8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 1/27
Euro crisisChallenges faced by Euro in emerging economy
SADDAM HUSSAIN QAZI
1ST YR. MBA
JUSTICE K.S HEDGE INST.
OF MANAGEMENT NITTE.
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 2/27
2
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
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 3/27
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
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 4/27
4
Euro Zone Member countries
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 6/27
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
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 7/27
7
Motivation for joining Euro zone
• No Transaction costs
•
• No Exchange risk
•
• Exchange rate certainty
•
• Increased liquidity in “United Euro”
financial market.
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 8/27
8
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
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 9/27
What went wrong?
The European sovereign debt crisis
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 10/27
Periphery countries: Portugal, Ireland, Greece,Spain, Italy
The Euro Zone
Core countries: Germany,France, Netherlands, Austria,etc.
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 11/27
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
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 12/27
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.
€
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 13/27
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
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 14/27
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
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 15/27
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?
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 16/27
The great debate: will the Euro survive?
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 18/27
CHALLENGES FACED BY THE EURO
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 19/27
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
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 20/27
20
Impact of Euro Crisis
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 21/27
21
Impact on developing countries
€ Low exports€
€
€
Tourism slowdown€
€
€Domestic competition
€
€
€Capital flows
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 22/27
22
IMPACT ON UNITED STATES
€ Lower domesticproduction
€
€ Rise in the unemployment
rate€
€ Appreciation of Dollar
€
€Fuel price fall
€
€ Greater consumer confidence
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 23/27
23
IMPACT ON CHINA
€
€ Low exports
€ Increased competition inmarket
€
€ Less domestic production
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 25/27
25
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.
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 26/27
26
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
€
8/7/2019 Euro Final
http://slidepdf.com/reader/full/euro-final 27/27
27