1

Crisis in the Eurozone

ECOSOC Expert Carmen G. Baez Lopez
European economic and financial system
The Eurozone as an economic and monetary union surged in 1999. After that the economic development
temps of the countries-members has grown to become one of the strongest economies in the World. The Eurozone
currently consists of Austria !elgium "yprus Estonia #inland #rance $ermany $reece %reland %taly
&u'embourg (alta the )etherlands *ortugal +lova,ia +lovenia and +pain. To be part of the Eurozone these
countries had to accomplish a difficult program of economic measures. )o state has left and there are no provisions
to do so or to be e'pelled. (onetary policy of the zone is the responsibility of the European "entral !an, -E"!.
which is governed by a president and a board of the heads of national central ban,s. The principal tas, of the E"! is
to ,eep inflation under control.
As a result of the global financial crisis that began in /001-/002 the Eurozone endure its first official
recession in the third 3uarter of /002. 4espite the recession Estonia became member of the Eurozone and %celand
put in an E5 application in order to 6oin the euro seeing it at the time as a safe haven. %n /009 the &isbon Treaty
formalized the Euro $roup. !ut before his formalization Eurozone leaders already held e'traordinary summits in
reaction to the financial crisis of /002 in *aris. 7ather than a Euro $roup meeting finance ministers met the heads
of states in order to define a 6oint action plan for the Eurozone and the European "entral !an, to stabilize the
European economy. %n spite of that in such meetings many euro governance reforms would be agreed the crisis grew
bigger and influenced different economical aspects. !etween /001 and /009 several states from the /008
enlargement acceded to the Eurozone. These were +lovenia in /001 "yprus and (alta in /002 +lova,ia in /009 and
Estonia in /011. (ost other /008 countries faced greater difficulties in fulfilling the criteria to 6oin and even now
when they are part of the E5 they don9t fulfill the European standards in all the aspects of economy. %n (arch /011
initiated a new reform of the +tability and $rowth *act that aims to straight the rules by adopting an automatic
procedure imposed penalties in case of breaches of either the deficit or the debt rules. %n /01/ the dialog continues
but very shy results.
The economic crisis that began in /001 is heading for its fifth year. The so waited economic recovery that
many predicted has not occurred and the reasons are above all political. %n spite of the broad consensus on the
measures that should be ta,en there is no political will.
The European crisis resulted from a combination of comple' factors including the globalization of
finance: easy credit conditions during the /00/;/002 period that encouraged high-ris, lending and borrowing
practices: the /001;/01/ global financial crisis: international trade imbalances: real-estate bubbles that have since
burst: the /002;/01/ global recession: fiscal policy choices related to government revenues and e'penses: and
approaches used by nations to bail out troubled ban,ing industries and private bondholders assuming private debt
burdens or socializing losses.
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+ome of the European countries are no more capable to repay or re-finance their
government debt without the assistance of third parties. That is why this crisis is called by the specialist the European
sovereign debt crisis.
Some crisis!s "acts
Analysis of the crisis should begin with analyzing the situation in the so called #$GS economies. #$GS is
an acronym that refers to the economies of *ortugal $reece +pain and either or both %reland and %taly. The
economies of 5nited <ingdom -as $reat !ritain. and %celand are also included in variants.
2

=n 1 (ay /010 the Gree% government announced a series of austerity measures that were met with great
anger by the $ree, public leading to massive protests riots and social unrest. !ut this way it was possible to secure
a three year >110 billion loan. As problems were not resolve government understood the necessity of a second bailout
loan. The Troi,a -E5 E"! and %(#. gives $reece a second bailout loan worth >1?0 billion in =ctober /011 but
with the activation being conditional on implementation of further austerity measures and a debt restructure
agreement. =n 9 (arch /01/ the %nternational +waps and 4erivatives Association -%+4A. issued a communi3u@
calling the debt restructuring deal with its private sector involvement -*+%. a A7estructuring "redit EventA which will
trigger payment of credit default swaps.
