European Economy

1999- 2010

Akhil Jain 32279| Ankit Bakliwal 32306 | Ashwini Krishna 32223 | Divyarani R 32259|
Hakim Allanabanda 32258 | Kaajal Bhatia 32158| Vaibhav Vichare 32___
 Presentation Path
Introduction

Crisis – PIIGS

Causes

Implications

Measures
Introduction
 Evolution of Euro
End of Second World • Bretton Woods Agreement, 1944
War • The Treaty of Rome, 1957

• Barre Report, 1969

Bretton Wood Crisis • Introduction of EMU, 1971

• Creation of ERM, 1979

Creation of the EMS • European Currency Unit (ECU)

• ECU renamed as Euro

Preparations for EMU • European Monetary Institute

• Euro adopted in non-physical form,1991

Start of EMU • Eurozone- 12 countries
• Convergence Criteria-Maastricht Treaty
 Euro Timelines
15th
1 January 29th March
November
2001 2005
2004
• 12th member • Did not meet • Austerity
nation to join the conditions budget
the euro to join the • Tax hikes,
• Dramatically Eurozone increase in VAT
reduced • The deficit was from 18 to 19%
inflation and never below 3%
interest rates
 Euro Timelines
8th
4 October
th
Spring 2006 December
2009
2009
• GDP up 4.1% in • Greek economy • Fitch
the first 3 contracted 0.3% downgrades
months of 2006 • National debt: Greece’s credit
262bn Euros rating to BBB+
• Government • Cost of
expects 2009 borrowing
deficit to reach increases
6% of GDP
 Euro Timelines

17th
28 January 2 February
December
2010 2010
2009
• Workers take to • The spread • Wider austerity
street to between the package
protest the cut interest announced
backs charged on • Freeze public
• S&P Greek and sector pay and
downgrades the German debt higher taxes
credit rating widens to 4%
 Euro Timelines

11 February 26 February 3 March

2010 2010 2010

• Germany • Goldman Sachs • Greek

opposes a quick accused of population told
bailout of helping to cause to accept lower
Greece, saying the crisis by bonuses and
the country using derivatives higher taxes or
must tackle its contracts to risk bankruptcy
debt problems disguise how
itself much Greece
was borrowing
 Euro Timelines
9 March 11 April 16 April
2010 2010 2010
• Greek prime • EU ministers • Government
minister agree Greek seeks help
seeks help bailout from IMF,
from Obama terms pushing its
• €30bn bailout up
bailout to €45bn
package
 Euro Timelines
19 April 23 April 27 April
2010 2010 2010
• Spread • With €16bn • Standard &
between of debt Poor's
yield on maturing in downgrade
Greek and May, Greece Greek credit
German officially rating to junk
bonds shoots requests a status
up to 469 bailout
basis points
 Euro Timelines

28 April 2010 2 May 2010 4 May 2010

• Rumours of a • Greece granted • Large scale

€120bn package €110bn aid to cutbacks leads to
calm the markets avert meltdown stock markets
• Germany admits • IMF, the EC and crash and gold
that admitting the ECB hammer hits a record high
Greece into the out a three-year • Investors vary
euro may have package to rescue whether €110bn
been a mistake Greece bailout will
actually solve
Greece problems
Crisis – PIIGS
Economy
Portugal, Spain & Italy
 Portugal Facts….
• Diversified and service based economy
• Last two decades, government privatized state-controlled
firms, liberalized key areas of the economy e.g. financial &
telecom sectors
• Economic growth had been above the EU average for much of
the 1990s, but fell back in 2001-08, and shrank 3.3% in 2009
• GDP per capita stands at roughly two-thirds of the EU-27
average
• Portugal having a population of 11.3 million, has an
unemployment rate of 10.2%1, highest in a quarter century
• In 2009, the budget deficit reached 6.8% of GDP
• Foreign Liabilities – 108% of GDP (€177 bn)
 Portugal Problems….
• Low investor confidence after Greece default, became a
deterrent to foreign investments within the country
• The budget deficit surged to an all-time high of 6% of GDP in
2005, but the government reduced the deficit to 2.6% in 2007
• In December 2009, ratings agency Standard and Poor's lowered
its long-term credit assessment of Portugal to "negative" from
"stable," voicing pessimism on the country's structural
weaknesses in the economy and weak competitiveness that
would hamper growth and the capacity to strengthen its public
finances and reduce debt
• Corruption has become an issue of major political and economic
significance for the country

1
Source: http://en.wikipedia.org/wiki/Portugal
 Spain
“The biggest trouble spot isn’t Greece, it’s Spain”
~ Paul Krugman
• Spain has high fiscal deficit at 11.4 percent
coupled with 19 percent unemployment rate -
twice the European Union average
• Spain alone needs to sell €30 billion of bonds in
July
• Foreign Liabilities of Spain – 91% of GDP (€950 bn)
• 2009 Trade deficits for Spain estimated to be
$69.5 billion
 Positives and Negatives….
• Spain has most of the debt controlled internally and
thus in better fiscal situation than Greece and
Portugal
• In early May, 2010, Spain’s government announced
new austerity measures designed to reduce the
country’s budget deficit
• IMF worsened the estimates for Spain’s 2009
contraction to minus 4% of GDP
We can’t help you either….
Italy
 Italy facts….
• The EU Commission estimate that the gross
government debt-to-GDP ratio climbed by almost 9
percentage points in 2009, to around 114.5%, and
forecast that it will continue rising to around 118% in
2011
• The 2009 increase is overwhelmingly due to the
sharp fall in nominal GDP
• A possible solution to recovery – Tax amnesties
 Greece-Crisis in the Making
• Deficit of 5% viz 2% for Eurozone countries
• Current Account deficit of 9% viz for 1% for Eurozone
• Budget deficit estimated at 13%
• These deficits resulted in high debts, external debts
amounted to 116% of GDP in 2009
 Greece-Outbreak
• 2009- Estimated deficit increases from 6.7% to 12.7%
• Drop in credit ratings by 3 rating agencies
• Bond yields jump by 400bps over German bonds
• In April 2010, Greece borrowed € 8 billion at 650bps
above German bonds
 Ireland Crisis
• The Irish crisis was in essence a real estate bubble
• Similar to the 2008 sub-prime crisis of the US
• Irish crisis was due to real estate loans
• Not due to CDO and CDS. Hence, its effects were not
all that far reaching
 Causes of Crisis Micro
Factors
• Convergence criteria • Cheap Debt • Reckless borrowing
• Fudging of figures • Housing boom • Debt To GDP – 120%
• Deficit – 12% of GDP

