Francois Bernard Duhamel

Banking System: European central bank and the eurosystem.

Introduction

The decision to create an economic and monetary union was taken by the European

Council in the Dutch city of Maastricht in December 1991, and was later enshrined

in the Treaty on European Union (the Maastricht Treaty). Economic and monetary

union takes the EU one step further in its process of economic integration, which

started in the 1950s

Economic structures vary across the euro area countries, causing differentials in

economic performance between them. Diversity in economic structures relates, for

example, to the relative importance of different economic activities for aggregate

output. The differences in the relative importance of activities reflect countries’

specialisation in the production of different goods and services, which is shaped by

factors such as geographical location, demography, the institutional framework

(including fiscal policies) and consumption patterns.

Fiscal policies have a significant impact on economic growth, macroeconomic stability

and inflation. Key aspects in this respect are the level and composition of

government expenditure and revenue, budget deficits and government debt. Fiscal

discipline is a pivotal element of macroeconomic stability. The need for fiscal

discipline is even stronger in a monetary union, such as the euro area, which is

made of sovereign states that retain responsibility for their fiscal policies.

Monetary policy decisions are taken by the ECB's Governing Council. The Council

meets every month to analyze and assess economic and monetary developments

and the risks to price stability and to decide on the appropriate level of the key

interest rates, based on the ECB's strategy. To implement its monetary policy

decisions, the Governing Council of the ECB has adopted a set of monetary policy

instruments and procedures as laid down in the General documentation on Euro

system monetary policy instruments and procedures.

Economic and Monetary Union:

The story of the euro began when EU leaders agreed to launch an economic and monetary union (EMU), with a single currency, as part of the Maastricht Treaty signed in 1992. After several years of preparations, involving completing the single market and establishing the European Central Bank, between 1999 and 2002 twelve EU Member States withdrew their national currencies — like the guilder, the franc and the peseta — and joined together in the euro area, with one single currency: the euro.

All EU countries are part of the EMU, although not all use the euro. The EMU is managed by several EU and national institutions, each with its own role. This management process is known as economic governance and it is achieved through an institutional structure which comprises the following actors.

The European parliament — shares the job of formulating legislation with the Council and exercises democratic oversight of the economic governance process.

The European Council — the Heads of State or Government from all EU countries set out the main policy orientations.

The Council — finance ministers from all EU countries coordinate policies, decide on proposals from the Commission and take decisions which can bind individual EU countries.

The euro group — finance ministers of the euro area countries decide on matters concerning the euro.

The European Commission — proposes orientations for the conduct of economic and fiscal policy to the Council, monitors performance and ensures that EU countries comply with decisions and recommendations of the Council.

The EU Countries — set their national budgets within agreed limits for deficit and debt, determine their own structural policies involving labour, pensions and capital markets, and implement Council decisions.

The European Central Bank — independently implements monetary policy for the euro area, with price stability as the prime objective.

The European Central Bank

The ECB is the central bank for Europe's single currency, the euro. The ECB’s main task is to maintain the euro's purchasing power and thus price stability in the euro area. The euro area comprises the 18 European Union countries that have introduced the euro since 1999.

The mission of the European Central Bank

The European Central Bank and the national central banks together constitute the ES, the central banking system of the euro area. The main objective of the ES is to maintain price stability: safeguarding the value of the euro.

We at the European Central Bank are committed to performing all central bank tasks entrusted to us effectively. In so doing, we strive for the highest level of integrity, competence, efficiency and transparency.

The role of the ECB in the EuroSystem

Under Article 9.2 of the Statute of the ESCB, the ECB ensures that the tasks of the ES are carried out either by its own activities or through the NCBs. In line with this statutory role, the ECB exercises several specific functions. In particular, it:

• is the decision-making center of the ESCB and the Eurosystem;

• ensures consistent implementation of ECB policies;

• exercises regulatory powers and the right to impose sanctions;

• initiates Community legislation and advises the Community institutions and EU

Member States on draft legislation;

• monitors compliance with the provisions of Articles 101 and 102 of the Treaty;

• carries out those tasks of the former EMI which still need to be performed in

Stage Three of EMU because not all EU countries participate in EMU.

The mission of the Eurosystem

The ES (ES), which comprises the European Central Bank and the national central banks of the Member States whose currency is the euro, is the monetary authority of the euro area. In the ES the primary objective is the maintenance of price stability for the common good. Acting also as a leading financial authority, they aim to safeguard financial stability and promote European financial integration.

