Description
This is a presentation highlights the nuances of eurozone crises with focus on greece crisis, spain crisis, irish crises.
The Euro Zone
The Euro Zone
?It is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency. ?The original goal behind the integration of Europe was to prevent the devastating wars of the first half of the twentieth century from ever happening again. ?EU was established by the Maastricht Treaty in 1993. ?The euro was introduced on January 1, 1999.
Convergence Criteria to be fulfilled to Join European Union
?Price stability ?Long-term interest rate ?Government budget deficits ?Total government debt ?Exchange rate stability ?Central bank independence
Advantages of Euro Zone
? High reduction in the probability of war ? Single Market resulted in breakdown of all tariff and non-tariff barriers to trade and business which resulted in free circulation of goods, capital, people and services. ? Single currency eliminated exchange rate transaction costs and risks. ? It resulted in macroeconomic stability (e.g low inflation) and financial integration of the nations in the Euro zone. ? Each member country is stronger against other big economies like US and Japan.
5
The European Central Bank and its Policies
6
European Central Bank
?The European Central Bank is the institution of the European Union(EU) that administers the monetary policy of the 17 EU Euro Zone member states. ?The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. ?The current President of the ECB is Mario Draghi, former governor of Bank of Italy. ?The owners and shareholders of the European Central Bank are the central banks of the 27 member states of the EU.
7
Objectives and Key tasks of ECB
?The primary objective of the European Central Bank is to maintain price stability within the Euro Zone, which is the same as keeping inflation low(around 2%). ?Define and implement the monetary policy for the Euro Zone. ?Conduct foreign exchange operations. ?Take care of the foreign reserves of the European System of Central Banks. ?Promote smooth operation of the financial market infrastructure. ?Authorize the issuance of euro banknotes.
8
The Euro Zone Crisis
9
The Euro Zone Financial Crisis
?Transmission from the United States ?Housing Price Bubble and Collapse ?Financial Market Freeze and Collapse ?Policy Response ?Support for Financial Sector ?Monetary Policy ?Effect of the Euro Currency Zone
10
SPAIN CRISIS
11
The origins of the Greek crisis
?Greece?s euro membership marked by consumption, investment booms ?Wages rise faster than productivity, competitiveness deteriorates ?Low interest rates fuel credit growth ?Poor fiscal discipline and weak institutions ?Large revisions to budgetary statistics ?Unsustainable pension, health systems
Greece and the EU rise to the challenge
May 2010: Greece adopts €110bn program supported by the EU and IMF Program aims to restore sustainable public finances and recover lost competitiveness
Far-reaching structural reforms being adopted (e.g. landmark pension reform)
Drastic cuts in public expenditure across all levels of government Program will stabilize debt ratio (but at a high level)
The origins of the Irish crisis
Ireland experienced strong growth in recent decades Transformation from agricultural economy to “Celtic Tiger” Strong presence of multinational companies, skilled workforce But reckless lending by banks to commercial property developers
Bad debt of banks causes problems for whole economy
Deep recession – 14% unemployment
Ireland and the EU rise to the challenge
Government already taking drastic measures over last several years November 2010: Ireland adopts €85bn program supported by the EU and IMF Program aims to cut budget deficit and repair the damage caused by the banking crisis Shrinking and restructuring of banking sectors Drastic cuts in public expenditure across all levels of government
Impacts and Remedies
17
Long Term Interest Rates
Long-term interest rates of selected European countries (secondary market yields of government bonds with maturities of close to ten years)
18
Unemployment: stable, but still too high
12
10
8
%
6
4
2
0 2004 2005 2006 2007 2008 2009 2010
Euro area (16 countries)
United States
Source: Eurostat, IMF 19
Inflation: if anything, too low?
4.5 4 3.5 3 2.5
%
2 1.5 1 0.5 0 -0.5 -1 2004 2005 2006 2007 2008 2009 2010
Euro area (16 countries)
United States
Source: Eurostat, IMF 20
Monetary policy: one size fits all
Real GDP growth rate %
15
10
5 Germany Ireland 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-5
-10
Source: IMF
GDP growth: deep recession, fragile recovery
4 3 2 1
%
0
2006 2007 2008 2009 2010 2011 2012
-1 -2 -3 -4 -5
Euro area (16 countries)
United States
Source: OECD, IMF 22
Exchange Rates
23
Where will it end?
Financial markets have become much more reluctant to lend to euro area countries . . . . . . especially those with higher debt and deficit levels:
• Portugal?
• Spain? • Italy? • Belgium? Financial markets exhibit „herd behavior?
Impact on Interest Rates
Chilling Effect
Domino Effect
25
Possible Resolutions
?Countries Muddle through ?Likely Impact: ?Uncertainty and Risk remain ?Negative effect on borrowing costs and growth ?Recession becomes a near certainty in Japan, Greece, Portugal, Italy and Spain. ?The probability of recession rises above 70% ?For the time being, G20 countries have agreed to boost resources of IMF
26
Possible Resolutions
?Economy after economy defaults ?Likely Impact: ? Once Greece defaults, banks having Greek debt will be at loss ?Other countries will likely follow to default as investors become worried about risks in the region ?Portugal is most likely to follow, followed by Irish Republic, Spain and Italy ?Generalized Banking Crisis likely will follow
27
Possible Resolutions
?Greece exits the Euro ?Cost to Greece: ?First year – per person 11500 Euros ?Second year onwards – per person up to 4000 Euros ?Likely Impact: ? Greek de-evaluation would be certain ?COLLAPSE of the Greek Financial System ?International Creditors would incur huge losses ?Greek businesses would go bust, Greek will face high Inflation ?Mass Emigration of skilled labor, towards other EU countries ?New barriers to trade may come up
28
doc_992811155.pptx
This is a presentation highlights the nuances of eurozone crises with focus on greece crisis, spain crisis, irish crises.
