have been faced with the inability to repay their debts. In

November of 2010, the EU and IMF agreed to an 85 billion euro bailout package tothe Republic of Ireland, followed by a May 2011 bailout of 78 billion to Portugal. In

July of 2011, a second bailout package of 109 billion euros was agreed to for

Greece. Due to increased fear that any of these countries coulddefault on their

public debts, Portugal, Ireland, Italy, Greece and Spain have been given the

unfortunate acronym of PIIGS.

-bailout package, rescate financerio

Spain and Italy

Since the economies of Spain and Italy are considerably larger than that of Ireland

and Greece, bailing them out would present such an impossibility that the entire

future of the euro zone is at stake. In these countries in particular, governmentborrowing is not even the main cause of their debt crises. Both Spain and Italy had

large debts before the crisis of 2008, and it was due to borrowing by the private

sector (mortgageborrowers and companies) rather than by the government. So

what does this mean? Well, it means that even if the governments of Spain and Italy

dont break the 3% borrowing rule in the future, there is still the possibility that they

will be faced with the same crisis again.

- at stake, en juego-mortgage, hipoteca-

Fear of default

Should any of these key members of the euro zone default on their loans, the global

economy would be in real trouble. Banks and other financial institutions worldwide

have invested in the debt of these countries and default would amount to significant

financial losses, which couldtriggera global domino effect producing the equivalent

of a financial tsunami. Already, some private banks holding Greek debt have had to

accept losses of up to 70%. Default by the larger economic members of the euro

zone would be devastating.

- default, impagos-, en juego-trigger, provocar-

No Simple Solutions

Reintroduction of national currency

Although extremely difficult to implement due to restrictions imposed by the original

terms of EU membership, it has been suggested that some nations return to their

original currency. This could be one of the only solutions for the most heavily

indebted members. However, this could cause significant problems for the European

economy and could quite possibly lead to the collapse of the euro altogether.

Further spending cuts

Should Spain and Italy further cut spending, the European recession would likely

worsen, resulting in increased unemployment and lower wages. With lower wages,

the people will likely cut their own spending and be unable to pay off their own debts.

Ensuing unrest would increase timidity in the financial markets.


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No spending cuts

On the other hand, if Italy and Spain do not increase their spending cuts, the amount

they need to borrow will continue to explode. Their economies will be too weak tosupport their debt and because of the size of the debt, other governments will be

unable to bail them out. Complete financial collapse could be the result.

spending cuts, recortes de gastos

Germany to the rescue

As the key player in the euro zone, other members look to Germany for help. While

Germany does support the continuation of the euro, they do not want to use their

own capital to bail out the euro zones weakest members. Germany has suggested

imposing a hard cap limit restricting the amount an EU nation would be able to

borrow. This idea has come under substantial criticism.

The European Stability Mechanism

Currently, the most promising solution appears to be the European Stability

Mechanism (ESM). Created in February of 2011, the ESM is a bailout fund created

by euro zone finance ministers. It will hold 500 billion euros, and euro zone members

who cant get investors to buy its debt can apply for loans. Nearly half the money in

the ESM comes from Germany and France. A second version of the treaty

establishing the ESM was signed on February 2, 2012, and pending full agreement

from all euro zone members, this fund is expected to be running by July of 2012.

While the financial crisis in the euro zone continues to unfold, the world should

continue to keep its collective eye on Spain and Italy, as well as the route thatGreece will take to resolve its own economic catastrophe. The ripple effectof a

major economic collapse in the euro zone will be far reaching. Hopefully, this makes

the complexities of the crisis a little more understandable


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.uropean ebt 8risis

Aanne!ore :oerster/!oomberg ?e&s

Developments

Feb. 14 .uropean economiesshrank in the fourth -uarter at their fastest rate since the depth of the

financial crisis in 200=, new data showed, with both strong and weak countries falling short of

e"pectations >nemployment in &reece hit a record high of 2 percent

Jan. 10 The .uropean 8entral Bank and the Bank of .nglandboth left their interest rates at record

lows,as officials said the euro6one economy remains weak but may be stabili6ing

Jan. 8 >nemployment in the euro 6onerose to a new high in (o%ember,according to data that also

showed that the troubles in the 1!nation currency bloc were straining its strongest member,&ermany

Dec. 13


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Dec. 12:fter a frantic two days of ca7oling and arm!twisting, &reece finally persuaded local banks and

foreign in%estors tosell back about 32 billion euros worth of discounted bonds, a step that could erase