(id (ay /01/ the crisis and impossibility to form a new government after elections led to strong
speculations $reece would have to leave the Eurozone shortly due. This phenomenon became ,nown as A$re'itA and
started to govern international mar,et behavior
3
. The center-rightBs narrow victory in the Cune 11th election gives
hope that a coalition will enable $reece to stay in the Euro-zone. !ut specialists as 7ahbari and !uiter believe that
$reece leaving the Euro is highly possible and that the probability has tipped over D0E for it to occur in the ne't 12
months from #ebruary /01/.
1 &ewis (ichael. Touring the 7uins of the =ld Economy FF )ew Gor, Times. -/011.
2 Haidar Camal %brahim. +overeign "redit 7is, in the Eurozone FF World Economics. ; /01/-(arch. ;ps. 1/?-1?I.
3 $re'it - What does $re'it meanJFF $ogreece.about.com. April 10 /01/. -/01/.
2
A victory by the anti-austerity a'is could have been Aan e'cuse to cut $reece out of the euro zoneA
according to the Wall +treet Cournal. +pecialist of the Wall +treet Cournal thin,s that $erman "hancellor Angela
(er,el might have preferred a +yriza victory as an e'cuse to cut $reece out of the euro zone.
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)ew #inance (inister Gannis +tournaras is preparing a new plan of austerity measures for the ne't two
years would amount to 1?.9 billion euros. At a press conference after the meeting 9 =ctober-/01/. Eurogroup chief
Cean-"laude Cunc,er and %nternational (onetary #und -%(#. chief "hristine &agarde ac,nowledged the
Asubstantial progressA made by $reece particularly recently.
%n another hand in $reland the sovereign debt crisis was not based on government over-spending as it
was in $ree, but from the state guaranteeing the si' main %rish-based ban,s who had financed a property bubble.
=n /9 +eptember /002 #inance (inister !rian &enihan issued a two-year guarantee to the ban,sB
depositors and bond-holders. %n /009 was created ad )ational Asset (anagement Agency -)A(A. in response to
the %rish financial crisis and the deflation of the %rish property bubble. This institution should ac3uire large property-
related loans from the si' ban,s at a mar,et-related Along-term economic valueA.
%rish ban,s had lost an estimated 100 billion euros much of it related to defaulted loans to property
developers and homeowners made in the midst of the property bubble which burst around /001. The economy
collapsed during /002. 5nemployment rose from 8E in /00I to 18E by /010 while the national budget went from a
surplus in /001 to a deficit of ?/E $4* in /010 the highest in the history of the eurozone despite austerity
measures.
%n Culy /011 European leaders agreed to cut the interest rate that %reland was paying on its E5F%(#
bailout loan from around IE to between ?.DE and 8E and to double the loan time to 1D years. The move was
e'pected to save the country between I00;100 million euros per year.
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The Euro *lus (onitor report from )ovember /011 attests to %relandBs vast progress in dealing with its
financial crisis e'pecting the country to stand on its own feet again and finance itself without any e'ternal support
4 A $ree, 7eprieveK The $ermans might have preferred a victory by the left in Athens.FF Wall +treet Cournal. 12 Cune
/01/.
5 Hayes "athy. %reland gets more time for bailout repayment and interest rate cut FF %rish "entral.-/011.
from the second half of /01/ onwards.
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=n /I Culy /01/ for the first time since +eptember /010 %reland was able to
return to the financial mar,ets selling over >D billion in long-term government debt.
%n the first half of /011 #ortugal re3uested a >12 billion %(#-E5 bailout pac,age in a bid to stabilize its
public finances.
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7obert #ishman in the )ew Gor, Times article A*ortugalBs 5nnecessary !ailoutA points out that
*ortugal fell victim to successive waves of speculation by pressure from bond traders rating agencies and
speculators. %n the first 3uarter of /010 before pressure from the mar,ets *ortugal had one of the best rates of
economic recovery in the E5. #rom the perspective of *ortugalBs industrial orders e'ports entrepreneurial
innovation and high-school achievement the country matched or even surpassed its neighbors in Western Europe.
