PRESENTED BY:

MIHIR SHAH

EUROZONE CRISIS

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CONTENTS

• EURO ZONE FORMATION

• EUROZONE CRISIS

• COUNTRIES AFFECTED AND IMPACT ON THEIR ECONOMY (PIIGS)

• POLICY REACTIONS

• ECONOMIC REFORMS AND RECOVERY PROPOSALS

• PROPOSED SOLUTIONS

• CONCLUSION

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European Union

• A group of European countries that participates in the world economy as one economic unit and operates under one official currency, the euro.

• The current formalized incarnation of the European Union was created in with 12 initial members. Since then, many additional countries have since joined. The EU has become one of the largest producers in the world, in terms of GDP.

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Why EU was formed?

• Trade barrier

1. Exchange fee

2. Tariff fee

• Europe was devastated due to world war II

• Berlin war

• Maastricht treaty

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The Maastricht criteria

• Inflation rates

• Government finance

Annual government deficit

Government debt

• Exchange rates

• Long term interest rates

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EURO CRISIS

BEFORE EURO

INVESTOR

HIGH INTEREST

RATE

LIMITED MONEY

GREECE

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• AFTER EURO

INVESTOR

0% INTEREST RATE

UNLIMITED MONEY

GREECE

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• REASONS:

Money was wasted by politician

Retirement plans

Tax benefits

• All EU countries had debts but repaid with more borrowed money.

• Great Recession

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• Unified monetary policy became problem for entire europe

• Austerity measures

• Germany agreed to pay debts of all Countries

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European Financial Stability Facility

(EFSF)

• Established on 9th May,2010 this facility aims at providing financial assistance to countries in need.

• They can issue bonds or debt instruments in the market.

• Emissions of bonds are backed by guarantees given by the euro area member states.

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European Financial Stabilization Mechanism (EFSM)

• It is an emergency funding program reliant upon funds raised on the financial markets.

• It is guaranteed by the European Commission.

• It has the authority to raise up to €60 billion.

• It runs parallel to the EFSF.

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European Central Bank

• May 2010: Open market operations buying government and private debt securities reaching €219.5 billion in February 2012.

It reactivated the dollar swap lines with federal reserve support.

• Nov 2011: US Fed, the central banks of Canada, Japan, Britain and the Swiss national bank provided global financial markets with additional liquidity to ward off the debt crisis and to support the real economy.

• Nov 2013: Interest rates were further lowered by 0.25% in order to boost the economy.

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• June 2014 the central bank cut the prime interest rate to 0.15% and set the deposit rate at -0.10% the moves are aimed at avoiding deflation, devaluing the euro to make exportation more viable, and at increasing "real world" lending

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ECONOMIC REFORMS AND RECOVERY PROPOSAL

• Direct loans to banks and banking regulation

• Less austerity, more investment

• Increase competitiveness

• Address current account imbalances

• Mobilization of credit

• Commentary

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Proposed solution

• Fiscal profligacy and rising national debt

• Shaky banks that are too big to fail:

• Panic and self-fulfilling prophecy:

• Fiscal austerity and the debt trap:

• Fiscal autonomy and weak European identity:

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SOLUTIONS

•Grind Down Wages

•Raise Productivity

•Slash Spending

•Raise Taxes

•Transparent Banking System

•Endure Such Austerity Drives for many years

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• Monetary Union is flawed without political union behind it

• European governments have tried to act together, not always successfully.

• Common currency members avoided large devaluations and foreign currency debt.

• There needs to be more macroeconomic cooperation to avoid internal imbalances

• Greece facing difficult adjustment problems, European banks avoiding losses on Greek bonds.

• Germany needs to stimulate internal demand

• EZ periphery needs to be more productive and competitive

• The EZ needs to tackle the appreciation bias of the euro17