20 billion euros of debt from the countrys disastrous balance sheet and clear the way for a newinstallment of aid

Crisis at a Glance

*n the wake of the global economic meltdown of 200?, the .uropean >nion has been struggling with a

slow!mo%ing but unshakable crisis that has underscored the flaws behind the common currency, the

euro The turmoil has toppled go%ernments, pushed a number of countries into a second recession and

e"posed deep rifts between regions

:s the crisis headed toward its third year, it remained unclear whether it would end up unra%eling oraccelerating the continents ;0 years of progress toward gradual unification, as .urope teetered between

a breakup of the euro and stronger measures that would create tighter fiscal and political bonds


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But markets appeared to belie%e that it would go into effect if needed, and that 'pain in particular would

sooner or later re-uest some sort of aid These factors produced a rare calm spell that in ctober ga%e

.uropean leaders some breathing room to consider their ne"t steps toward integration without beingdri%en by fear of impending calamity

*n (o%ember, new conflict arose when the *nternational 4onetary nion, the *nternational 4onetary


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2012, the troika engineered a default by &reece on most of its pri%ate debt and a second bailout package,

of 130 billion euros, in e"change for new rounds of budget!cutting and pri%ati6ation

But by that time a wa%e of anger was building against austerity *n 4ay 2012,


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The seemingly endless series of euro 6one crises has.uropean officials pushing for a banking unionthat

would watch o%er and bind together the currency groups faltering financial institutions

But on the ground in the euro 6one, there seems little appetite for such a compact right now *n fact,

banks and their national regulators, an"ious about the &reek elections and 'pains hastily arranged

bailout, are beha%ing more parochially than e%er

That poses a threat to the interbank lending across borders that is crucial to maintaining li-uidity D the

free flow of money that is the lifeblood of the global financial system


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ac!%ro#nd

The debt crisis first surfaced in &reece in ctober 200=, when the newly elected 'ocialist go%ernment of

rime 4inister&eorge : apandreouannounced that his predecessor had disguised the si6e of the

countrys ballooning deficit

But its roots of the crisis go back further, beginning with a strong euro and the rock!bottom interest

rates that pre%ailed for much of the pre%ious decade &reece took ad%antage of this easy money to dri%e

up borrowing by the countrys consumers and its go%ernment, which built up 00 billion in debt

*n 'pain and *reland, go%ernment spending was kept under control, but easy money helped turn real!

estate booms there into bubbles D a process helped in *relands case by the aggressi%e deregulation of its

banks that helped draw in%estment from around the world :fter the bubble burst, the *rish go%ernmentmade the banks problems its own by guaranteeing all their liabilities

:fter the e"tent of &reek debt was re%ealed, markets reacted by sending interest rates up not only for its

debt, but also for borrowing by 'pain, ortugal and *reland

*n early 2010, the .uropean >nion and the *nternational 4onetary nion and the *nternational 4onetary


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Conta%ion Fears (et#rn

By the summer of 2011, it was clear that &reece would need a second big bailout package, and worries

rose again about contagion, as *taly and 'pain saw the interest rates charged on its borrowing rise

steeply The .uropean 8entral Bank responded by buying large amounts of *talian and 'panish bonds,

as leaders put together a plan that would increase the powers of the .uropean


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The response to the package was not what leaders hoped@ in%estors began dri%ing up interest rates in

*taly and 'pain, economies too large to be bailed out by the new arrangements :t the same time, the fall

in confidence threatened to undermine the big banks in those countries, whose large holdings ofgo%ernment bonds began to lose %alue

n :ug , 2011, the.uropean 8entral Bank saidit would)acti%ely implement+ its bond!buying

programto address )dysfunctional market segments,+ a statement interpreted as a sign that it will

inter%ene to pre%ent borrowing costs for *taly and 'pain from becoming unsustainable

+owin% Closer "at$s

To address the growing debt crisis,8hancellor :ngela 4erkel of &ermany and resident (icolas 'arko6y

of


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4eanwhile, leaders groped for a way to e"pand the effecti%e firepower of the bailout fund, the .uropean


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e"traordinarily easy terms of 1 percent interest for a three!year loan :nalysts suggested that the Bank

had hit upon an indirect method of stopping the market spiral threatening *taly, 'pain and other

go%ernments, by flooding banks with money they could use to lock in guaranteed profits by buyingso%ereign debt