In pursuing their objectives, they attach utmost importance to credibility, trust, transparency and accountability. An effective communication with the citizens of Europe and the media is an important aspect. ES is committed to conducting our relations with European and national authorities in full accordance with the Treaty provisions and with due regard to the principle of independence.

ES jointly contribute, strategically and operationally, to attaining our common goals, with due respect to the principle of decentralization. ES is committed to good governance and to performing our tasks effectively and efficiently, in a spirit of cooperation and teamwork. Drawing on the breadth and depth of their experiences as well as on the exchange of know-how, ES aim to strengthen our shared identity, speak with a single voice and exploit synergies, within a framework of clearly defined roles and responsibilities for all members of the ES.

The strategic intents of the Eurosystem:

Acknowledged authority in monetary and financial mattersBuilding on its solid constitutional basis, its independence and its internal cohesion, the ES, the central banking system of the euro area, shall act as the monetary authority of the euro area and as a leading financial authority, fully recognized inside and outside Europe. In pursuing its primary objective, the maintenance of price stability, the ES shall undertake the necessary economic and monetary analyses and adopt and implement appropriate policies. It shall also properly and effectively respond to monetary and financial developments.

Financial stability and European financial integrationThe ES shall aim to safeguard financial stability and promote European financial integration in cooperation with the established institutional structures. To this end, it shall contribute to policies providing for a sound European and global architecture for financial stability.

Accountability, credibility and trust. Closeness to the citizens of EuropeThe ES attaches utmost importance to credibility, trust, transparency and accountability. It aims for effective communication with the citizens of Europe and the media. It is committed to conducting its relations with European and national authorities in full accordance with the Treaty provisions and with due regard to the principle of independence. To this end, the ES will keep abreast of the transformations affecting money and financial markets and will be sensitive to the public interest and market needs.

Shared identity, clarity of roles and responsibilities and good governanceThe ES shall aim to strengthen its shared identity within a framework of clearly defined roles and responsibilities for all its participants. To this end, the ES will build on the potential and deep involvement of all its members, as well as on their commitment and willingness to work towards agreement. Furthermore, the ES is committed to good governance and to applying effective and efficient organizational structures and working methods.In performing its activities, the ES shall be guided by a number of organizational principles.

About the most characteristics members of the EU:

Austria

Austria, with its well-developed market economy, skilled labor force, and high standard of living, is closely tied to other EU economies, especially Germany's. Its economy features a large service sector, a sound industrial sector, and a small, but highly developed agricultural sector. Following several years of solid foreign demand for Austrian exports and record employment growth, the international financial crisis of 2008 and subsequent global economic downturn led to a sharp but brief recession. Austrian GDP contracted 3.8% in 2009 but saw positive growth of about 2% in 2010 and 2.7% in 2011. Growth fell to 0.6% in 2012. Unemployment did not rise as steeply in Austria as elsewhere in Europe, partly because the government subsidized reduced working hour schemes to allow companies to retain employees. The 2012 unemployment rate of 4.3% was the lowest within the EU. Stabilization measures, stimulus spending, and an income tax reform pushed the budget deficit to 4.5% in 2010 and 2.6% in 2011, from only about 0.9% in 2008. The international financial crisis of 2008 caused difficulties for Austria's largest banks whose extensive operations in central, eastern, and southeastern Europe faced large losses. The government provided bank support including in some instances, nationalization to support aggregate demand and stabilize the banking system. Austria's fiscal position compares favorably with other euro-zone countries, but it faces external risks, such as Austrian banks' continued exposure to Central and Eastern Europe as well as political and economic uncertainties caused by the European sovereign debt crisis. In 2011 the government attempted to pass a constitutional amendment limiting public debt to 60% of GDP by 2020, but it was unable to obtain sufficient support in parliament and instead passed the measure as a simple law.

