Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
SlideShare a Scribd company logo

Understanding the Eurozone Crisis

•
•
European Centre for Development Policy Management (ECDPM)
European Centre for Development Policy Management (ECDPM)

The document summarizes the key stages of the Eurozone crisis from 2007 to 2011. It began with the seizure of the banking system in 2007 due to subprime mortgage debt. It discusses the stages including the bankruptcy of Lehman Brothers in 2008, the $5 trillion fiscal expansion committed by G20 leaders in 2009, the shift to concerns over government solvency in 2010, and the downgrade of US debt to AA+ in 2011. The crisis spread from the periphery to the core of the Eurozone, with bailouts of Ireland, Portugal, and multiple bailouts of Greece. Key factors fueling the crisis were slowing growth, rising debt levels, vulnerable banks, and lack of political leadership. The document also analyzes Europe's

Related slideshows

Greece crisis explained
Greece crisis explainedGreece crisis explained
Greece crisis explained
 
European sovereign debt crisis
European sovereign debt crisisEuropean sovereign debt crisis
European sovereign debt crisis
 
Euro debt crisis
Euro debt crisisEuro debt crisis
Euro debt crisis
 
1 of 18
UNDERSTANDING THE EUROZONE CRISIS Isabelle Ramdoo (Ms) Policy Officer, Economic and Trade Cooperation Pearl Beach Hotel 14 November 2011
6 KEY STAGES: 2007 – 2011 Stage 1: 9 August 2007 The seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt. Stage 2: 15 September 2008 The US government allowed the investment bank Lehman Brothers to go bankrupt 1. KEY FACTS – FROM SUB-PRIME TO DEBT CRISIS
Stage 3: London, G20 summit, 2 April 2009 : world leaders committed themselves to a $5trillion fiscal expansion to boost jobs and growth Stage 4: 9 May 2010 The focus of concern switched from the private sector to the public sector. The issue was no longer the solvency of banks but the solvency of governments . Stage 5: 5 August 2011 : the morphing of a private debt crisis into a sovereign debt crisis was accentuated when the rating agency, S&P announced that America's debt would no longer be classed as triple A
Stage 6 : 2010 – 2011 : The crisis moves from the periphery to the heart of the Eurozone, with the threat of contagion to the whole region – Bail of of Ireland and Portugal; Greece (3 times), now threat to Italy and Spain
2. KEY FACTORS BEHIND MARKET TURMOIL
The key factor worrying investors is slowing growth in the US and Europe. (I) Growth Fears
The concerns about growth have also fuelled worries about the indebtedness of eurozone states. (ii) Debt Crisis Spreading Annual borrowing cost for 10 year bond, %
There are increasing fears that sovereign debt could spill over to the banking sector, given the share of banks and private lending in government debts (iii) Vulnerable Banks
The G20 group of leading economies has said it is ready to "take action" to stabilise global markets. But there is disagreement as to what form that action would take.   Any global action will be based on steps taken at a regional and national level. With deficits already at record highs, governments have very limited room to manoeuvre. (iv) Lack of Political Leadership
(i) Borrowers v/s Lenders   Europe faces a large overhang of government and private sector debt much of which is now not repayable. In a fixed currency agreement like the Eurozone, the country with the credit sets the rule. And here it is Germany Germany believes that the crisis is all the fault of bad fiscal policies. But this vies suffers from 2 drawbacks: it may not be entirely true It is self defeating 3. Europe’s 4 big dilemma
(ii) Austerity v/s growth   Under pressure from Germany and the ECB, all of these countries have undertaken painful spending cuts and tax rises, which were rather counter productive. But here's the problem: austerity is killing growth throughout Europe. Requiring deep fiscal cuts, privatization and other structural reforms risk greater unemployment and deep recessions.
Discipline v/s Solidarity Germany's view on the eurozone crisis is simple. Southern European governments borrowed recklessly at the cheap interest rates available inside the euro. Now they are being punished by markets, and must learn discipline. Germany wants other governments to incorporate strict budget rules into their constitutions to stop such recklessness in future.   But rules, with penalties attached, may not be credible. Imposing a fine on an over-indebted government is counter productive and may exacerbate the problem.
(iv) Europe v/s the Nations   The big political standoff in Europe is one of paymaster Germany versus bankrupt southern Europe. For Germany, their country's post-War economic miracle was built on a hard currency, prudent finances, and strong exports. But Germany has everything to lose if it does not help the south out, and if the eurozone unravels.
3. HOW THE EU IS DEALING WITH IT?
Stimulus Packages: Necessary but not sufficient In 2010, EU, US and China all adopted ambitious stimulus packages to foster economic growth. While they provided a short term life jacket but did not address the causes of the crisis (ii) Financial Response: Important, but somehow contradictory to stimulus packages Fears of contagion and financial turmoil (due to high involvement of many European banks in Greece and the nervousness of markets) drove the Europeans, the IMF, the Greek government, and central banks to provide financial support to Ireland, Portugal and Greece. 1. ECONOMIC POLICY RESPONSE
(iii) Political Response The crisis has highlighted EU’s difficulties to take coherent and coordinated decisions Fundamentally, EU lacks a European government and governance It has proved quite difficulty for the EU to agree on the interpretation of the crisis and of its interests. Strong political union is yet to be seen
The Greek crisis has raised some more specific economic and political implications: Crisis has exacerbated concerns on the health of EU financial institutions It has created new financial liabilities for other EU countries It has highlighted the policy constraints on members of the Eurozone It has sparked a broader re-examination of the EU governance It has posed challenges and opportunities for deeper integration Broader Implications
Thank you! Contact: Isabelle Ramdoo ( [email_address] ) Page