Greece Dod%es De&a#lt Wit$ a econd ailo#t

By early 2012, the sense of crisis had returned, as the leaders of nions plan of ta" increases, spending cuts and now wage cuts has pushed the country

into a deep recessionC the economy shrunk by almost 12 percent between 200= and 2011 and is e"pected

to shrink by up to ; percent in 2012 The crisis also stripped &reeces political center, weak to begin

with, of its last shreds of political legitimacyWith unemployment at 21 percent, businesses closing,

credit scarce and the proposed new wage cuts e"pected to further decimate the shrinking middle class,

the hard left and e"treme right are rising

*n early


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&reece must persuade, if not actually force, its pri%ate sector bond holders to accept a higher than

e"pected loss of more than 0 percent on their holdings to reduce &reeces debt stock by the targeted

amount of N100 billion

The agreement included a reduction in interest rates on loans from &reeces first rescue in 2010, and

.uropean central banks foregoing profit on their &reek bond holdings, that allowed the deal to satisfy a

mandate set by the*nternational 4onetary


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Down%radin% Frances Credit (atin%

n $an 13, 2012, 'tandard I oorsstripped nion countries because of the crisis &ermanyand the (etherlands, which were on the original list, did not recei%e a downgrade

*n addition to *taly and ortugal, two nations D 'pain and 8yprus D had their ratings cut by two

notches :ustria, 4alta, 'lo%enia and 'lo%akia, along with


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The challenge for .urope is to keep *taly and 'pain from ending up like &reece and ortugal, whose

borrowing costs rose so high in 2011 that it signaled real likelihood of default, making it impossible for

the go%ernments to find buyers for their debt 'ince then, &reece and ortugal ha%e been reliant on thefinancial backing of the.uropean >nionand the *nternational 4onetary nited 'tates did not depend solely on go%ernment!backed entities like

the


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message appeared increasingly to be that countries cannot cut their way to fiscal health, but need

growth, too

*n 4ay, %oters in


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/$e C teps 'p

*n $uly 2012, 4r raghi said that the .uropean 8entral Bank would take steps to ensure the future of

the euro, including buying bonds to stabili6e what he described as unwarranted high interest rates The

announcement came without details, but was enough to keep markets calm through the rest of the

summer

*n 'eptember, the bank outlined a framework for action

8alled utright 4onetary Transactions,the program will focus on purchasing go%ernment bonds with

maturities from one to three yearsThe .8B will not set a limit on how much it buys and will not insist

on senior creditor status, which means being paid ahead of others in the e%ent of a restructuring 'uch

status worries other in%estors who fear they would face disproportionate losses

But countries wanting help will ha%e to ask for it and will then need to meet strict conditions That

presents a crucial problem for 'pain, which is at the heart of the crisis and whose go%ernment worries

that such a formal re-uest would constitute a political humiliation

While the .8Bs announcement has undoubtedly bought time for the single currency area, analysts

said it needed to use that time to build more credible structures in order to restore market confidence,

including ambitious plans to construct a banking union

The e"perience of the euro 6one crisis so far is that, whene%er pressure from the financial markets isreduced, politicians postpone difficult decisions arado"ically, that could mean that the .8Bs

inter%ention will make agreement on crucial changes seem less urgent

The continents bailout fund, the .uropean 'tability 4echanism, will make bond purchases in the

primary market, that is, directly from go%ernments The bank will make its purchases in the open, or

secondary, market *t will )sterili6eG its purchases by selling an e-ual amount of other bond holdings, a

step meant to ease inflation fears by keeping the si6e of the money supply stable

4r raghi 7ustified the program on the grounds that high interest rates based on market fears of a

financial crisis rather than on economic fundamentals interfered with the banks ability to use monetarypolicy to keep prices stable But his critics, most notably the head of &ermanys powerful central bank,

said the plan amounted to printing money to support go%ernment spending, something they said the

bank was forbidden from doing by its charter

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tPcrisis7inde#html
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The Euro Crisis

Author: Edmond Alphandry : Chairman of the Board of CNP InsuranceFormer Minister of Economy

SUMMARY:THE EURO ZONE STATES ARE EXPERIENCING AN ECONOMIC CRISIS THAT RAISES

CERTAIN QUESTIONS. FIRSTLY THE AUTHOR REMINDS US OF THE REASONS FOR THEINTRODUCTION OF THE SINGLE CURRENCY AND THE INSTITUTIONAL STRUCTURE OF THE

