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Agenda Definitions The World European Union Eurozone What Went Wrong Outcome Analysis and Opinion What Can Plausibly Happen Recovery Solutions


Definitions Crisis – Any event that is, or expected to lead to, an unstable and dangerous situation affecting an individual, group, community and whole society; negative changes in the security, economic, political, societal or environmental affairs. Financial Crisis – The term is applied broadly to the situations in which some financial institutions or assets suddenly lose a large part of their value Recession – A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. Depression – Persisting Recession

The World:

The World

The 7 Continents:

The 7 Continents Asia Africa North America South America Antartica Europe Australia A continent is one of the several landmasses on the Earth, generally identified by convention rather than any strict criteria. SIZE


Europe Second smallest continent 47 member countries Population of 731 million (Less than that of India) First to industrialize GDP in 2010 - $19.92 trillion (32.4% of the World) Germany, France and UK are 4 th , 5 th and 6 th largest economy in the World..

European Union (EU):

European Union (EU) Unique economic and political partnership between 27 European countries. Free movement of Capital, Goods, Services and labor. GDP - €12,268,387 million (2010 est.)

Member States of EU (Chronologically):

Member States of EU (Chronologically) 1952 – Belgium, France, Germany, Italy , Luxembourg, Netherlands formed EU 1981 – Greece 1986 – Portugal and Spain 1995 – Austria, Finland and Sweden 1973 – Denmark, Ireland and UK 2004 – Cyprus, Czech, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia 2007 – Bulgaria and Romania

Who Governs EU?:

Who Governs EU? Represents the EU`s citizens and is directly elected by them Represents the governments of the individual member countries; Presidency shared by member states on a rotating basis R epresents interests of the Union as a whole

Eurozone :

Eurozone A geographical and economic region consists of all the EU countries that have fully incorporated euro as their national currency 17 Countries Also called “Euro Area” Monetary Policies – ECB (Germany) Fiscal Policies - Individual Countries

A Comparison :

A Comparison Population GDP % of World GDP Eurozone 317 million €08.4 trillion 14.6% EU (27) 494 million €11.9 trillion 21.0% USA 300 million €11.2 trillion 19.7% Japan 128 million €03.5 trillion 06.3%

What Went Wrong……:

What Went Wrong……

Year 1997:

Year 1997 Each Country should not borrow more than 3% of its GDP Agreed! It`s just a norm, right?


Offenders Italy – Worst offender; regular in breaking 3% limit Germany and France followed Almost everyone joined Greece never stuck to 3% target, manipulated its borrowing statistics Heavy borrowings

Fiscal Deficit Basics:

Fiscal Deficit Basics FD is shortfall of Government Revenue against its spending FD is financed by Borrowings Rise in interest rates Monetization Inflation and currency Devaluation

Trade Deficit Basics:

Trade Deficit Basics TD is shortfall of exports w.r.t to Imports TD has to be financed Forex Borrowings Rise in interest rates FDI/FII inflows Trade Deficit has to be balanced by Surplus of Capital flows Leads of Currency Devaluation Cheaper exports and costlier imports Tendency to close the Trade Deficit

Eurozone Crisis:

Eurozone Crisis In a nutshell Portugal, Spain, Greece Trade Deficit especially with Germany High Fiscal Deficit Common Currency & Monetary Union Cannot devalue currency Cannot Monetize FD The Results German loans finance imports from Germany Borrowings to finance FD keep rising

Portugal and Greece:

Portugal and Greece High Fiscal Deficits Low growth economy Low Tax revenues High Government Spending Govt Employment Pensions and Subsidies FD 9-10%


Ireland Failure of 6 Major Banks Property bubble Irish Government Bailout Protect Depositors and Shareholders Bill upto $ 100 bn FD upto 32.4% of GDP

Outcome :

Outcome Greece defaults Huge Sovereign debt of Eurozone Countries Govt. and Banks in Eurozone have about $500 billion in outstanding bonds coming due in first quarter of 2012 Banks not in a position to issue corporate bonds at affordable rates Recession – Everyone is sitting on their money Weakening of Euro Impacted growth in other parts of the World

Analysis and Opinion:

Analysis and Opinion

Mario Draghi, President, ECB:

Mario Draghi, President, ECB ECB loans could indirectly help some heavily indebted European countries if the banks use ECB loans to invest in govt. bonds. Many European banks are now facing possible losses on their holdings of bonds issued by cash-strapped governments and don’t want to buy any more But the bankss might be willing to resume their purchases if they don’t have to repay their loans to ECB for 3 years By then, region`s financial health might be resolved and governments restored to financial health

Uri Dadush:

Uri Dadush G20 must help manage Eurozone crisis: Build a firewall around Spain and Italy Impose demanding conditions on Europe Foster open international trade and reform the WTO Focus on the big pictire

What could plausibly happen?:

What could plausibly happen?

Reform and recovery :

Reform and recovery

Proposed long-term solutions :

Proposed long-term solutions European fiscal union and revision of the Lisbon Treaty Eurobonds European Stability Mechanism (ESM) Address current account imbalances European Monetary Fund Speculation of the breakup of the Eurozone

Who can take Advantage of Eurozone Crisis.:

Who can take Advantage of Eurozone Crisis.

Eurozone crisis is 'biggest threat to emerging Asia':

Eurozone crisis is 'biggest threat to emerging Asia'


Solutions Bailouts Loan write downs upto 50% Interest rate cuts Austerity measures to cut FD to 3% European Financial Stability Facility Created by 27 member countries Bonds from German market $ 440 bn can go upto 1 Tn Other players – IMF, ECB etc


Solutions Liquidity – delay the crisis Eurozone countries want to funnel $200 billion through IMF Closer budgetary cooperation among 17 eurozone countries A Govt. of bureaucrats is formed in Italy to tackle the situation

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