EURO CRISIS

PRESENTED BY: SAMBIT MOHANTY DHYANANANDA MOHANTY SANKALP PATTANAIK SHREYANSH AGRAWAL SAURABH RAJ SHIV KUMAR SINGH VISHAKHA PANCHBHAI (12202152) (12202134) (12202155) (12202160) (12202156) (12202159) (12202175)

WHAT IS EURO ZONE ?

The Eurozone is the nickname commonly used to describe the member states that use the EUs single currency, the Euro. The idea was first mentioned in the 1970, which led to the establishing of the European Monetary System (EMS), the forerunner of the Economic and Monetary Union (EMU). Established certain budgetary and monetary rules for countries wishing to join the EMU (known

as the convergence criteria).

1. Keep the budget deficit below 3% of GDP; 2. Keep public debt below 60% of GDP 3. Demonstrate long-term price stability 4. Ensure interest rates remain within certain limits for at least 2 years.

Currently there are 17 member states (Germany, France, Italy, Belgium, Luxembourg, the

Netherlands, Spain, Portugal, Ireland, Austria, Finland, Cyprus, Estonia, Greece, Malta, Slovakia,
Slovenia) adopted a single exchange rate, which was set by the European Central Bank . The new Euro notes and coins were launched on 1 January 2002

WHAT IS EUROZONE CRISIS ?

From 2007, the international financial crisis caused a global economic downturn. Within the European Union, some states were particularly badly hit. The debt crisis of Greece which put a question on the stability of the Euro zone's single currency,

the Euro, and the future of the EUs Economic and Monetary Union (EMU).
In April 2010, Euro-zone unemployment reached ,an all-time high of 15.86 million (10.1% of the Euro-zone population). There was a big build-up of debts in Spain and Italy before 2008 but related to private sector i.e. companies and mortgage borrowers who were taking out loans due to which interest rates had

fallen to really low levels in the Southern European countries when they joined the Euro which
acted as fuel to the fire to the debt-fuelled boom.

Germany became an export power house after the euro zone was setup in 1999,

exporting far more to the rest of the world than it was importing. It was earning a lot of
surplus cash on its exports and giving most of the cash as lent to the Southern European countries. During the economic boom unlike other Southern European countries the wages rate kept on increasing, the German kept the wage rate static. As a result Spain and the Italian workers had huge competitive price disadvantage. It became very difficult for the Southern European countries to export and earn. The government borrowings has increased since the 2008 global financial crisis, so it played a small part in creating the Euro-zone crisis.

For countries in the Southern Europe specially SPAIN & ITALY where due to recession

no one wants to spend their hard-earned money . Exports are not up to the mark and not
globally competitive enough to pull the country out of the recession. So in order to control down the overall debt govt. decided to cut down borrowing in order to revive

their economies.

This cost cutting cause many other problems like Unemployment (more than 20% in SPAIN) which decrease the wages making it very hard for general people to pay their debt, spending decrease, it create a huge number of arrears in the already savaged economy of the country.

Secondly, coming to the situation where the governments keep on injecting into the economy then the countries might be on the brink of an financial collapse as there is a limitation on the fund available with the Governments.

Effect of Eurozone Crisis on the Global

The global economy is interrelated, so if major trading blocks like the Eurozone or countries like the US or China go into recession, its likely to affect economic growth around the world. The Eurozone is a massive market for businesses for the United States, China, India, Japan, Russia and the other major world economic powers and if the Euros value gets depreciated it will eventually affect them.

China has considered lending money to Europe, they are that concerned that the Euro may
collapse. The International Monetary Fund (IMF), which was set up to help countries in economic difficulty, set aside hundreds of billions of dollars for a bailout of some of the Eurozone countries.

Effect of Eurozone Crisis on the Global Contd.

The wider world is so keen to see the Euro survive for the following reasons.
To preserve the Eurozones massive consumer market :: Euro is the currency of seventeen nations. 322 millions people uses it for buying goods and services from overseas and if there was a collapse in its value, then they would be unable to buy imports. To prevent a global recession :: By collapse of the Euro some European governments would be unable to repay their huge debt, which will have a negative impact on the world economy and eventually will lead to a global recession with no business investment, no new

hiring, cost cuts, job cuts etc.

To protect the world financial system :: Banks around the globe who have given debt to Eurozone countries also hold large amounts of Euros. If the Euro will fall in value, which could affect them. It could be like the 2007 and 2008 financial crash again, and will put global banking system under threat. This would be bad news for everyone. There are 150 million people in African countries whose currencies are pegged to value the Euro. If the value of the Euro collapses, these African countries will see the value of their

currency collapse too.

GREEK DEBT CRISIS

In the first quarter of 2010 , the national debt of Greece was put at 300 billion euro($413.6 billion) , which is bigger than the countries economy. The Greek debt crisis is an expensive lesson in the importance of fiscal discipline - that comes with a multi-billion-dollar price tag.

Greece has the worst combination, large budget deficit and on of high debt level and
large external debt . Due to decades of overspending, Greece is currently receiving a bailout package of $159 billion (110 billion Euros) from European governments and the International Monetary Fund (IMF) to meet payment obligations.