EURO ZONE BEFORE THE START OF THE DEBT CRISIS. HE THEN PRESENTS THE ECONOMIC

RESULTS OF THE FIRST TEN YEARS OF THE EURO, MARKED BY GOOD RESULTS AS FAR ASGROWTH AND INTERNATIONAL CREDIBILITY ARE CONCERNED; HE THEN ILLUSTRATES THATTHERE IS ALSO AN INCREASING DIFFERENCE IN COMPETITIVENESS BETWEEN THE NORTH

AND THE SOUTH, WHICH DOES NOT SEEM DIRECTLY DUE TO THE SINGLE CURRENCY PER SE

BUT WHICH DOES CALL FOR COMMON BUDGETARY DISCIPLINE RULES. FINALLY THE AUTHORPRESENTS THE FEATURES OF THE SOVEREIGN DEBT CRISIS, ITS EFFECTS ON THE FINANCIALSECTOR AND ON THE REAL ECONOMY, AS WELL AS THE MEASURES TAKEN TO SETTLE IT.

Introduction:

As a Minister for the Economy in France in the 90s I ha!e "een in!ol!ed in the march to#ardsthe euro$ %hen the euro #as launched in &999' I created the Euro(0 )roup "ecause #ith otherEuropean personalities I considered at that time that the creation of the European currency #asan unfinished "usiness' and that loo*in) ahead #e mi)ht hardly a!oid tra!ellin) on "umpyroads$ +his is precisely #hat happened ten years later$ I ha!e to add that in my capacity of

Chairman of CNP Assurances' the leadin) French life insurance company' I am no# follo#in) thecurrent euro crisis from the !ie#point of a pri!ate in!estor$

,oo*ed from a"road' the euro-one is too often descri"ed as "ein) on the !er)e of collapse$ +hisis certainly an outra)eous picture$ %e all *no# that if there #ere a "rea*do#n of the euro' thenno country in the #orld #ould "e spared$ Conse.uences #ould "e tra)ic e!ery#here$ I do notthin* there is any pro"a"ility at all of a "lo# out of the euro-one$ +here are certainly pro"lems#hich I #ill e/amine #ith you today$ But one has to *eep in mind that the European economyremains stron)$ Its industry' its financial sector and its commercial net#or* remain in )oodhealth and competiti!e$ As far as the outloo* of the euro crisis is concerned' euro-one )rossdomestic product contracted 0$12 in the last .uarter of 30&&$ And it is mo!in) closer to arecession 4defined as t#o successi!e .uarters of ne)ati!e )ro#th5$ But one can remainconfident$ +here are si)ns 4#hich I #ill descri"e later5 that the situation has si)nificantlyimpro!ed since the "e)innin) of this year$ +he ne# stance of ECB monetary policy' the 6fiscalcompact6 in preparation in the +reaty' the "uildin) of a si)nificant fire#all' the last "ailout

a)reement on 7reece of Fe"ruary 3&st' are creatin) a momentum #hich may herald a return toa more sta"le and rosier en!ironment$

,et me today raise for you three fundamental .uestions #hich #ill help me to )i!e you ano!erall !ie# of the current euro crisis8&:

&$ %hy ha!e European so!erei)n states' each of them #ith different economies and policies'decided to adopt a common currency

3$ ;o# did the euro perform durin) its &0 first years' from &999 to 3009

1$ And a"out the euro crisis itself: #hy this crisis ;o# did it e!ol!e And ho# did #e face it
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1. ORIGIN OF THE EURO


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Enshrined in the Maastricht +reaty and later detailed 4in &99=5 in the socalled 6S(/$1$(y '#G&*6(h P(6 #ere the t#o ceilin)s of 12 of fiscal pu"lic deficit to 7P and ?02 of pu"lic de"tto 7P ratios' #hich each Mem"er tate #as re.uired to a"ide "y$ But due to poor enforcement

procedures' these rules ha!e "een !iolated' e!en "y 7ermany and France$ %orse' durin) the#orld financial crisis in 300=3009' in order to a!oid the #orld economy to fall into a depression')o!ernments #ere incited "y international "odies 4the IMF or the 7305' in the pure Heynesiantradition' to e/pand pu"lic e/penditures and accept' at least temporarily' hi)her "ud)et deficits$

No #onder that in Europe' as you see in the )raph' there is an up#ard mo!e in the rate ofpu"lic de"t increase after 300=$ It is tellin) that this acceleration is more pronounced in theperipheric countries #hich later on ha!e "een hit "y the euro crisis$

,et us no# ha!e a loo* at the performance of the euro since its inception in &999$ +#o periodsneed to "e considered: from &999 to 3009' the euro performed remar*a"ly #ell' #hereas sinceearly 30&0 the euro-one entered into a crisis #hich is less a"out the euro itself than a"out thepu"lic inde"tedness of some of its Mem"er tates$

2) THE SUCCESSFUL EARS: 1!!!"2##!