=n 1I (ay /011 the eurozone leaders officially approved a >12 billion bailout pac,age for *ortugal which became
the third eurozone country after %reland and $reece to receive emergency funds. The *ortuguese government ta,es
austerity measures as the elimination of its golden share in private corporations.
%n /01/ all public servants had already seen an average wage cut of /0E relative to their /010 baseline
with cuts reaching /DE for those earning more than 1D00 euro per month. This led to a flood of specialized
technicians and top officials leaving the public service many loo,ing for better positions in the private sector or in
other European countries.
%n 4ecember /011 it was reported that *ortugalBs estimated budget deficit of 8.D percent in /011 would
be substantially lower than e'pected due to a one-off transfer of pension funds. The country would therefore meet its
/01/ target a year earlier than e'pected.
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Spain had a comparatively low debt level among advanced economies prior to the crisis. The countryBs
public debt relative to $4* in /010 was only I0E more than /0 points less than $ermany #rance or the 5+ and
more than I0 points less than %taly %reland or $reece. &i,e %taly +pain has most of its debt controlled internally and
both countries were in a better fiscal situation than $reece and *ortugal at the outset of the financial crisis.
However debt relative to $4* is e'pected to reach 90.DE $4* during /01?. While public debt was restrained prior
to the crisis private mortgage debt fueled a housing bubble. +pain is the E5Ls fourth-largest economy larger than
$reece *ortugal and %reland combined that why its fall will cause the unleash of the dominoLs effect affecting
6 Euro *lus (onitor /011. -/011. ; p. DD
7 *ortugal re3uests bailout FF"hristian +cience (onitor. -/011. -httpKFFwww.csmonitor.comF.
8 "hip <ra,off. *%%$+ To The +laughterK After $reece *ortugal FF +ee,ing Alpha -httpKFFsee,ingalpha.comF. -/01/.
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another economies. %n +eptember /011 yields on Cyprus long-term bonds had risen above 1/E since the small
island of 280000 people was downgraded by all ma6or credit ratings agencies following a devastating e'plosion at a
power plant in Culy and slow progress with fiscal and structural reforms. =n 1? (arch /01/ (oodyBs has slashed
"yprusBs credit rating into Cun, status warning that the "yprus government will have to in6ect fresh capital into its
ban,s to cover losses incurred through $reeceBs debt swap. "yprusBs ban,s were highly e'posed to $ree, debt and so
are disproportionately hit by the haircut ta,en by creditors. %t was reported on Cune /D /01/ by The #inancial Times
that ban,s in "yprus held >// billion of $ree, private sector debt.
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=ne of the central concerns prior to the bailout
was that the crisis could spread to several other countries after reducing confidence in other European economies
and also to nonmembers of the Eurozone.
$talyBs deficit of 8.I percent of $4* in /010 was similar to $ermanyLs at 8.? percent and less than that of
the 5.<. and #rance. %taly even has a surplus in its primary budget which e'cludes debt interest payments. However
its debt has increased to almost 1/0 percent of $4* -5.+. M/.8 trillion in /010. and economic growth was lower than
the E5 average for over a decade.
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=n 1D Culy and 18 +eptember /011 %talyBs government passed austerity
measures meant to save >1/8 billion.
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%n /010 BelgiumBs public debt was 100E of its $4*Nthe third highest in the eurozone after $reece and
%taly and there were doubts about the financial stability of the ban,s following the countryBs ma6or financial crisis in
/002;/009. )evertheless on /D )ovember /011 !elgiumBs long-term sovereign credit rating was downgraded from
AAO to AA by +tandard and *oor and 10-year bond yields reached D.IIE.
12
9 Cames Wilson. "yprus re3uests eurozone bailoutFFThe #inancial Times. - /01/.
10 +ee "%A #actboo,-%taly-7etrieved 4ecember /011 -cia.gov.
11 E5 austerity drive country by countryFF !!" )ews. - /011.
12 $ill #ran,. 7atings on !elgium &owered to BAAB =n #inancial +ector 7is,s to *ublic #inances FF=utloo,
)egative +tandard and *oors 7ating +ervice. ; /011.
