Eurozone Crisis

EUROZONE

CRISIS

GROUP 7 (SECTION B)

GAGANDEEP PGP05067

HARSHAN PGP05068

HENNA PGP05069

JAYESH PGP05071

JOEL PGP05072

IntroductionPIIGS

EconomiesCountry Wise

Analysis

Policies to tackle the

CrisisConclusion

January 1st 1999 the currencies of 11 countries were

fixed against a new currency, the Euro.

In 2002 Euro came into circulation.

Currently Eurozone has 18 members while the

European Union has 28 members.

Economic and monetary union (EMU) -18 European

Euro-zone states and 10 non-Euro states.

European Central Bank :define and implement the

monetary policy of the Monetary Union with target

of price stability (2% inflation)

Joining of Eurozone under Maastricht qualifying

criteria(1991)

Country

National Currency per euro at time of joining

Austria 13.76

Belgium 40.33

Finland 5.94

France 6.55

Germany 1.955

Greece 340.75

Ireland 0.787

Italy 1936.25

Luxembourg 40.33

Netherlands 2.202

Portugal 200.482

Spain 166.386

A Europe without frontiers

Export dependent model: low labour cost after

labour market reforms in 2003 by Gerhard

Schröder.

Devaluation of D-mark gave a boost to exports

as compared to other euro nations.

Exports contribute about 45% to German GDP.

REER below other euro zone nations gave

it export competitiveness.

Euro zone accounts for about 37% of

German exports.0

5

10

15

20

25

30

35

40

45

50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

German Exports as Percentage of GDP

90

92

94

96

98

100

102

104

106

108

110

1 2 3 4 5 6 7 8 9 10 11 12 13

REER (index 2005=100)

GERMANY Spain Greece Italy

IntroductionPIIGS

EconomiesCountry Wise

Analysis


CrisisConclusion

The German Miracle

Introduction PIIGS EconomyCountry Wise

Analysis


CrisisConclusion

PIIGS and other peripheral economies could borrow

at low rates after joining euro fuelling a spending

binge.

Debt burden unsustainable after 2007 financial crisis.

Ballooning budget deficits due to fall in tax receipts

and increased spending on unemployment benefits.

Low interest rates fuelled domestic spending

and spurred inflation in wages and goods,

making their exports more expensive and left

imports relatively cheaper-20

-15

-10

-5

0

5

10

2006 2007 2008 2009 2010 2011 2012 2013

Current account deficit

Germany Ireland Greece Spain Italy Portugal

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

2006 2007 2008 2009 2010 2011 2012 2013

Budget Deficit

Germany Ireland Greece Spain Italy Portugal

PIIGS Economy

Southern economies have leant too heavily on

consumer spending, have weak public finances

and rely on foreign capital to supplement their low

savings.

Southern European economies racked up huge

current-account deficits in the first decade of the

euro while countries in northern Europe ran offsetting

surpluses.

Credit flows from the euro-zone core to the

overheated housing markets of countries like Spain

and Ireland.

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exports as a percentage of GDP

Greece Portugal Italy


Analysis


CrisisConclusion

Unsustainable growth in Southern Economies

0 10 20 30 40 50 60

Percentage increase

Unit Labour cost % change (1999-2013)

Portugal Italy France Spain Germany

Investors considered euro-zone sovereign bonds to

be risk free.

But seeing unsustainable debt levels after the

American crisis they started demanding a premium

from PIIGS(peripheral) economies.

Refinancing of debt became impossible due to

spiraling bond yields.

European Banks had exposure to sovereign debt .

Falling confidence in banks reinforced falling

confidence in sovereigns which reinforced falling

confidence in banks.

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013 2014

10 year government bond yields

Germany Portugal Spain Italy Greece Ireland


Analysis


CrisisConclusion

Falling confidence in Sovereigns


Analysis


CrisisConclusion

Greece's mess largely thanks to its spendthrift

government and its citizens' refusal to pay their taxes.

Most generous, and therefore expensive, state

pension systems added to budget deficit 12.7% of

GDP in 2010

Current-account deficit widened to 14.6% of GDP in

2008.

Unability to refinance existing debt led to bailout

from TROIKA formed by the European Commission,

the European Central Bank and the International

Monetary Fund

0 50 100 150 200

2013

Debt to GDP ratio

Portugal greece Italy Spain Ireland Germany

Greece's sovereign-debt crunch

Low interest rates and reckless lending, abetted by dozy

regulation, pushed up land values and caused Ireland to

turn into a nation of property developers.

Property prices started sliding in 2006-07, leaving the banks

hopelessly exposed.