&$ urin) its first decade of e/istence' the European currency fared remar*a"ly #ell: itsinception #hich #as a perilous e/ercise too* place #ithout any hitch$ urin) all this period' theprice le!el remained sta"le@ the !alue of the euro on the forei)n e/chan)e remained stron)$ Interms of economic )ro#th' the euro-one economy compared fa!oura"ly #ith the other


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3$ No# if you loo* inside the euro-one' you #ill o"ser!e interestin) disparities$ First' in terms of"alance of payments' there is a clear di!ide "et#een countries of the north of the euro area47ermany' Austria' +he Netherlands' Bel)ium and Finland5 #hich post a 4risin)5 current accountsurplus and countries of the 6outh plus Ireland6 4France' Italy' pain' 7reece' Portu)al'Ireland5 #hich ha!e a current account deficit$


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Clearly' countries in the south ha!e "een li!in) "eyond their means$ By spendin) more thanthey produced' they )a!e "irth to a fundamental dise.uili"rium inside the euro-one #hich is atthe core of the current crisis$

+#o e/planations to this phenomenon can "e dra#n from "oth sides of the macroeconomice.uili"rium:

D

D But there #as also another ori)in #hich can "e found on the supply side: these currentaccount disparities reflect also discrepancies in competiti!eness$Gou can see on the )raph that #a)es ha!e risen much faster in countries from the 6outh plus

Ireland6 than in 7ermany$


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+o #hat e/tent is the euro to "lame for this di!ide +his .uestion )oes to the heart of thede"ate on the sin)le European currency$ For my part' I "elie!e that one of the main inno!ationsthe euro has introduced has "een the elimination of the e/ternal constraint for the Euro-onetates$


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sector' the real economy$

$.1 The so&erei'n de(t crisis

Euro-one Mem"er tates #hich posted hi)h fiscal deficits and hi)h or increasin) le!els of pu"licde"t started to raise serious concerns a"out sustaina"ility of their pu"lic finance 4see )raphs5$7reece #as the first country #hich durin) the sprin) of 30&0 forced the European nion to putin place an assistance mechanism$ +he .uestion that needs to "e addressed is to e/plain #hycountries of the euro area #hich fi)ures accordin) to international standards #ere no #orsethan in other countries outside the euro-one 4the ' the H5 suffered lar)e sales of treasury"onds #hich enlar)ed the spreads of their interest rates' and forced the European nion tointer!ene either in the frame#or* of the European assistance mechanism 4EFF5 47reece'Ireland' Portu)al5 or throu)h the purchase of so!erei)n "onds "y the ECB on the secondarymar*et 4pain' Italy5$


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In an insi)htful paper 83' Paul de 7rau#e and Guemi Li point out that the countries #hichsuffered a sur)e of their spreads #ere precisely those #here durin) the first decade of the eurothe so!erei)n ris* had "een underpriced$ Mar*ets o!erreacted to this ris*' leadin) to #hat Paulde 7rau#e and Guemei Li call a 6"ad6 e.uili"rium: compared to a 6)ood6 e.uili"rium #here anincrease in interest rates is a disciplinary incenti!e for the country to )o "ac* to its

6fundamentals6 4throu)h reduction of its pu"lic and pri!ate e/penditures5' in a "ad e.uili"rium'this rise leads a country li*e 7reece in a self fulfillin) process a#ay from its 6fundamentals6' dueto an increase in pu"lic deficit caused "y a "uiltin sur)e in interests payments and a fall inta/es induced "y the contraction of economic acti!ity$

+here are !arious e/planations to this ris* o!erpricin):

D First' it does not seem a"normal that after a lon) period of ris* underpricin)' the mar*etstarts to o!erreact in the opposite direction #hen fi)ures start to "e #orrisome$