"rance and Germany wants a balanced budget: automatic sanctions if deficits P?E $4*: harmonization
of euro zone corporation ta'es a ta' on financial transactions. #rance is averse to !russelLs power over national
budget. $ermany is against E"! %ntervention to buy
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bonds.
&' says the more it is as,ed for the more it will as, in return - and any treaty agreed by the 5< would
have to go through parliament. (enmar% wants speedy resolution to crisis with minimum treaty change and 5<
wants to avoid ma6or treaty change 4enmar, wants to avoid change that would trigger referendum. )ustria
*etherlands "inland and Luxem+ourg are alarmed by warnings of possible accreditation downgrade that would
affect cost of borrowing. They also argue for a !russels commissioner to have power to e'pel member states from the
Eurozone. And they are reluctant to have treaty change. Belgium Estonia ,alta Slova%ia and Slovenia want low
borrowing costs and also want to be among the decision-ma,ers. And they are against ma6or treaty change.
Gross external de+t of the general government sector in the euro
area and its mem+er countries
Percentages of GDP
Countri
es
2005 2006 2007 2008 2009
Luxem+
ourg
0.0 0.1 0.1 0.1 2.4
,alta 4.5 3.8 3.0 2.6 5.2
Slova%
-epu+li
c
16.0 11.4 13.4 12.3 11.2
Sloveni
a
8.4 7.4 7.7 8.8 10.0
Cyprus 18.9 16.7 13.9 13.4 13.7
Spain 24.0 23.5 21.9 18.8 20.9
German
y
27.3 31.0 30.3 30.5 33.9
"inland 39.2 36.1 33.3 29.6 28.4
*etherl 33.6 34.9 32.4 29.6 42.7
13 EurocrisisFF=,onomist. -/01/.
4
ands
$reland 17.2 16.6 15.4 15.9 31.8
"rance 36.7 36.6 35.0 33.9 40.2
$taly 43.1 49.0 43.0 41.0 45.2
)ustria 49.9 52.3 50.8 49.8 53.6
Belgium 44.8 46.4 44.2 51.9 56.6
#ortuga
l
43.4 49.5 48.5 48.0 53.0
Greece 67.1 74.3 73.5 78.2 80.3
Eurozo
ne
14.1 13.0 13.8 18.3 21.4
+ources -as at /D Cune /010.K E"! %(#
#olitics and Crisis
"risis in the Eurozone influence the internal politics of each of its members. %n +pain *ortugal
)etherlands +lovenia +lova,ia $ree, #inland and %reland the governments collapsed and in some cases were set
early elections. %n another hand in #rance /01/ became the first time since 1921 that an incumbent failed to gain a
second term. Also raise the influence of $ermany in other countries as the strongest economy of the Eurozone.
Eurozone parliaments are in the process of ratifying a tough set of rules - insisted on by $ermany - that will limit
their governments AstructuralA borrowing -that is e'cluding any e'tra borrowing due to a recession. to 6ust 0.DE of
their economies output each year. The pact which will come into force once 1/ out of the 11 eurozone member states
have ratified it will also limit their total borrowing to ?E.
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These rules are supposed to stop them accumulating too
much debt and ma,e sure there wonBt be another financial crisis. To ensure that the internationally agreed stricter
rules for ban,s can ta,e effect as planned on 1 Canuary /01? $ermany approved legislation drafted by the #ederal
(inistry of #inance to transpose the !asel %%% rules into national law in advance of final agreement in !russels.
15
14 Eurozone crisis e'plainedFF !!" )ews. -/01/.
15 $ermany puts pressure on tal,s in !russelsK "abinet approves legislation on !asel %%% ban,ing rulesFF#ederal
(inistry of #inance -httpKFFwww.bundesfinanzministerium.de.
!ut only a few ,now that the rules that want to impose $ermany were already set. "ountries agreed to
e'actly the same ?E borrowing limit bac, in 1991 when the euro was being set up. The Astability and growth pactA
was insisted on by $erman finance minister Theo Waigel.
