Will the euro disappear? disappear?

Khaoula CHBANI Mohamed ETTALBI Zakariae BEN ELKADI

SUMMARY
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I Introduction II The Euro crisis III The euro crisis protagonists IV Possible scenarios for the future V Conclusion

INTRODUCTION
Definition and history of Euro
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Official currency of the euro zone : 17 european countries

Adopted on 1999, effective since 2002

Euro mecanisms
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Deficit<3%, Debt<60%, low inflation, interest rate The value of the euro is controlled by:
  

Central european Bank Monetary volume in Euro zone Member countries public debt

MCE II: Mecanism that regulates the exchange rate of euro and other european currencies

Advantages of Euro
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Facilitate economic exchanges among the EU Elimination of transaction costs Control over exchange rate and interest rate Uniformization of prices in EU

The Eurozone crisis

Debt


The debt crisis is threatening a various countries of the Eurozone since 2008, different stories but the problem stays the same public finances. The blooming debt is one of the most manifested Eurozone crises; its a problem due to the loss of competitiveness that happened after the adoption of the euro by the GIIPS.

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In Greece: Greece didnt have a balanced budget even before joining the Eurozone. Joining the euro zone caused an economic boom due to the low cost of borrowing,

the rating agencies keep downgrading the countrys debt, its actual grade is CC the lowest grade of any government in the world.

In Ireland: having a large real estate bubble didnt help the country to avoid the debt crisis. When the crisis hit on 2008, the financial situation of this country gets worst and the measures taken by the government didnt help much.

In Portugal: the crisis was well managed in the first part of economic crises, but due to the forecasts of no growth in long term, in 2010 the government was obliged to ask for a bail out due to its financial situation.

In Spain: there was also a real estate bubble which affects its growth.

In Italy: the country has a slow growth and a large debt, which was downgraded by S&P.

Inflation
The actual inflation rate 3% is the highest since October 2008; inflation refers to a general raise of prices, adding this problem to the debt crisis may generate a recession in the Eurozone.

Budget deficit
The mean reason of budget deficit is that the countries GIIPS have been living beyond their means during the bubble period.

Measures taken to address these issues



European financial solidarity The EU has always opted for solidarity to face the financial crisis, to

express this solidarity the



European Financial Stability Facility (EFSF) Mission: provide loans to countries having financial crisis,

bail out

Greece 109bn euros, Ireland 85bn euros Portugal 78bn euros.

Government austerity measures

Responding to the debt crisis the countries adopted a round of austerity measures, these measures can affect pensions, the taxation system.
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In Greece : the government passed two austerity packages, a new property tax, Jobs and spending, Selling state assets. in Portugal:The austerity measures adopted were: Pay cut for top earners in the public sector, A VAT rise of 1% and income tax hikes for high-earners, The military budget, two high-speed rail projects have been postponed.

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In Italy : the measures adopted by the government affected healthcare fees, regional subsidies, family tax benefits, pensions of high-earners. In Spain: tax rise for the rich, spending cuts, Pay cut for the Government workers, The retirement age is being raised to 67, the tax on tobacco is to rise to 28%, Selling state assets ( the Spanish national lottery and a minority stake in the country's airport authority)

THE EURO CRISIS PROTAGONISTS

European union and its institutions
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European Commission and Parliament:

  

Help the indebted countries (160B EUR for for for for Greece) Reschedule some countries debt Impose regulations: Stability pact

BCE:
 

Support countries in difficulty (ex: Portugal and Moodys) Protect the other countries from the crisis

Countries in debt: Ireland, Portugal, Greece debt:

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Perform political reforms (New elections in Portugal) Take economic measures: Greece: Public austerity plan Other countries take also measures to avoid crisis: Italys public austerity plan and Spains golden rule

The France-Germany Tandem

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Take the initiative of new reforms: Golden rule, financial transactions taxation, economic government of euro zone, etc.

Block measures that seem excessive or premature: example of european obligations, EU budget augmentation, etc.

International institutions and rating agencies

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FMI Helps financing aid plans for countries in debt: 22,5B EUR to Ireland in

2010, 78B EUR to Portugal, 30B EUR to Greece in 2011.

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Rating agencies Decline the rating of countries in crisis: Moodys : Portugal BAA to BA2

Greece: B3 to CAA, Fitch : Ireland (AA to A+).

Possible Scenarios for the future

Greece euro-withdrawal
 The incentive to a voluntary departure from the euro area means that Greece will be free to devalue its currency, to make its economy more competitive and to set its own interest rate. But this option doesnt mean that expulsion or withdrawal of Greece is an easy measure to take.  The expulsion way out is not conceivable (at least for the moment) because it will affect negatively the European solidarity principle, however, a voluntary departure is almost possible especially if Greece comes out with an arrangement with ECB and the other countries of Euro zone to accompany its withdrawal.

In case of withdrawal of Greece, problems of Euro Zone will not be resolved, because this measure can ruin the economies of Greeces creditors which could not get back their investments on Greek debts.

Therefore, the focus now in the financial markets is on whether Greece can sort its problems out and, if not, there will be some sort of international intervention.

In European capitals concerned by the euro zone crisis, the hope is that this talk about departure will be just speculation.

Reenforcement of European solidarity: towards a European federation?



Greece debt crisis shows to European governments that the main reason of the European sovereign crisis is that each country has its own financial policy, which makes the task of ECB to control the monetary market very difficult.

The idea of European Federation isnt to rule out. USA could be a good example to follow; the Federal Reserve FED controls and regulates the US financial market, although the states are relatively independents.

Basically, the EU is has to face an existential crisis which it doesn't have the entire institutional tools to solve. One way to come up this deadlock would be to go back to the member states and get their approval to revise the entire treaty governing the federation. But that approach is extremely difficult, even hard any delay or dilution of the common rescue fund or centralized budget authority could have disastrous effect for the European economy and the pocketbooks of its citizens.

Complications in Spain and Italy: dislocation of Euro Zone



Italy and Spain are confronted with serious financial problems related to their high debt levels, Italy will likely default but Spain could escape. We are talking about dislocation of Euro Zone, because these two countries have big economical statures in Europe, particularly Italy which is the third largest economy in the Eurozone

Contagion of debt crisis in those countries could be the beginning of the end of Euro Zone according to the experts.

Italy:


Italy couldnt hold up its debt even if rates fall back unless Roma sharply increases growth in the next three years.

Even hard Italy has managed to run tight budgets and, plans to eliminate its deficit by 2014, with its massive debt it won't be able to survive if it can't raise its growth rate.

Spain:


The situation in Spain can be considered as better than in Italy because its debt is much lower.

Even under the extreme bad scenario, Madrid's debt ratio would rise to no higher than 75% of GDP.

The Spanish economy was highly affected by the financial crisis of 2008 and the current European sovereign debt crisis but there is a real chance that Spain could avoid default and debt restructuring

CONCLUSION
what will happen if Euro disappears?


ECB would have to return all of its gold to the European States in proportion to their contributions.

Old European currencies would have to reappear and Euro reserves converted back to the mix passed to the ECB from the beginning of the Eurozone.

 

The worlds Forex Markets would be in disorder. Confidence in currencies would probably disappear. There would be a huge demand for all hard assets

REFERENCES
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