More Related Content

Understanding the Eurozone Crisis

  • 1. UNDERSTANDING THE EUROZONE CRISIS Isabelle Ramdoo (Ms) Policy Officer, Economic and Trade Cooperation Pearl Beach Hotel 14 November 2011
  • 2. 6 KEY STAGES: 2007 – 2011 Stage 1: 9 August 2007 The seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt. Stage 2: 15 September 2008 The US government allowed the investment bank Lehman Brothers to go bankrupt 1. KEY FACTS – FROM SUB-PRIME TO DEBT CRISIS
  • 3. Stage 3: London, G20 summit, 2 April 2009 : world leaders committed themselves to a $5trillion fiscal expansion to boost jobs and growth Stage 4: 9 May 2010 The focus of concern switched from the private sector to the public sector. The issue was no longer the solvency of banks but the solvency of governments . Stage 5: 5 August 2011 : the morphing of a private debt crisis into a sovereign debt crisis was accentuated when the rating agency, S&P announced that America's debt would no longer be classed as triple A
  • 4. Stage 6 : 2010 – 2011 : The crisis moves from the periphery to the heart of the Eurozone, with the threat of contagion to the whole region – Bail of of Ireland and Portugal; Greece (3 times), now threat to Italy and Spain
  • 5. 2. KEY FACTORS BEHIND MARKET TURMOIL
  • 6. The key factor worrying investors is slowing growth in the US and Europe. (I) Growth Fears
  • 7. The concerns about growth have also fuelled worries about the indebtedness of eurozone states. (ii) Debt Crisis Spreading Annual borrowing cost for 10 year bond, %
  • 8. There are increasing fears that sovereign debt could spill over to the banking sector, given the share of banks and private lending in government debts (iii) Vulnerable Banks
  • 9. The G20 group of leading economies has said it is ready to "take action" to stabilise global markets. But there is disagreement as to what form that action would take.   Any global action will be based on steps taken at a regional and national level. With deficits already at record highs, governments have very limited room to manoeuvre. (iv) Lack of Political Leadership
  • 10. (i) Borrowers v/s Lenders   Europe faces a large overhang of government and private sector debt much of which is now not repayable. In a fixed currency agreement like the Eurozone, the country with the credit sets the rule. And here it is Germany Germany believes that the crisis is all the fault of bad fiscal policies. But this vies suffers from 2 drawbacks: it may not be entirely true It is self defeating 3. Europe’s 4 big dilemma
  • 11. (ii) Austerity v/s growth   Under pressure from Germany and the ECB, all of these countries have undertaken painful spending cuts and tax rises, which were rather counter productive. But here's the problem: austerity is killing growth throughout Europe. Requiring deep fiscal cuts, privatization and other structural reforms risk greater unemployment and deep recessions.
  • 12. Discipline v/s Solidarity Germany's view on the eurozone crisis is simple. Southern European governments borrowed recklessly at the cheap interest rates available inside the euro. Now they are being punished by markets, and must learn discipline. Germany wants other governments to incorporate strict budget rules into their constitutions to stop such recklessness in future.   But rules, with penalties attached, may not be credible. Imposing a fine on an over-indebted government is counter productive and may exacerbate the problem.
  • 13. (iv) Europe v/s the Nations   The big political standoff in Europe is one of paymaster Germany versus bankrupt southern Europe. For Germany, their country's post-War economic miracle was built on a hard currency, prudent finances, and strong exports. But Germany has everything to lose if it does not help the south out, and if the eurozone unravels.
  • 14. 3. HOW THE EU IS DEALING WITH IT?
  • 15. Stimulus Packages: Necessary but not sufficient In 2010, EU, US and China all adopted ambitious stimulus packages to foster economic growth. While they provided a short term life jacket but did not address the causes of the crisis (ii) Financial Response: Important, but somehow contradictory to stimulus packages Fears of contagion and financial turmoil (due to high involvement of many European banks in Greece and the nervousness of markets) drove the Europeans, the IMF, the Greek government, and central banks to provide financial support to Ireland, Portugal and Greece. 1. ECONOMIC POLICY RESPONSE
  • 16. (iii) Political Response The crisis has highlighted EU’s difficulties to take coherent and coordinated decisions Fundamentally, EU lacks a European government and governance It has proved quite difficulty for the EU to agree on the interpretation of the crisis and of its interests. Strong political union is yet to be seen
  • 17. The Greek crisis has raised some more specific economic and political implications: Crisis has exacerbated concerns on the health of EU financial institutions It has created new financial liabilities for other EU countries It has highlighted the policy constraints on members of the Eurozone It has sparked a broader re-examination of the EU governance It has posed challenges and opportunities for deeper integration Broader Implications
  • 18. Thank you! Contact: Isabelle Ramdoo ( [email_address] ) Page