Eurozone Financial Crisis
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Transcript of Eurozone Financial Crisis
An analysis of
the eurozone
financial crisisFROM EURO TO ZERO
• Formation of the eurozone
• Causes of the financial crisis
• Response of the ECB and governments
• Recommendations for the future
SUMMARY
1970s: Creation of the European Monetary System within the
European Community
France/ German dynamic
Early 1989: Delors Plan instigated by France
Vague deadlines
FORMATION OF EUROZONE
December 1989:
Importance of uniting Germany to Europe
Germany’s opposition and France’s concern
Chancellor Kohl and President Mitterand agree on details of
Delors Plan at Strasbourg Summit– known at the Maastricht
Treaty
TURMOIL BRINGS UNION
Germany drags feet
Slow process– “low levels of inflation, interest rates, and budget
defects”
1990-1991: Maastricht Treaty finalized amid now -or-never
mentality
Ironically, neither Kohl nor Mitterand were proficient in
economics.
DEVIL IN THE DETAILS
EMU Regulations Created
Requirements regarding budget deficits, debt-to-GDP ratios, inflation,
and interest rates
1997: Stability and Growth Pact enacted to continue these
No sovereign bailouts (oh really?)
EMU REGULATIONS
1999: Currency implemented
Initial implementation: 11 of 15 EU countries members
2001: Greece joins
2002: Currency begins circulating
Greece and Italy do not achieve sufficient debt -to-GDP level.
AND SO IT BEGINS
EMU Structure
Common currency between countries
European Central Bank charged with monetary policy
Economic autonomy with caveat of Stability and Growth Pact
HOW IT WORKS
2008: Housing Bubble collapses (that’s another story)
Impact on Euro is dismal
2009: Greece’s debt equals 113% of its GDP
2010: Ireland receives bailout of 85 billion euros
GLOBAL RECESSION STRIKES
The PIIGS wrecked havoc…
PIIGS=Portugal, Ireland, Italy, Greece, and Spain
Borrowing in their own currencies
Interest rates compounded problems
Rates converged at Germany’s (lower than other countries)
Sovereign debt increases
2008: Greece and Italy’s public debt as percent of GDP was 112.9
and 106.1
WHAT HAPPENED?
Germany saw an opportunity
With low interest rates, the private sector was incentivized to
increase spending.
2007: Ireland’s private sector debt 184.3% of GDP
By 2010: Germany was the second largest creditor to Irish banks
WHAT HAPPENED (CONT.)
2010: ECB requires austerity measures after discovery that
Greece l ied about debt levels
Austerity measures increase taxes and cut expenditures
Decreased revenue
April 2010: Bonds’ yields so high that Standard and Poor
downgraded them to junk status
Greece’s banks had about 25% of GDP in bonds
2010: International Monetary Fund and eurozone announce
first bailout for Greece
GREECE
“ It is those countries that were borrowing (as opposed to
those whose governments were borrowing) that are currently
under attack” (Shambaugh).
Italy and Greece (sovereign debt); Ireland and Spain were not
guilty of this
Investments “that had little ef fect on future productivity
growth” ( ie housing bubble) major problem.
Revenue slowed, no liquidity (can’t print money, no profit)
MULTI-FACETED PROBLEM
Austerity Measures--> stunted economic growth
Bailouts to Greece, Portugal, and Ireland
Three-year loans if they implemented austerity measures and
structural reforms
Banks invested in ECB bonds (not bad, just not fixing anything)
ECB bought bonds from countries (especially Italy and Spain)
Aimed at reducing bond yield
Temporary Fix
Current actions:
Stress tests to determine assets
ECB take over
ECB’S RESPONSE
Option 1: Dissolve eurozone
Not optimal
Peripheral countries would lose 40-50% of GDP in first year alone
Option 2: Remove Greece
Run on banks (drachmas)
WHAT SHOULD BE DONE?
Eurozone is politically beneficial, economically disastrous
Causes of the crisis are multi-faceted and debated
Solution is not clear
SUMMARY