The Euro Crisis

Sarah Blaettner & Norman Walter

Sarah Blaettner, Norman Walter, MA Int. Business Development, ESB, Hochschule Reutlingen, Alteburgstrae 150, 72762 Reutlingen, www.reutlingen-university.de,

Agenda

Key Facts about the Euro Zone

Evolution of the Euro Crisis

Reasons for the Euro Crisis

Ways Out of the Crisis

Conclusions

Discussion

Agenda

Key Facts about the Euro Zone

Evolution of the Euro Crisis

Reasons for the Euro Crisis

Ways Out of the Crisis

Conclusions

Discussion

1. Key Facts about the Euro Zone General Overview

Definition Euro Zone Economic and Monetary Union of 17 European Union (EU) member states that have adopted the euro () as their common currency!

Member States Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain

1. Key Facts about the Euro Zone General Overview

Criteria for Membership (declared in Maastricht Contract) Member of European Union Inflation rate must be no more than 1.5 percentage points higher than the average of the three best performing countries Government deficit must not exceed 3% of GDP Government debt must not exceed 60% of GDP Nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states. Applicant countries should have joined the exchange-rate mechanism (ERM II) for 2 years

1. Key Facts about the Euro Zone Institutional Structure

European Union (EU)

27 countries

European Monetary Union (EMU)

17 countries (synonym= Euro Zone)

1. Key Facts about the Euro Zone Institutional Structure

Political Institutions of the EU European Council
Convention of the EU leaders setting the political direction without real power

Non-political Institutions of the EU

Court of Justice
interprets the EU law

European Comission
drafts proposals for new EU laws

European Parliament
debating and passing laws and budget with the Council of the EU

Court of Auditors
audits the EU finances

Legislative
Law making

European Central Bank

important role for the European Monetary Union.

The Council of the EU

passes all new EU laws

1. Key Facts about the Euro Zone Institutional Structure

Institutions of the EMU European Central Bank (ECB) authorises the issue of bank notes in the euro zone assists national central banks sets the prime rate European System of Central Banks (ECSB) consists of the ECB and the national central banks maintains price stability ECOFIN takes decisions regarding the exchange-rate policy EURO Group informal and advisory body Economic and Financial Comitee reviews the financial situation of the members

ECB

Economic and Financial Comitee

ESCB

European Monetary Union

Euro Group

Ecofin

Agenda

Key Facts about the Euro Zone

Evolution of the Euro Crisis

Reasons for the Euro Crisis

Ways Out of the Crisis

Conclusions

Discussion

2. Evolution of the Euro Crisis

2009 2010 2011 2012

2008/2009 financial crisis:

October 2009:

March 2010:

April 2010:

Banks losses and recession leads to government spending in Euro counries

Credit rating Agencies downgrade Greece Greece implements austerity measures and asks Euro member states for support

Euro Zone and IMF grant voluntary credit to Greece Elaboration of European rescue funding

Greece requests money from the newly implemented rescue fund

10

2. Evolution of the Euro Crisis

2009 2010 2011 2012

May 2010:

June 2010:

July 2010:

August 2010:

Euro Zone grants further credit to Greece Portugal and Spain get affected Creation of European Financial Stability Facility (EFSF) by the euro area member states

Euro Zone decides to establish permanent crisis solution after 2013 to replace EFSF European Stability Mechanism

Portugal is downgraded by rating agencies

Ireland is downgraded by rating agencies

11

2. Evolution of the Euro Crisis

2009 2010 2011 2012

November 2010:

February 2011:

March 2011:

April 2011:

Ireland asks Euro Zone and IMF for money Euro Zone finance ministers agree on Irish aid package from EFSF

Germany and France call for Pact of Competitiveness to increase economic growth in Europe

EU leaders agree on "Euro Plus Pact

Portugal is downgraded by rating agencies once again Portugal asks Euro Zone and IMF for money Portugal receives money from EFSF

12

2. Evolution of the Euro Crisis

2009 2010 2011 2012

June 2011:

