Eurozone Crisis

What is the Eurozone?

- Officially created in January 1999 to create economic unity within Europe - Currently consists of 17 member countries - Governed by a President and a board composed of the heads of individual nations' central banks Goals of the Eurozone - Primary goal of Eurozone economic policies is to control inflation - Debt/GDP Ratio must be tightly controlled

Causes
- Trade Imbalances > Trade Deficits and Inflows of Capital

> Disparities in Labor Costs

> Low interest rates that drove investment bubbles - The Global Economic Crisis > Global Investors' Loss of Confidence - Period of Loose Monetary Policy & Easy Credit

> Explosion of Sovereign Debt

- Structural Issues within the Eurozone > Monetary Union without Unified Fiscal Policy > Inflexibility of Monetary Policy

Greece: Government Failures

- Government Deficits: from 2004-2009 the Greek Government vastly increased its expenditures > During that period: 87% increase in expenditures while tax revenues rose only 31% > Greek Government guaranteed entitlement benefits

- Misrepresentation of Economic Data and Budget Compliance

> Greece intentionally misrepresented economic data to the EU to comply with guidelines > Lack of control by the Federal government over budget practices and tax collection

Greece: Other Factors

- Two big industries -- Shipping and Tourism -- were sensitive to Business Cycle changes

> Shipping and Tourism Revenues fell 15% in 2009

> Greek Government borrowed to compensate - Credit Downgrade to BB+ ('junk') & accompanying rise in interest rates > Complete loss of confidence in Greece's ability to pay back their debts to foreign investors > Drove rates on Greek Bonds to extreme levels > Increased interest rates made it even harder for the Greek government to repay its debts

The Greek Crisis Visualized

Spain: Housing Issues

- Private Mortgage Debt fueled by a Housing Bubble > 1996-2007: 200% Increase in real estate prices > Home ownership = 80% > Huge decrease in construction > Large losses in Real Estate Wealth - Banking System Failures > Unique practices of Spanish Banks hid losses and volatility of investments for years > Alliances between Spanish Government and Banks led to artificially high levels of investment and construction that contributed to the housing bubble > Major banks were eventually downgraded > These banks were nationalized by the Spanish Government at huge cost to taxpayers

Ireland: Crony Banking

- Ireland became the first Eurozone country to enter a recession > Many Defaulted loans to homeowners and property developers - Irish Banks were guaranteed by the government > When property bubbles burst, budget deficits exploded - Credit Rating was plummeting > April 2011: Moody's awarded the banks' debt "junk" status

Eurozone Crisis Timeline

Eurozone Crisis Timeline

2009-2010
- Late 2009: Concerns regarding certain EU member states' debts begin heating up (PIIGS) - Early 2010: Greek total debt reaches 113.6% of GDP (13.6% deficit relative to GDP) - February: Greek protests in response austerity measures to curb deficit - March: Eurozone & IMF approve to 22bn euro safety net but no loans - April: Eurozone agree to 30bn euro loans - May: Eurozone & IMF agree to 110bn euro bailout package - November: EU & IMF agree to 85bn euro bailout to Irish Republic

2011
- February: Permanent European Stability Mechanism set up, worth 500bn euros - May: Portugal receives 78bn euro bailout from Eurozone & IMF - July: 12bn euros more in loans for Greece - July: Second Greek bailout worth 109bn euros* - August: European Central Bank begins to buy Italian & Spanish government bonds - September: Italy passes a 50bn euro austerity budget - September: Italy's debt rating cut from A+ to A - October: Bank of England injects 75bn GBP into the British economy through Quantum Easing - October: Eurozone approves another 8bn euro loan to Greece

2012
- January: Standard & Poor's downgrade France and 8 other Eurozone countries - February: Greece passes unpopular austerity bill in order to secure bailout funds from IMF - March: Eurozone and IMF finally back second Greece bailout worth 130bn Euros - June: Greece holds second presidential elections after failing to form a government. Pro-austerity party wins, helping to lessen worries of a Greek exit from the Euro - June: Spain receives 125bn Euro bailout, becomes 4th Eurozone nation to receive a bailout - September: ECB agrees to unlimited bond buying program known as "Outright Monetary Transactions"

Current State

- Eurozone unemployment: 11.4% - Greek unemployment: 25.1% - Spanish unemployment: 25.1% - Irish unemployment: 15% - Eurozone area Debt to GDP:: 90% - 6 countries are currently in recession: Greece, Spain, Italy, Malta, Portugal, and Cyprus - Greece agreed to new harsh austerity measures in order to obtain more bailout funds - Rumors of Spain and Greece requiring additional bailouts

Why should you care?

- European Union represents a large source of demand for United States exports - A healthy European economy is conducive to a well-functioning global economy - Default of European nations on their debt obligations hurts the U.S. Stock Market - As globalization progresses into the future, foreign economic events (good and bad) will have increasing impact on the world economy

Opinions?

Sources Cited
http://www.bbc.co.uk/news/business-13856580 http://www.rte.ie/news/2011/0418/rating-business.html http://www.nytimes.com/2008/09/25/business/worldbusiness/25iht-punt.4.16485796.html?_r=0 http://en.wikipedia.org/wiki/2008%E2%80%932012_Spanish_financial_crisis http://en.wikipedia.org/wiki/European_sovereign-debt_crisis#Trade_imbalances http://en.wikipedia.org/wiki/Greek_government-debt_crisis