After the Lehmann crisis with share prices

falling,government took the fateful decision to guarantee

liabilities worth €400 billion ($572 billion) at six financial

institutions.

Growing banking losses resulted in sovereign debt crisis for

Ireland.

Unsustainable debt levels resulted in Ireland being the

second country to be bailed out.


Analysis


CrisisConclusion

Ireland's housing crash

-20

-15

-10

-5

0

5

10

15

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Housing Price Growth in Ireland

Budget deficit 9.4% of GDP and public debt

85% of GDP in 2009.

Contagion from Greece and slow real GDP

growth over the decade since Portugal

joined the euro zone led to the crisis.

Loss of export competitiveness and high

household debt of almost 100% of GDP.

High borrowing costs led Portugal to seek

rescue funds from its euro-zone partners like

Greece and Ireland.

-12

-10

-8

-6

-4

-2

0

2

4

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Portugal GDP,BUDGET Deficit

GDP Budget deficit


Analysis


CrisisConclusion

Crisis in Portugal

Caught in a spiral of deepening recession, drowning banks exposed to toxic real estate and

soaring borrowing costs.

As in Ireland, the origins of Spain's debt problems were private, not public.

Debt binge by Spanish households and firms fuelled a property bubble with spain's banks being

the conduit for this private borrowing binge.

Bank bailouts and the economic downturn increased the country's budget deficit, which

reached 8.9% of GDP in 2011 and led to increase in borrowing costs.

Aid package for recapitalization of the banks was granted to spain.

Global financial crisis and exposure to Greece made Cyprus vulnerable.

Decision to wipe out about 80% of the value of Greek debt that the private sector held hit

Cypriot banks very hard and eventually a bailout for recapitalization of Cypriot banks.


Analysis


CrisisConclusion

Pain in Spain

Crisis in Cyprus

Real Italian GDP lower than it was in 2001

Low competitiveness without any option

of devaluation to boost exports.

High wage growth as compared to

productivity.

€1.9 trillion ($2.6 trillion) of sovereign debt

outstanding in 2011.

Political instability and feeble growth led

to the increase in borrowing cost.

0

20

40

60

80

100

120

140

-6

-5

-4

-3

-2

-1

0

1

2

3

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Italy GDP rate

GDP growth Debt to GDP


Analysis


CrisisConclusion

Italy’s lost decade in Euro


Analysis


CrisisConclusion

-5

-4

-3

-2

-1

0

1

2

3

4

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Euro inflation,GDP

Inflation Euro GDP

4

9

14

19

24

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Unemployment rate

Germany Greece Italy Portugal Spain

Youth unemployment above 50% in spain and Greece.

Deflationary pressures adding to the Indebtedness of the peripheral economies.

No fiscal leeway as need to comply with fiscal deficit target of 3% of GDP and austerity imposed by germans.

No option of devaluation while in euro to boost export competitiveness.

Unemployment and Deflationary pressures


Analysis


CrisisConclusion

Steps taken to tackle euro crisis:

Loose monetary policy by ECB with rates as low

as 0.05 in 2014.

Stability and growth pact focused on

monitoring member states' compliance with

the agreed targets for their budget deficits

and their public debt levels.

Permanent crisis management mechanism -

the European Stability Mechanism (ESM) with a

maximum lending capacity of €500 billion

Banking union - an EU-level banking supervision

and resolution system - has been created.

0

0.5

1

1.5

2

2.5

3

3.5

4

ECB rate

Taming the Crisis


Analysis


CrisisConclusion

Funding-for-lending scheme-Provided banks with €1 trillion ($1.3 trillion) of cheap three-

year variable-rate loans to avert a funding crisis.

Started with purchase of asset-based securities (ABS)—whose underlying claims are in the

private non-financial sector—and covered bonds—bonds issued by banks that are

backed by mortgages or public loans.

Austerity and budget cuts imposed on profligate nations by troika to get public finances

back into shape.

Stance taken by ECB chief Mario Draghi to do whatever it takes to save euro involving

buying sovereign bonds to give relief to bond yields of indebted economies.

Taming the Crisis


Analysis


CrisisConclusion

Other measures that should be taken:

Germany with budget deficit must increase

investment and boost consumption currently at 23%

and 18% of GDP.

Structural reforms in peripheral economies to boost

competitiveness and more fiscal leeway given to

sovereign governments instead of imposing stringent

austerity measurements.

More steps towards a banking union to break the

nexus between sovereigns and banks.

Quantitative easing i.e. creating money to buy

financial assets to stave off deflation should be done

inspite of german opposition.

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

Average Exchage rate Dollars/euro

Economy & Finance

Eurozone Crisis