IMPACT OF GREEK CRISIS

Greek crisis has made investors nervous about lending money to government, through buying government bonds. The bonds & securities of PIIGS country was not bought by any other country as the credit worthiness of these PIIGS countries got eroded .

Big U.S. banks have been lending generously to banks across Europe. Close to 29% of
their lending books during the past two years have gone to their heavyweight European counterparts. There was a impact on private individuals Now Germany and France are demanding for independent monetary & fiscal policy.

THE EUROPEAN BANKS LOANS TO GREECE

CREDIT RATING DEVELOPMENT OF THE GREEK BONDS (1997-2010)

MAJOR FACTORS THAT CAUSED EURO-ZONE CRISIS

1) Excessive borrowing can make government debt dangerously large (a lack of growth makes
it harder for borrowers to pay back loans and interest). 2) Conflict over who is responsible for bank bail-outs. In a sovereign state, this responsibility clearly lies with the national government that controls the central bank. However, no such clear line of responsibility exists in the Eurozone. 3) Problems when separate countries pursue different macroeconomic policies. Some countries may want to promote growth by lowering interest rates and, in doing so, increasing inflation.

However, other countries may want to keep inflation low to consolidate growth.
4) National economic growth occurring at a faster rate in one country than in other countries. If a countrys economy grows and demand increases, prices will rise and supply will be encouraged, which will reduce demand. This process may be accompanied by an appreciation of the countrys currency. Imports from countries with weaker economies - whose currency has not appreciated at the same rate - will be more attractive. This would allow weaker countries to increase their output, which would appreciate their currency. However, this

process cannot occur in the Eurozone because there is a single currency rate .

MAJOR FACTORS THAT CAUSED EURO-ZONE CRISIS (Contd)

5. Trade imbalances, A trade deficit occurs when the value of a countrys imports exceeds the

value of its exports. A trade surplus is when the opposite occurs.

6. Stabilizing elements of the EMU were not rigorously enforced or followed. 7. The role of the ECB. By issuing loans to countries those are unable to pay them back, setting interest rates low, to encourage investment and job creation, the ECB encouraged excessive borrowing. 8. The global financial crisis. It is also important to remember that some of the problems faced by the Eurozone were caused by problems in the wider global economy and financial system. 9. Countries borrowed too heavily and invested the borrowed money unwisely.

IMPACT OF THE EUROZONE CRISIS ON INDIA

As Euro value fell, the value of dollar against the Indian Rupee increases in a drastic way. As a result of this inflow of money in the economy will be less as Foreign investors would be very conservative in investing their money. One of the biggest outcomes of this would be the rise in price of the fuels, as India primarily depends for fuels in the form of imports. Euro-zone crisis was the result of encouraging high-risk lending and borrowing practices, international trade imbalances and slow economic growth. If the right lessons

are not taken from this INDIA might be the epicenter of another GLOBAL
FINANCIAL CRISIS.

SOME MEASURE TO TACKLE

Cleaning up banks Reducing the public debt in Greece, the only Euro zone country which has likely become insolvent Fostering adjustment and growth in peripheral countries.

Increasing the production in own country so that export and employability can be
increased. Decreasing the wages rate. Investing funds to improve infrastructure and other elements of the economy that could improve growth and competitiveness of the country.

CONCLUSION

The Eurozone is the most adventurous economic Endeavour the world has seen; never before have so many diverse and large economies been integrated both monetarily and economically. The Euro zone's future has huge implications for economic theory and practice. It is perhaps safe to say that the Eurozone is at a crossroads, where European economic integration is set to increase or perhaps fatally stall.

There seem to be a number of paths that the Eurozone could take. First, Estonias impending accession to the Eurozone (in 2011) could prove to be the last for a while if Eurozone leaders lose the stomach for greater integration in the face of continuing economic problems.

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Secondly, the current economic problems could encourage the EU to push for further political and economic integration, tying the political structures of the EU with the economic system of the EMU. This could happen if national governments see it as a way to shift responsibility away from themselves in the event of future economic problems (including trade imbalances, dangerous levels of debt and lack of competitiveness). Thirdly, if member states cannot agree on a suitable reform program, or if the economic conditions proposed by some members are unworkable for others, the Eurozone could disband or devolve into separate, smaller Euro zones (e.g. a Mediterranean, a Central European, and a Baltic version). Those who support the ekstablishing of smaller sub-zones argue that each zone might be more suitable for the economies that comprise it, and therefore could ease the tensions that arise in the bigger, single Eurozone. This advantage, however, would depend on the competitiveness of states within each sub-zone being more comparable

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Another observation was made about the leaders in some countries. These leaders were supposed to understand the situation and bring desired solutions to the crisis. Germany, Netherlands and France never explained the importance of the situation to their people. The reason behind not taking this seriousness to public was the fear for losing the votes and so they acted slowly and didn't take any urgent measures . Thus without any further delays, countries with high debt ratios and macroeconomic disproportions such as Portugal, Spain, Ireland, Greece and Italy should be accommodated with fast and sufficient debt restructuring and macroeconomic and political factors should be made cooperative. If these measures do not take place, then some countries will go through the spiral of the crisis and will be forced to see the negative results of this case.