Belgium

This modern, open, and private enterprise based economy has capitalized on its central geographic location, highly developed transport network, and diversified industrial and commercial base. Industry is concentrated mainly in the more heavily-populated region of Flanders in the north. With few natural resources, Belgium imports substantial quantities of raw materials and exports a large volume of manufactures, making its economy vulnerable to volatility in world markets. Roughly three quarters of Belgium's trade is with other EU countries, and Belgium has benefited most from its proximity to Germany. In 2011 Belgian GDP grew by 1.8%, the unemployment rate decreased slightly to 7.2% from

8.3% the previous year, and the government reduced the budget deficit from a peak of 6% of GDP in 2009 to 4.2% in 2011 and 3.3% in 2012. Fourth quarter GDP growth in 2012 was at -0.1%, the third consecutive quarter of negative growth. This brought economic growth for the whole of 2012 to negative 0.2%. It also left Belgium on the brink of a possible recession at the end of 2012. However, at year's end, the government appeared close to meeting its 2012 budget deficit goal of 3% of GDP. Despite the relative improvement in Belgium's budget deficit, public debt hovers around 100% of GDP, a factor that has contributed to investor perceptions that the country is increasingly vulnerable to spillover from the euro-zone crisis. Belgian banks were severely affected by the international financial crisis in 2008 with three major banks receiving capital injections from the government, and the nationalization of the Belgian retail arm of a Franco-Belgian bank.

Bulgaria

Bulgaria, a former Communist country that entered the EU on 1 January 2007, averaged more than 6% annual growth from 2004 to 2008, driven by significant amounts of bank lending, consumption, and foreign direct investment. Successive governments have demonstrated a commitment to economic reforms and responsible fiscal planning, but the global downturn sharply reduced domestic demand, exports, capital inflows, and industrial production. GDP contracted by 5.5% in 2009, stagnated in 2010, despite a significant recovery in exports, grew 1.7% in 2011, and 1% in 2012. Despite having a favorable investment regime, including low, flat corporate income taxes, significant challenges remain.

Corruption in public administration, a weak judiciary, and the presence of organized crime continue to hamper the country's investment climate and

economic prospects.

Croatia

Though still one of the wealthiest of the former Yugoslav republics, Croatia's economy suffered badly during the 1991-95 war. The country's output during that time collapsed and Croatia missed the early waves of investment in Central and Eastern Europe that followed the fall of the Berlin Wall. Between 2000 and 2007, however, Croatia's economic fortunes began to improve slowly with moderate but steady GDP growth between 4% and 6% led by a rebound in tourism and credit-driven consumer spending. Inflation over the same period remained tame and the currency, the kuna, stable. Croatia experienced an abrupt slowdown in the economy in 2008 and has yet to recover. Difficult problems still remain, including a stubbornly high unemployment rate, uneven regional development, and a challenging investment climate. The new government has announced a more flexible approach to privatization, including the sale in the coming years of state owned businesses that are not of strategic importance. While macroeconomic stabilization has largely been achieved, structural reforms lag. Croatia will face significant pressure as a result of the global financial crisis, due to reduced exports and capital inflows. Croatia reentered a recession in 2012, and Zagreb cut spending. The government also raised additional revenues through more stringent tax collection and by raising the Value Added Tax in February 2012. On 1 July 2013 Croatia joined the EU, following a decade long application process. Croatia will be a member of the European Exchange Rate Mechanism until it meets the criteria for joining the Economic and Monetary Union and adopts the euro as its currency. Croatia's high foreign debt, strained state budget, and over-reliance on tourism revenue could hinder economic progress over the medium term.

Denmark

This thoroughly modern market economy features a high-tech agricultural sector, state-of-the-art industry with world-leading firms in pharmaceuticals, maritime shipping and renewable energy, and a high dependence on foreign trade. Denmark is a member of the European Union (EU); Danish legislation and regulations conform to EU standards on almost all issues. Danes enjoy a high standard of living and the Danish economy is characterized by extensive government welfare measures and an equitable distribution of income. Denmark is a net exporter of food and energy and enjoys a comfortable balance of payments surplus but depends on imports of raw materials for the manufacturing sector. Within the EU, Denmark is among the strongest supporters of trade liberalization. After a long consumption-driven upswing, Denmark's economy began slowing in 2007 with the end of a housing boom. Housing prices dropped markedly in 2008-09 and, following a short respite in 2010, has since continued to decline. The global financial crisis has exacerbated this cyclical slowdown through increased borrowing

costs and lower export demand, consumer confidence, and investment. The global financial crisis cut Danish real GDP in 2008-09. Denmark made a modest recovery in 2010 with real GDP growth of 1.3%, in part because of increased government spending; however, the country experienced a technical recession in late 2010-early 2011. Historically low levels of unemployment rose sharply with the recession and have remained at about 6% in 2010-12, based on the national measure, about two-thirds average EU unemployment. An impending decline in the ratio of workers to retirees will be a major long-term issue. Denmark maintained a healthy budget surplus for many years up to 2008, but the budget balance swung into deficit in 2009. In spite of the deficits, the new coalition government delivered a modest stimulus to the economy in 2012. Nonetheless, Denmark's fiscal position remains among the strongest in the EU with public debt at about 45% of GDP in 2012. Despite previously meeting the criteria to join the European Economic and Monetary Union (EMU), so far Denmark has decided not to join, although the Danish krone remains pegged to the euro.