Fudging the
figures Asset Bubble Huge Debt
• High Expenditures • ECB’s relaxation in • Goldman Sachs
• Low revenues monetary policy • Easy funding
• Corruption • High liquidity

No fiscal Low Interest False Credit

Discipline Rates Rating
 Causes of Crisis
Macro
Factors

• Perception of stability
Euro Unification • Overflowing Liquidity

• No coordination between
Monetary Vs monetary and fiscal policies
Fiscal Policy • No option to mint money
 Impact on the US Economy
• Exchange Rate
– Weaker Euro lower US exports to Eurozone and increase US imports
from Eurozone
– Widen US trade deficit
– Make purchase and US investments in Eurozone cheaper in dollar
terms

• Large financial stake in EU

– EU is US biggest trading partner
– Financial instability in EU
• Impact trade and growth in US indirectly
• Make investment in US more attractive
 Impact on the US Economy
• $16.6 billion of Greece’s debt obligation owed to US

• US like Greece reliant on foreign investors to fund large

budget deficit
– Rising level of external debt
– Vulnerability to sudden reversal in investor confidence

• Imbalances between current account deficit and

current account surplus countries within the Eurozone
 Impact on India
• Greece- little economic trade with India
• “Greece Crisis Fears” the NIFTY closed below 5100
levels for the first time since march 5, 2010.
INDIA’S TRADE WITH PIIGS (31st March 2009)
Country Export % Import %
Greece 0.56 0.03
Italy 2.86 1.46
Ireland 0.18 0.15
Portugal 0.29 NA
Spain 1.51 NA
 Impact on the Eurozone - PIIGS
• Portugal, Ireland, and Spain too are giving the Eurozone countries
much consternation
• Portugal, which has a population of 10 million, has an
unemployment rate of 10 percent - highest in a quarter century
• Ireland's has a hefty deficit of USD 30 billion, representing 12.5
percent of its GDP, second only to Greece in the 16-nation
Eurozone.
• The Irish republic also has an unemployment rate of 12.6 percent
• Spain has high fiscal deficit at 11.4 percent coupled with 19
percent unemployment rate - twice the European Union average
• Spain alone needs to sell €30 bln of bonds in July
 Greek Domestic Policy Response
• Fiscal Austerity
– Target to reduce fiscal deficit from1 3.6% to 3% by 2014
– cutting large government budget deficits (which requires contractionary
fiscal policies to address)
– stimulating the economy during cyclical economic downturn (which
requires expansionary fiscal policies)
– crackdown on tax evasion and improved collection of social security
contributions
– Other Measures
- rise in the average value-added tax rate from 19% to 21%
- tax increases on fuel, tobacco, liquor, and luxury products
- one-off 1% tax increase on personal incomes of over €100,000 ($133,000)
- corporate, personal, and real estate tax reforms
- spending cuts on civil service
 Greek Domestic Policy Response
– Other Measures (contd)
- 5:1 retirement/recruitment ratio for new public sector hires from 2011
- 10% cut in civil service salary allowances (bonuses)
- a freeze on state pensions
- 30% cut in public sector supplementary pay (equivalent to about one
month of pay)
• Structural Reforms
– Reforms to the pension and health care systems
– Reforms to Greece’s public administration
– enhancing employment and economic growth
– fostering increased private sector development
– Supporting research, technology, and innovation
 IMF Bailout
• Financial Assistance from the Eurozone Member
States
– Package of €30 billion (approximately $40 billion) from Eurozone in
bilateral loans at interest rate of 5% and additional €15 billion
(approximately $20 billion) from the IMF
– Discussing a three year deal (2010-2012) worth some €90 billion
(approximately $121 billion) in loans
– Germany would provide the largest bilateral loan, expected to be
about €8.4 billion (approximately $11.2 billion)
– France is expected to loan about €6.3 billion (approximately $8.4
billion)
 IMF Bailout
• Financial Assistance from the IMF
– Financial assistance expected to be worth €15 billion ($20billion)
– “Outside” intervention from the IMF has been viewed by many
as a potential “humiliation” for the Eurozone
– Member states came to favor a twin-track approach combining
Eurozone and IMF financial assistance
IMF Bailout
 Measures in other EU nations
• EU has allocated € 4 billion to investments in clean energy
technologies and more secure fuel supplies for customers across the
Union – fighting the climate change at the same time as supporting
economic growth and creating jobs
• € 50 million assigned to strengthen the interconnection between
Spanish and Portuguese electric grids
• To create jobs during the crisis at the same time as building the
infrastructure of future, the EU has brought forward planned
spending on two major transport projects –
(a) € 5.4m on upgrading the rail network around Lisbon
(b) € 6mon developing Faro airport

• Helping Portuguese textile and car workers back into employment

Thank you!