Eurozone Crisis- TestCracker

The Eurozone Crisis

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Quick Questions

1. Who was awarded the Nobel Peace Prize in 2012? Why?

2. How many countries are there in Euro Zone?

• Will your answer change on 1st January 2014?

3. How many countries are there in the European Union?

• What would have been your answer before 1st July 2013?

4. How many countries are there in Europe?

5. When was Euro launched?

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If you have been regularly reading ‘The

Burning Issues’ on www.testcracker.in you will already know the answers!

Answers – 1. European Union (for keeping Europe free from war) 2. 17 (Latvia will become the 18th in 2014) 3. 28 now (Croatia is the newest) 4. 50 5. 1999 (virtually)

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Once upon a time in Europe

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Just after World War II

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The Evolution of Euro Zone

European Coal and Steel Community (1951 Treaty of Paris)

European Economic Community (1957 Treaty of Rome)

European Free Trade Association (1959)

Single European Act (1986)

Maastricht Treaty (1992, EEC becomes EU)

European Central Bank (1998)

Launch of Euro (1999)

Treaty of Lisbon (2007)

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Key Concepts

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The Convergence Criteria

What is measured

How it is measured

Convergence Criteria

Price stabilityHarmonized consumer price inflation rate

Not more than 1.5% above the rate of the three best performing Member States; and this level of inflation must be sustainable

Sound and sustainable public finances

Government deficit as % of GDP

Not exceeding the reference value of 3%,unless it "has declined substantially and continuously and reach a level that comes close to the reference value”(Article 104 (2)(a) EC Treaty)

Sound and sustainable public finances

Government debt as % of GDP

Not exceeding the reference value of 60%,unless “the ratio is sufficiently diminishing and approaching the reference value at satisfactory pace”(Article 104 (2)(b) EC Treaty)

Convergence in long term interest rates

Long term interest rates

Not more than 2% above the rate of three best performing Member States in terms of price stability

Exchange rate stability

Deviation from a central rate

Participation in the Exchange Rate Mechanism (ERM II) for two years without severe tensions; no devaluation on own initiative

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The Seven Institutions of the European Union

1. The European Parliament is the directly elected parliamentary institution of the European Union (EU). Together with the Council of the European Union (the Council) and the European Commission, it exercises the legislative function of the EU and is one of the most powerful legislatures in the world.

2. The European Council is entrusted with the responsibility of defining "the general political directions and priorities" of the Union. It is thus the Union's strategic (and crisis solving) body.

3. The Council of European Union is is part of the essentially bicameral EU legislature, representing the executives of EU member states.

4. The European Commission (EC) is the executive body of the European Union responsible for proposing legislation, implementing decisions, upholding the Union's treaties and day-to-day running of the EU.

5. The Court of Justice of the European Union (CJEU) is the institution of the European Union (EU) that encompasses the whole judiciary. Seated in Luxembourg.

6. The European Central Bank (ECB) is the central bank for the euro and administers the monetary policy of the 17 EU member states which constitute the Eurozone.

7. The Court of Auditors (ECA) has a mandate to externally check if the budget of the European Union has been implemented correctly, in that EU funds have been spent legally and with sound management.

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A really complex mechanism…

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The Crisis was always coming…

Accumulation of massive and unsustainable deficits and public debt levels in a

number of peripheral economies

Failure to adhere to fiscal commitments

Excessive social spending

Lack of political will, individually or collectively to take strong action

The Eurozone comprised of the Strong economies (Germany, France, Italy,

Spain) & the Peripheral economies (Greece, Cyprus, Malta, Portugal, Estonia…)

• The periphery states thrived in the first years of the euro, propelled by

large infusions of liquidity and unprecedented access to credit from

other eurozone states.

• The "productive capacity" of the periphery was limited by rigid labor

markets and a reduction of economic competitiveness By 2010, a sovereign debt crisis--most pronounced in Greece--was

spreading throughout the periphery and endangering the future of the eurozone.

Between spring 2010 and spring 2011, the EU and the IMF acted to bail out Greece, Ireland, and Portugal.

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It is not ‘One Crisis’!

Each troubled country of Eurozone has its own reasons for the crisis

Greece - prolonged deficit spending, economic mismanagement, government

misreporting, and tax evasion.

Ireland's debt crisis was triggered by a bank default crisis, a result of its

housing bubble collapsing in 2008.

Spain is struggling with massive unemployment – 29% along with depressing

GDP

Portugal is in crisis because of over-expenditure and investment bubbles

The crisis in Cyprus is a spill-over from Greece!

Overarching theme is the inability of the governments to imagine that there will be a day when they will not be able to finance the deficits!

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The Bailouts

1. Greece has received two bailout packages (110 b Euros in May 2010 + 130 b Euros in Feb 2012) from its eurozone partners and the International Monetary Fund.

2. Ireland secured a 67.5-billion euro package in November 2010.

3. In May 2011, Portugal agreed to a package of 78-billion euros in rescue loans.

4. The Spanish government agreed a deal in July 2012 with eurozone officials to get up to 100-billion euros in rescue loans directly for the banks. The European Central Bank vowed to do “whatever it takes” to save the euro.

5. Cyprus agreed to confiscate a part of deposits in exchange for 10-billion euros in rescue loans (March 2013)

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The EFSF

• The European Financial Stability Facility (EFSF) was created by the euro area Member States in May 2010

• Its mandate is to safeguard financial stability in Europe by providing financial assistance to euro area Member States within the framework of a macro-economic adjustment programme.

• EFSF was created as a temporary rescue mechanism.

• In October 2010, it was decided to create a permanent rescue mechanism, the European Stability Mechanism (ESM).

From this date onwards, the ESM became the main instrument to finance new programmes.

In parallel to the ESM, the EFSF will continue with the ongoing programmes for Greece, Portugal and Ireland.

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Key Facts about ESM

The European Stability Mechanism is a permanent crisis resolution mechanism for the countries of the euro area. The ESM issues debt instruments in order to finance loans and other forms of financial assistance to euro area Members States.

intergovernmental organisation under public international law, based in Luxembourg

total subscribed capital of €700 billion, with paid-in capital (€80 billion) and committed callable capital (€620 billion)

effective lending capacity of €500 billion

shareholders are the 17 euro area Member States

Managing Director: Klaus Regling

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The roots of the crisis

Euro Zone is a

monetary union – but

not a fiscal union

Unsustainable

spending on social

welfare

‘Soft’ taxation policies

Easy credit conditions

Increase in bond yields

due to credit

downgrades

Globalization of

finance?

Roots

of th

e c

risis

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Is Crisis the New Normal?

Risk of default => Bail-outs => Austerity measures => Subdued economic activity +

Political unrest => No solution in sight

The Big Question

Whom to follow - Whom to follow - Keynes or Hayek?Keynes or Hayek?

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India EU FTA – 6 years & counting

Negotiations started in 2007 15 round of negotiation without result Contested issues –

• Germany wants Duty cut in automobile sector, wines and spirits and dairy

products Hike in FDI cap in the insurance sector Strong intellectual property regime

• India wants • Liberalised visa norms for its professionals• Data secure status • Market access in services and pharmaceuticals sector.

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Eurozone Crisis- TestCracker

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Transcript of Eurozone Crisis- TestCracker