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Euro crisisChallenges faced by Euro in emerging economy

SADDAM HUSSAIN QAZI

1ST YR. MBA

JUSTICE K.S HEDGE INST.

OF MANAGEMENT NITTE.

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KEY ISSUES

€ Introduction

€ Which countries have joined the Euro zone?

€ What is the convergence criteria?

€ Motivation of joining Euro zone?

€ What went wrong in Europe?

€ Challenges faced by Euro currency?

€ Impact of Euro crisis on emerging economies?

€ Conclusion

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The €uro€In 1999, the Euro area was established as a

currency

€

€Out of the 27 EU Member States today, 17

have adopted the Euro currency

€

€Striking benefits of a single currency are low

interest rates due to a high degree of price

stability and credibility

€

€

€

The €uro

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Euro Zone Member countries

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European Central Bank€ The European Central Bank (ECB)

€ The ECB operates independently

€ To maintain the purchasing power and

price stability .

The euro was introduced in 1999

Manager of Euro currency

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Motivation for joining Euro zone

• No Transaction costs

•

• No Exchange risk

•

• Exchange rate certainty

•

• Increased liquidity in “United Euro”

financial market.

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Convergence Criteria

MAASTRICHT CRITERIA Four main criteria as per article 121 (1) of European community

treaty

• Inflation Rates

• Government Finances

• Interest Rates

• Exchange Rate Stability

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What went wrong?

The European sovereign debt crisis

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Periphery countries: Portugal, Ireland, Greece,Spain, Italy

The Euro Zone

Core countries: Germany,France, Netherlands, Austria,etc.

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The origins of the Greek crisis

€Greece’s Euro membership marked by

consumption, investment booms

€

€70% of govt. bonds held externally€

€

€Wages rise faster than productivity,competitiveness

€

€

€lower domestic production

€€

€Poor fiscal discipline and weak institutions€

€

€Unsustainable pension, health systems

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Greece and the EU rise to the challenge

€

€

€Increased govt. deficit and debt€

€

€

€ May 2010: Greece adopts €110bnProgram supported by the EU and IMF.

€

€

€Program aims to restore sustainablepublic finances and recover lostcompetitiveness.

€

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The origins of the Irish crisis

€Ireland experienced stronggrowth in recent decades

€Deep recession – 14%unemployment

€Reckless lending by banks tocommercial property developers

€Bad debt of banks causesProblems for whole economy

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Ireland and the EU rise to the challenge

€€Govt. Drastic measures€

€

€Drastic cuts in public expenditure acrossall levels of government

€

€

€November 2010: Ireland adopts €85bnprogram supported by the EU and IMF

€

€Program aims to cut budget deficitand restructuring of banking sectors

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Where will it end?

Financial markets have become muchmore reluctant to lend to Euro areacountries . . .

. . especially those with higher debt anddeficit levels:

•Portugal?•

•Ireland?•

•Spain?•

•Italy?•

•Belgium?

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The great debate: will the Euro survive?

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CHALLENGES FACED BY THE EURO

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High debt and deficits

€ Deficit and debt levels rose sharply dueto the crisis

€

€ But already too high in several

countries€

€ Countries now facing much higher borrowing costs

€

€ Greece and Ireland forced to seekassistance

€

€ Too high a debt level reduceseconomic growth

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Impact of Euro Crisis

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Impact on developing countries

€ Low exports€

€

€

Tourism slowdown€

€

€Domestic competition

€

€

€Capital flows

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IMPACT ON UNITED STATES 

€ Lower domesticproduction

€

€ Rise in the unemployment

rate€

€ Appreciation of Dollar 

€

€Fuel price fall

€

€ Greater consumer confidence

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IMPACT ON CHINA

€

€ Low exports

€ Increased competition inmarket

€

€ Less domestic production

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Conclusion

The sovereign crisis that is unfolding in Euro

zone is a fiscal crisis unlike the US subprime,

We can also say that it is the second stage of 

the financial crisis of 2008-09. It is believed that

the bailout package announced works and the

crisis do not spread to the economies of GIIPS(Portugal, Ireland, Italy, Greece and Spain)

countries.

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Reference

€ Chinn, Menzie and Jeffery Frankel, 2008, “The Euro May over the Next 15 YearsSurpass the Dollar as Leading InterntionalCurrency” KSG Faculty ResearchWorking Papers Series, RWP08-016

€

€ Cohen, Benjamin J. 2008. Forecasting the Euro’s future.http://www.resourceinvestor.com/pebble.asp?relid=46197(20.02.09)

€

€ European Commission http://ec.Europa.eu/index_en.html

€ Hosli, Madleine O. 2005. The Euro. A concise introduction to European moneyintegration. Lynne Rienner Publishers, London http://www.economist.com/

€

€ Pei,m, china trapped transition: the limits of developmental autocracy, Harvard 2008€

€ Pope, H, son of the conquerors: the risk of the Turkic world, overlook press, London,2005

€

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