D econd' contrary to stand alone countries 4the H' the A5' the a"sence of a Central Ban* asa potential lender of last resort on so!erei)n "onds enhances the ris* of default$ +hisphenomenon appears clearly #hen #e compare the situation in pain and in the H 4see)raphs5 as Paul de 7rau#e ri)htly points out$
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;ence the necessity in order to fi)ht conta)ion in the euro-one 4presently to Italy and pain5to "uild fire#alls of a si)nificant si-e$ +he European nion is presently tryin) to "e capa"le tomo"ili-e up to & trillion not only throu)h the current European Financial ta"ility Facility4EFF5 and the ne# European ta"ility mechanism 4EM5 "ut also than*s to internationallenders li*e the IMF$ +here is a de"ate "et#een 7ermany and all other Mem"er tates4includin) other AAA countries5 a"out the si-e of this fire#all$ But anyho#' there is a consensus


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that this is a maor tool a)ainst the crisis$Ne!ertheless the "est strate)y to fi)ht this sur)e in the spreads is to incite countries to put theirhouse in order$ i)nificant pro)ress has "een made in this respect in the euro area$ In all the

countries hit "y the crisis 4Ireland' 7reece' Portu)al' pain and Italy5' )o!ernments committedto fiscal rectitude ha!e recently "een put in place$ +heir endea!our is already "earin) fruit: selffulfillin) mo!ements play on "oth sides$ %hen mar*ets thin* the )o!ernment to "e moresol!ent' "orro#in) costs fall 4see )raph5 "ecause it is unli*ely to )et "an*rupt$ In Italy thetechnocratic )o!ernment led "y Mario Monti has "een a"le in a matter of a fe# #ee*s too!erhaul the pension system' li"erali-e a raft of monopolistic industries and crac* do#n on ta/e!asion$ As you see' this country ten year "ond yield #hich #as a"o!e =2 in the end of 30&&has dropped in a matter of #ee*s to ($(2$ +here is also relief in pain #hich has seen a sharpdrop in its 3year treasury "ond' #hereas Portu)al is continuin) to suffer despite its endea!ourto reduce its fiscal deficit' to mo!e decisi!ely on its pri!ati-ation pro)ram and to en)a)e ins#eepin) social reforms$ Ireland is the "est pupil in class$ Its a"ility to meet deficit reductiontar)ets and its return to economic )ro#th dri!en "y its e/ports ha!e impressed the mar*ets$And it is already preparin) for an e/it from the EIMF assistance pro)ram at the end of 30&1$+he yield on ( year Irish "onds fell from &2 4Luly 30&&5 to 2 4Fe"ruary 30&35$

7reece #hich accounts for no more than 12 of the euro area 7P remains the #ea* spot of thiso!erall comfortin) picture$ In spite of si)nificant impro!ements #hich you can see on the 1)raphs #hich ha!e "een )i!en to me "y the 7ree* Prime Minister' ,ucas Papademos' #hom I!isited in Athens on Fe"ruary 3nd' confidence is still lac*in)$espite a ne# austerity pro)ram comprisin) a cut of 332 in the minimum #a)e' a reduction of)o!ernment o"s' a free-e of all salaries' there still remains a dou"t on the commitment of the7ree* political class to fiscal rectitude and structural reforms$


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"y Lean PisaniFerry81$

+he Irish case sho#s that despite pro)ress in the panEuropean "an*in) super!isionarchitecture 4#ith the creation of the European Ban*in) Authority and the European ystemic>is* Board5' there is still a de!ice missin) at the European le!el to ta*e care of the "ail out of anational "an*in) sector #hich "an*ruptcy may entail a systemic ris* for the #hole euro area'#hen the country does not possess the fundin) capacity to "ear the "ail out "y itself$3$ My second comment is a"out the recapitali-ation of European "an*s$In order to stren)then the "an*in) sector' policy ma*ers are draftin) re)ulatory rules across theE *no#n as Basel III$ ,ast summer' fearin) an insufficient resilience of the European "an*in)sector to the euro crisis' the European Ban*in) Authority' under the pressure of the IMF' forcedthe European "an*s to increase their capital ratio' accordin) to a timin) #ell in ad!ance to theBasel III a)enda$ +his increase in the capital of the "an*s #as already under#ay in 30&& assho#n in the follo#in) ta"le$
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I do thin* that this insistence' e!en throu)h perfectly ustified' #as illscheduled$ It has ledmany "an*s to start a process of reducin) the amount of credit lent to the economy at a time#here the euro-one #as already slo#in) do#n' there"y raisin) the prospect of a recession' the#orst scenario that can "e ima)ined for the euro crisis$ %hich leads me to the third dimensionof the crisis' #hich is a"out the real economy$

$.$ The re*+ econo,-

,ate last year Euro-one industrial production contracted sharply' possi"ly' heraldin) a euro-onerecession$ +here are at least three reasons for this do#nturn:

1)As mentioned earlier' an early ti)htenin) of "an* re.uired capital ratios #hich ha!e

contri"uted to put the euro-one economy on the !er)e of a credit crunch$

2)+he ne)ati!e impact of economic policies follo#ed in peripheric countries #hich led some ofthem in recessionary territories 47reece' Portu)al' Italy and pain5$

$)+he rather relati!e strict monetary policy of ECB as compared to other Central Ban*s 4theFE' the Ban* of En)land' the Ban* of Lapan5' #hich can "e o"ser!ed on the )raph #hich )i!esthe *ey inter!ention rate tar)et of the main Central Ban*s:

+he e!olution of the crisis and the near "rea*do#n in trust last fall lead the ECB to inter!ene$After the ecem"er 9th European ummit #here Mem"er tates committed themsel!es to si)na +reaty to respect fiscal attitude' the ECB too* a decisi!e step: instead of focusin) on "ond"uyin) pro)ram' on ecem"er 3&' 30&& the ne# President of the ECB' Mario ra)hi' launched alon) term refinancin) operation 4,+>


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Christmas' (31 "an*s "orro#ed an amount of 9 "illion$ +his decision #hich #as permitted"y the adoption of the ne# 6%$-1 *+(6 "indin) euro-one politicians to stron)er rules onpu"lic finances pro!ided a #all of money #hich' as Mario ra)hi ri)htly said' 6 !*$#"# 7*&,

7*& &"#$( &)'h6$ It also contri"uted to reducin) the pressure on the so!erei)n de"t mar*etsof peripheric countries' many "an*s usin) this cheap li.uidity to underta*e carry tradeoperations on these treasury "onds$

By reducin) in a first mo!e last fall its tar)et rate of (0 "asis points' then "y launchin) this,+>< operation' the ECB has em"ar*ed into a monetary policy #hich is in my !ie# more in line#ith the needs of the euro-one$ For the euro area to cope efficiently #ith the euro crisis' theri)ht policy mi/ is presently to couple an una!oida"le restricti!e fiscal stance #ith a moreaccommodati!e monetary policy$ I recently spo*e in a!os #ith Nouriel >ou"ini' 4#)//"#8M$-("& D**85' and #e at least a)reed on that point that the euro-one cannot afford to pursuea monetary policy #hich is more restricti!e than in the ' in the H and in Lapan$ In thisrespect' it is interestin) to notice that the Me/ican President' Mr$ Calderon' #hose country is inchar)e of the 730' is pu"licly ad!ocatin) for a #ea*er euro$

Conc+usion:

,et me conclude this presentation "y a comment on the euro itself$ +he euro crisis led manyeconomists' commentators and e!en politicians to predict that the euro-one #ould "lo# out andthat the European currency #ould e!entually disappear$

%hat #e o"ser!e today is that if the crisis is certainly not o!er' the landscape ne!ertheless hasdramatically chan)ed$ +he mood today is much less pessimistic$ Ne# 7o!ernments areunderta*in) coura)eous and painful policies$ espite all the sufferin)' none of these Mem"ertates e!er contemplated the prospect of their country lea!in) the euro$ ,oo* at 7reece$ %henI #as in Athens a fe# days a)o' I reali-ed that the )reat maority of the 7ree* people did not#ant to "e out of the euro area and #ere ready to accept the sacrifices #hich #ere necessaryfor them to stay in the euro area$

+he current crisis is pro!in) the resilience of the European currency: it remains attracti!e notonly to states inside the euro area' "ut some in its periphery are still *noc*in) at the door$

In 3000' shortly after the launch of the euro' I #rote a "oo* ar)uin) that countries adoptin) thecommon currency should "e forced' due to the euro' to underta*e the necessary reforms$ +enyears later' structural reforms concernin) the pensions system' the la"our mar*et' competitionin many sectors' pri!ati-ation' reduction of the si-e of the pu"lic sector' are under#ay orplanned in all the euro area countries #hich are in need for them$ If durin) the first ten years ofthe European currency the euro alone could not "e a sufficient tri))er' the crisis of the euro-one' precisely "ecause it #as constrained "y the discipline imposed "y the common currency'is forcin) all the Mem"er countries to do their home#or*$ And there is no dou"t that at the endof the day all of them #ill "e more competiti!e' more ro"ust and they #ill end up #ith aneconomic' fiscal and social frame#or* more efficient and "etter fitted to the harsh rules of)lo"ali-ation$

At the European le!el' the crisis forced Mem"er tates to stren)then their common )o!ernance$