July 2011:

September 2011:

October 2011:

Greece is downgraded to the level of CCC by rating agencies

Euro Zone finance ministers agree on second aid package for Greece provided that Greece implements further austerity measures

Rating agencies downgrade 7 Italian banks Spain is downgraded by rating agencies

Euro Zone finance ministers discuss about extension of EFSF

13

2. Evolution of the Euro Crisis

2009 2010 2011 2012

November 2011:

December 2011:

January 2012:

...

to be continued

14

2. Evolution of the Euro Crisis Current Situation Budget Deficit 2011

Ireland Greece Spain Maastricht limit: 3% France Slovenia Portugal Cyprus Slovakia 6.30% 5.90% 5.80% 5.80% 5.10% 5.10% 4.00% 3.70% 9.50%

10.50%

Italy
Belgium Austria Netherlands Malta Germany Luxembourg Finland
0.00%

3.70%
3.70% 3.00% 2.00% 1.00% 1.00%
2.00% 4.00% 6.00%

euro-zone average: 4,3%

8.00%

10.00%

12.00%

15

2. Evolution of the Euro Crisis Current Situation Public Debt 2011

Greece Italy Ireland Maastricht limit: 60%. Portugal Belgium France Germany Austria 120.30% 112.00% 101.70% 97.00% 84.70% 82.40% 73.80% 68.10% 68.00% 63.90% 62.30% 50.60% 44.80% 42.80% 17.20%
20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 140.00%

157.70%

Spain
Malta Netherlands Cyprus Finland Slovakia Slovenia Luxembourg
0.00%

euro-zone average: 87,7%

160.00%

180.00%

16

2. Evolution of the Euro Crisis Current Situation Unemployment 2011

Spain

21.20% 15% 14.50% 13.40% 12.80% 12.30% 9.90% 8.40% 8%

Greece
Ireland Slovakia Luxembourg Portugal France Slovania Italy Finland Belgium Germany Malta Cyprus

7.90%
7.50% 6.10% 6.00% 5.40% 4.30% 3.70%
5.00% 10.00%

euro-zone average: 10,1%

Netherlands
Austria
0.00%

15.00%

20.00%

25.00%

17

2. Evolution of the Euro Crisis Current Situation The PIIGS

Budget Deficit 2011 Unemployment 2011
25% 10.50% 9.50% 21.20% 12.30% 20% 15% 10% 5% 0% 4.00% 5.00% 10.00% 15.00% Italy Portugal Ireland Greece Spain

Portugal
Ireland Greece Spain

14.50%

15%

6.30%
5.80%

8%

Italy

Portugal Italy 0.00%

Ireland 2011 Public Debt

Greece 157.70%

Credit Rating 2011

Greece Ireland Portugal Italy

CCC BA1 BA2 A2 AA2

18

Greece

Italy

120.30%
112.00% 101.70% 68.10%
50.00% 100.00% 150.00% 200.00%

Ireland

Portugal

Spain

Spain
0.00%

Spain

Agenda

Key Facts about the Euro Zone

Evolution of the Euro Crisis

Reasons for the Euro Crisis

Ways Out of the Crisis

Conclusions

Discussion

19

3. Reasons for the Euro Crisis

Possible Reasons

1. Lavish Finance Sector

2. Seductive Interest Rates

3. Weaknesses in Maastricht Treaty 4. Generous Accession Policy 5. Different Economic Potential

20

3. Reasons for the Euro Crisis

1. Lavish Finance Sector Banks grant cheap credit on real estate during boom After burst of bubble governments of member states have to compensate bank losses and recession

2. Seductive Interest Rates Low money market interest rate offers favorable financing conditions to instable member states Ireland, Spain, Greece and Portugal increase their debt and the speculation with real estate

3. Weaknesses in Maastricht Treaty Countries do not disciplines other countries for the non-fulfillment of the defined criteria in order to protect themselves Maastricht Treaty does not contain rescue mechanism for insolvent countries (originally Non-Bail-Out clause)
21

