European debt crisis and its effect on Indian economy

Presenter- Manpreet Singh

Agenda

What is Euro debt Crisis? Brief History Causes for the Crisis Remedial Actions Impact on Indian Economy Conclusions

What is Euro debt Crisis?

What is Euro debt Crisis?

This is also known as Eurozone sovereign debt crisis

The term indicates the financial woes caused due to overspending by some European countries

When a nation lives beyond its means by borrowing heavily and spending freely, there comes a point when it cannot manage its financial situation.

It is unable to repay its debts and lenders start demanding higher interest rates, the cornered nation begins to get swallowed up by what is known as the Sovereign Debt Crisis

Brief History

Brief History The actual beginning is how the European Union (EU) began in 1992

where 27 European nations "agreed to form an alliance that could compete economically with larger nations such as the US". This is what created the currency of the euro which was adopted in 16 December 1995.

Members of the European Union signed the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels.

However, in the early 2000, a number of EU member states were failing to stay within the confines of the Maastricht criteria. These violations marked the beginning Euro debt crisis.

Greece had experienced corruption and spending as its government continued borrowing money despite not being able to produce sufficient income through work and goods.

Spain, Portugal, and the other nations later followed Greece with alarming levels of debt on their economies.

The main European countries affected in the European Debt Crisis are as follows:

COUNTRIES STATISTICS

France Debt/G.D.P: 81.7%Unemployment. Oct 2011: 9.8%S&P Rating: AAA

Germany Debt/G.D.P: 83.2%Unemployment. Oct 2011: 5.5%S&P Rating: AAA

Greece Debt/G.D.P: 142.8%Unemployment. July 2011: 18.3%S&P Rating: CC

Italy Debt/G.D.P: 119%Unemployment. Oct 2011: 8.5%S&P Rating: A

Portugal Debt/G.D.P: 93%Unemployment. Oct 2011: 12.9%S&P Rating: BBB-

Spain Debt/G.D.P: 60.1%Unemployment. Oct 2011: 22.8%S&P Rating: AA Source:European commission,2011

Causes for the Crisis

Rising government debt and deficit levels

Countries with originally weak currencies (and higher interest rates) suddenly enjoyed much more favorable credit terms, which spurred private and government spending and led to an economic boom.

Source: ECB

Trade Imbalance

Almost all the countries in Eurozone have trade deficits.

A trade deficit is when imports exceed exports. Trade deficits have goods and services components. A country that is a net importer of goods and services must borrow capital to fund this activity.

Germany has a significant trade surplus, meaning it is a net exporter.

Structural problem of Eurozone system

There is a structural contradiction within the euro system, namely that there is a monetary union (common currency) without a fiscal union (e.g., common taxation, pension, and treasury functions)

In the Eurozone system, the countries are required to follow a similar fiscal path, but they do not have common treasury to enforce it.

 So it is hard to control and regulate national financial institutions.

Greece is example that highlights this problem(High social welfare spendings !!!)

High Interest rates

After failing to payback the huge debts the interest rates to repay rose significantly and swallowed the weaker economies in eurozone,further burdening their current situation.

Remedial Actions

Remedial Measures

Emergency loans have been extended as bailouts mainly by stronger economies like France and Germany, as also by the IMF.

ECB provides 500 Euro loans at very low interest rates to struggling banks.

The EU member states have also created the European Financial Stability Facility (EFSF) to provide emergency loans.

Restructuring of the debt

Austerity measures have been enforced.

Impact on Indian economy

Impact on Indian economy Lowered the market sentiments due to decrease

in confidence levels

Decline in trade

Could lead to rise in unemployment

Lower FDI and FII

Conclusion

It is not always a wise economic move to borrow money while already in debt.

Unified Fiscal body should be formed by the eurozone to monitor the financial budgets of all the members to keep check on them

Citizens must elect uncorrupt government which cares for the economic and political growth of the country.

With increased global integration, the Indian economy now is subject to greater influence of global business cycles.So any Impact on global front is bound to hit India sooner or latter.

Thank you