%ith the adoption of the Euro Pact' they are enhancin) multilateral sur!eillance amon) them$+hey ha!e also desi)ned ne# tools to fi)ht the crisis and to pro!ide the necessary assistance tocountries in need of help$ And Article I of the ne# +reaty under adoption' intends precisely to6-(&"'2(h"' (h" "*'*$ +$11& *% E*'*$ '# M*'"(&y U'$*' /y #*+($'2 -"( *% &)1"-$'("'#"# (* %*-("& /)#2"(&y #$-$+1$'" (h&*)2h %$-1 *+(, (* -(&"'2(h"' (h" **$'($*'*% (h" "*'*$ +*1$$"- '# (* $+&*!" (h" G*!"&''" *% (h" ")&* &"6$

Lean Monnet' the foundin) father of the methodolo)y of the European construction' prescientlyo"ser!ed in his 6M"*$&-6 1( years a)o: 6(h" E)&*+"' *'-(&)($*' $- *!$'2 h"# #)&$'2&$-"- '# $( 6$11 /" (h" -) *% (h" -*1)($*'- /&*)2h( /*)( $' *"& (* *!"&*" (h"6$


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In order to put a definiti!e stop to the systemic dynamic #hich has desta"ili-ed the euro-one' isit enou)h to institute a set of rules that e!ery country should ha!e to adhere to I am "elon)in)

myself to the school of thou)hts #hich thin*s that a )enuine' .uantum leap for#ard is neededto esta"lish federal structures to)ether #ith economic po#er at the euro-one le!el under thedemocratic control "y parliamentary institutions$ %e ha!e to thin* this throu)h #ith the !isionand am"ition that the seriousness of the crisis commands$ But #e must ac*no#led)e that asi)nificant part of the tas* is already under#ay$

8&peech )i!en at >enmin ni!ersity of China Beiin)' Fe"ruary 3?th 30&383Paul de 7rau#e' Guemei Li' 6Mispricin) of o!erei)n >is* and Multiple E.uili"rium in theEuro-one6' unpu"lished' ,eu!en' Lanuary 30&3$81Lean PisaniFerry : 6+he Euro Crisis and the Ne# Impossi"le +rinity6' Brue)el Policycontri"ution' Lanuary 30&3$

Pu"lishin) irector: Pascale L


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INTRODUCTION: The eurocrisis explained

Feelin1 nervous aout pain1 the ills> Anious> Stressed aout mone> Qoure in

1ood compan- ecause thats @ust ho the euro=one feels#

Its difficult to 1et to 1rips ith the financial crisis#


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9e factor Jo# , cheap det#

$i1her interest rates meant that /urope as suddenl facin1 a sustantial det#


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B- ou as3#


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As spendin1 reduces across the euro=one- economies e1in to contract (1et smaller)#

This means that the 1overnment has a smaller income and dets ecame harder to

repa# To fund repaments- the 1overnment has to 1et the mone for repaments

elsehere# In most cases the funds are raised via austerit cuts#

AusteritB simpl means that 1overnments rei1n in their spendin1 in the folloin1

areas; defence- state pensions- ta credits- the @osee3ers alloance- child enefits-

housin1 enefit and income support- as ell as prisons- roads and motoras-

healthcare- education and the arts# It also raises taes and cuts state salaries# These

savedB funds are then redirected toards loan repaments#

9e factor Jo# ; Austerit stifles 1roth

Austerit is ver unpopular- ecause it ma3es life ver hard# It also divides people

into to camps; supporters (ho ar1ue that austerit is the est lastKditch solution to

reduce det) and detractors (ho elieve that austerit lac3listsB a countr-

panic3in1 investors and delain1 economic recover)#

Is /urope headed for disaster- then>

Much as ed all li3e to elieve that the financial storm in the @ar of /urope can e

eathered- its not loo3in1 too ros for the euro at the moment# In theor- e 3no

ho to fi the crisis- ut puttin1 that theor into practise- ell

The financial spine of /urope 8 the /uropean 2entral Can3 (/2C) 8 ma et e ale

to avert disaster# If the /2C continues to fund ailouts- /urope ma u itself a littlerecuperation time# /urope can then tac3le the to thin1s hich could turn thin1s

around for /urope; a central tradin1 platform (a place here euro=one countries can

u and sell ithout ostacles) and a free laour mar3et (a shared euro=one

or3force)#

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What Big Emerging Markets Did the Euro Crisis Hit Hardest