3. Reasons for the Euro Crisis

4. Generous Accession Policy

Countries join the Euro Zone without fulfilling the accession criteria regarding government debt and government deficit

5. Different Economic Potential Negative trade balance of non-competitive member states lead to disparity within the Euro Zone Strong countries have to compensate

22

3. Reasons for the Euro Crisis

Euro Zone Current Account Balance

23

Agenda

Key Facts about the Euro Zone

Evolution of the Euro Crisis

Reasons for the Euro Crisis

Ways Out of the Crisis

Conclusions

Discussion

24

4. Way out of the Crisis

Possible Solutions

1 Small EU Reform

2 Radical Haircut
3 Three-Pillar Rescue 4 Europe as a Political Union 5 Europe of two Directions 6 Nations Reloaded

25

4. Way out of the Crisis

1. Small EU Reform Stricter set of rules combined with a modified institutional structure

Three-Pillar Rescue of the European Monetary Union

Stability and Growth Pact gets empowered and can react faster ( Sanctions still need a majority decision) Integrated Constant EU bail-out package gets incorporated in the EU treaties Stronger Commission for European Stability Supervision of the European Mechanism (ESM) 2. Radical Haircut European Financial Stability and Supervision Restructuring of heavily indebted nations within the EU Growth Pact Creditors loose their money to a certain extent or at least have to wait for the repayment Need for an increased bank rescue fund to save the national banks from bankruptcy 3. Three-Pillar Rescue Proposal from the council of economic experts ( =Wirtschaftsweisen) Stronger Supervision of the European Stability and Growth Pact (Sanctions decided by EU commission) Integrated commission for European Financial Supervision with more competence Introduction of the European Stability Mechanism (2013)
26

4. Way out of the Crisis

4. Europe as a political Union Proposal from Jean-Clausen Juncker, head of the Euro-Group and prime minister of Luxembourg Need for a stronger political union and more european solidarity European economic government (integrated tax and budget policies); Introduction of euro-bonds 5. Europe of two Directions Introduction of two currencies within the European Monetary Union North-Euro under the leadership of germany (Austria,Benelux countries and Finland) Hard currency South-Euro under the leadership of France (Spain, Italy, Greece, Portugal etc.) Soft currency 6. Nations Reloaded Break-up of the European Monetary Union Reintroduction of the old national currencies Resolution of the ECB National central banks are responsible for the national monetary policies again

27

Agenda

Key Facts about the Euro Zone

Evolution of the Euro Crisis

Reasons for the Euro Crisis

Ways Out of the Crisis

Conclusions

Discussion

28

5. Conclusion

Stuck in the middle !

29

Agenda

Key Facts about the Euro Zone

Evolution of the Euro Crisis

Reasons for the Euro Crisis

Ways Out of the Crisis

Conclusions

Discussion

30

Sources

http://www.eu-info.de/euro-waehrungsunion/5300/5318/5573/ http://www.efsf.europa.eu/attachments/faq_en.pdf http://www.europarl.europa.eu/document/activities/cont/201009/20100908ATT81666/20100908ATT81666EN.pdf http://www.fr-online.de/fotostrecken-wirtschaft,1473648,4861632,item,2.html http://www.bundesregierung.de/Content/DE/Artikel/2011/05/2011-05-17-portugal-eurohilfe.html http://www.insm.de/insm/Publikationen/Dossiers/Steuern-und-Finanzen/INSM-Dossier-Euro-Krise/Warum-der-Euro-in-dieKrise-rutschte.html#jump1 http://www.economist.com/node/21530960 European Comission http://www.eurotreaties.com/maastrichtec.pdf European Union http://europa.eu/about-eu/institutions-bodies/index_en.htm European Parliament http://www.europarl.europa.eu/parliament/expert/displayFtu.do?id=73&ftuId=FTU_5.2.html&language=en

31

BACK UP

32

http://www.youtube.com/watch?v=t_SZAY_dQ7U

33