The Euro Zone
The Euro Zone
?It is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency. ?The original goal behind the integration of Europe was to prevent the devastating wars of the first half of the twentieth century from ever happening again. ?EU was established by the Maastricht Treaty in 1993. ?The euro was introduced on January 1, 1999.
Convergence Criteria to be fulfilled to Join European Union
?Price stability ?Long-term interest rate ?Government budget deficits ?Total government debt ?Exchange rate stability ?Central bank independence
Advantages of Euro Zone
? High reduction in the probability of war ? Single Market resulted in breakdown of all tariff and non-tariff barriers to trade and business which resulted in free circulation of goods, capital, people and services. ? Single currency eliminated exchange rate transaction costs and risks. ? It resulted in macroeconomic stability (e.g low inflation) and financial integration of the nations in the Euro zone. ? Each member country is stronger against other big economies like US and Japan.
5
The European Central Bank and its Policies
6
European Central Bank
?The European Central Bank is the institution of the European Union(EU) that administers the monetary policy of the 17 EU Euro Zone member states. ?The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. ?The current President of the ECB is Mario Draghi, former governor of Bank of Italy. ?The owners and shareholders of the European Central Bank are the central banks of the 27 member states of the EU.
7
Objectives and Key tasks of ECB
?The primary objective of the European Central Bank is to maintain price stability within the Euro Zone, which is the same as keeping inflation low(around 2%). ?Define and implement the monetary policy for the Euro Zone. ?Conduct foreign exchange operations. ?Take care of the foreign reserves of the European System of Central Banks. ?Promote smooth operation of the financial market infrastructure. ?Authorize the issuance of euro banknotes.
8
The Euro Zone Crisis
9
The Euro Zone Financial Crisis
?Transmission from the United States ?Housing Price Bubble and Collapse ?Financial Market Freeze and Collapse ?Policy Response ?Support for Financial Sector ?Monetary Policy ?Effect of the Euro Currency Zone
10
SPAIN CRISIS
11
The origins of the Greek crisis
?Greece?s euro membership marked by consumption, investment booms ?Wages rise faster than productivity, competitiveness deteriorates ?Low interest rates fuel credit growth ?Poor fiscal discipline and weak institutions ?Large revisions to budgetary statistics ?Unsustainable pension, health systems
Greece and the EU rise to the challenge
May 2010: Greece adopts €110bn program supported by the EU and IMF Program aims to restore sustainable public finances and recover lost competitiveness
Far-reaching structural reforms being adopted (e.g. landmark pension reform)
Drastic cuts in public expenditure across all levels of government Program will stabilize debt ratio (but at a high level)
The origins of the Irish crisis
Ireland experienced strong growth in recent decades Transformation from agricultural economy to “Celtic Tiger” Strong presence of multinational companies, skilled workforce But reckless lending by banks to commercial property developers
Bad debt of banks causes problems for whole economy
Deep recession – 14% unemployment
Ireland and the EU rise to the challenge
Government already taking drastic measures over last several years November 2010: Ireland adopts €85bn program supported by the EU and IMF Program aims to cut budget deficit and repair the damage caused by the banking crisis Shrinking and restructuring of banking sectors Drastic cuts in public expenditure across all levels of government
Impacts and Remedies
17
Long Term Interest Rates
Long-term interest rates of selected European countries (secondary market yields of government bonds with maturities of close to ten years)
18
Unemployment: stable, but still too high
12
10
8
%
6
4
2
0 2004 2005 2006 2007 2008 2009 2010
Euro area (16 countries)
United States
Source: Eurostat, IMF 19
Inflation: if anything, too low?
4.5 4 3.5 3 2.5
%
2 1.5 1 0.5 0 -0.5 -1 2004 2005 2006 2007 2008 2009 2010
Euro area (16 countries)
United States
Source: Eurostat, IMF 20
Monetary policy: one size fits all
Real GDP growth rate %
15
10
5 Germany Ireland 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-5
-10
Source: IMF
GDP growth: deep recession, fragile recovery
4 3 2 1
%
0
2006 2007 2008 2009 2010 2011 2012
-1 -2 -3 -4 -5
Euro area (16 countries)
United States
Source: OECD, IMF 22
Exchange Rates
23
Where will it end?
Financial markets have become much more reluctant to lend to euro area countries . . . . . . especially those with higher debt and deficit levels:
• Portugal?
• Spain? • Italy? • Belgium? Financial markets exhibit „herd behavior?
Impact on Interest Rates
Chilling Effect
Domino Effect
25
Possible Resolutions
?Countries Muddle through ?Likely Impact: ?Uncertainty and Risk remain ?Negative effect on borrowing costs and growth ?Recession becomes a near certainty in Japan, Greece, Portugal, Italy and Spain. ?The probability of recession rises above 70% ?For the time being, G20 countries have agreed to boost resources of IMF
26
Possible Resolutions
?Economy after economy defaults ?Likely Impact: ? Once Greece defaults, banks having Greek debt will be at loss ?Other countries will likely follow to default as investors become worried about risks in the region ?Portugal is most likely to follow, followed by Irish Republic, Spain and Italy ?Generalized Banking Crisis likely will follow
27
Possible Resolutions
?Greece exits the Euro ?Cost to Greece: ?First year – per person 11500 Euros ?Second year onwards – per person up to 4000 Euros ?Likely Impact: ? Greek de-evaluation would be certain ?COLLAPSE of the Greek Financial System ?International Creditors would incur huge losses ?Greek businesses would go bust, Greek will face high Inflation ?Mass Emigration of skilled labor, towards other EU countries ?New barriers to trade may come up
28
doc_992811155.pptx