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%taly was the worst offender. %t regularly bro,e the ?E
annual borrowing limit. !ut actually $ermany was the first big country to brea, the ?E rule. After that #rance
followed. =f the big economies only +pain ,ept its nose clean until the /002 financial crisis: the (adrid
governments stayed within the ?E limit every year from the euroBs creation in 1999 until /001. )ot only has that - of
the four +painLs government also had the smallest debts relative to the size of its economy. $reece never stuc, to the
?E target but manipulated its borrowing statistics to loo, good which allowed it to get into the euro in the first
place.
As the time pass protesters in European countries e'press their discontent with the measures ta,en by the
governments. The violence is especially strong in $reece and +pain. According to the media in +pain where one in
four wor,ers is unemployed the second general stri,e in eight months in protest against budget cuts coasted the
government millions euro. )eighboring *ortugal also has held some general stri,e. *rotests are being called in
some 80 towns and cities across the bailed-out nation including &isbon and *orto. $reece is the epicenter of the
EurozoneLs debt crisis but its unions are focused on the national crisis and it has limited its protest to a three-hour
wor, stoppage and a rally in Athens. %talian unions too are see,ing a four-hour wor, stoppage. 5nion-led rallies
are being called across #rance !elgium and in *oland where wor,ers decry Asocial and wage-dumpingA in their
country.
Crisis in the Eurozone as preface of a .orld economic crisis
The rapid integration of global trade and capital flows over the past decades has made the lin,s that
connect different parts of the world economy ever more central to global prosperity. Get the practices and institutions
that regulate these lin,s ; the international monetary system ; as well as the main international currencies that
underpin this system are increasingly challenged.
Against this bac,drop it is clear the current dollar-based international monetary system needs to evolve.
!ut how it will evolve is highly uncertain. The widespread view is that the world is moving towards a multipolar
currency system based on the euro dollar and yuan. !ut each of these currency areas faces the need for significant
internal ad6ustments that constrain their future international roles. The =ctober /01/ $lobal #inancial +tability
7eport -$#+7. finds increased ris,s to the global financial system with the euro area crisis the principal source of
concern. The report urges policyma,ers to act now to restore confidence reverse capital flight and reintegrate the
euro zone. %f they do not Eurozone can become the center of a WorldLs crisis. %n both Capan and the 5nited +tates
steps are needed toward medium-term fiscal ad6ustment. Emerging mar,et economies have successfully navigated
16 Eurozone crisis e'plainedFF !!" )ews. -/01/.
5
global shoc,s thus far but need to guard against future shoc,s while managing a slowdown in growth. %f the economy
of the Eurozone falls the economies of his closest partners will fall also. And especially will fall the economies of
countries that depend of theirs European partners.
Economic crisis in +pain especially influence &atin-American economies. #or e'ample for &atin
American countries remittances play an important role in the economy -totaling over II.D billion 5+4 in /001.. This
problem is also important for )orth Africans "ountries which receive millions of euro is #rance. %n this situation
also is Tur,ey with millions of immigrants in $ermany.
7emittances to Africa play an important role to national economies but little data e'ists as many rely on
informal channels to send money home. TodayLs African 4iaspora consists of appro'imately /0 to ?0 million adults
who send about 5+4 80 billion annually to their families and local communities bac, home. And important part of
this diaspora lives in Europe but because of the economic situation most of them are losing their wor,s or inflation
does not permit them to send money li,e before. Also global growth in the pharmaceutical mar,et in the technology
mar,et and others depend on the European crisis. "ountries throughout the world will e'perience an economic
slowdown as the sovereign debt crisis in Europe continues to unfold according to a 5nited )ations report launched
in Canuary /01/. The 7eport also warns that governments must urgently address high unemployment rates
particularly among youth. The World Economic +ituation and *rospects /01/ -WE+*. report gives a detailed picture
on seven geographical regions and forecasts that growth rates for the ne't two years will slow down in most of them
with the e'ception of the African continent which will continue to en6oy growth due to stable commodity prices and
foreign investment. The decisions that will be made by the members of the European 5nion will influence the future
of the World economic.
Bi+liography
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