Slovakia

Slovakia has made significant economic reforms since its separation from the Czech Republic in 1993. Reforms to the taxation, healthcare, pension, and social welfare systems helped Slovakia consolidate its budget and get on track to join the EU in 2004 after a period of relative stagnation in the early and mid 1990s and to adopt the euro in January 2009. Major privatizations are nearly complete, the banking sector is almost entirely in foreign hands, and the government has helped facilitate a foreign investment boom with business friendly policies. Slovakia's economic growth exceeded expectations in 2001-08 despite a general European slowdown. Foreign direct investment (FDI), especially in the automotive and electronic sectors, fueled much of the growth until 2008. Cheap and skilled labor, low taxes, no dividend taxes, a relatively liberal labor code, and a favorable geographical location are Slovakia's main advantages for foreign investors.

Slovenia

Slovenia became the first 2004 European Union entrant to adopt the euro (on 1 January 2007) and has experienced one of the most stable political and economic transitions in Central and Southeastern Europe. With the highest per capita GDP in Central Europe, Slovenia has excellent infrastructure, a well-educated work force, and a strategic location between the Balkans and Western Europe. Privatization has lagged since 2002, and the economy has one of the highest levels of state control in the EU. Structural reforms to improve the business environment have allowed for somewhat greater foreign participation in Slovenia's economy and

helped to lower unemployment. In March 2004, Slovenia became the first transition country to graduate from borrower status to donor partner at the World Bank. In 2007, Slovenia was invited to begin the process for joining the OECD; it became a member in 2012. Despite its economic success, foreign direct investment (FDI) in Slovenia has lagged behind the region average, and taxes remain relatively high. Furthermore, the labor market is often seen as inflexible, and legacy industries are losing sales to more competitive firms in China, India, and

elsewhere. In 2009, the global recession caused the economy to contract - through falling exports and industrial production - by 8%, and unemployment to rise. Although growth resumed in 2010, it dipped into negative territory in 2012 and the unemployment rate continued to rise, approaching 12% in 2012.

Spain

After almost 15 years of above average GDP growth, the Spanish economy began to slow in late 2007 and entered into a recession in the second quarter of 2008. GDP contracted by 3.7% in 2009, ending a 16-year growth trend, and by another 0.3% in 2010; GDP expanded 0.4% in 2011, before contracting 1.4% in 2012. The economy has once again fallen into recession as deleveraging in the private sector, fiscal consolidation, and continued high unemployment weigh on domestic demand and investment, even as exports have shown signs of resiliency. The unemployment rate rose from a low of about 8% in 2007 to 26.0% in 2012. The economic

downturn has also hurt Spain's public finances. The government budget deficit peaked at 11.2% of GDP in 2010 and the process to reduce this imbalance has been slow despite the central government's efforts to raise new tax revenue and cut spending. Spain reduced its budget deficit to 9.4% of GDP in 2011, and roughly 7.4% of GDP in 2012, above the 6.3% target negotiated between Spain and the EU. Although Spain''s large budget deficit and poor economic growth prospects remain a source of concern for foreign investors, the government''s ongoing efforts to cut spending and introduce flexibility into the labor markets are intended to assuage these concerns. The government is also taking steps to shore up the banking system, namely by using up to $130 billion in EU funds to recapitalize struggling banks exposed to the collapsed domestic construction and real estate sectors.

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Estonia

Estonia, a member of the European Union and the eurozone since 2004, has a modern market-based economy and one of the higher per capita income levels in Central Europe and the Baltic region. Estonia's successive governments have pursued a free market, pro-business economic agenda and have wavered little in their

commitment to pro-market reforms. The current government has followed sound fiscal policies that have resulted in balanced budgets and low public debt. The economy benefits from strong electronics and telecommunications sectors and strong trade ties with Finland, Sweden, Russia, and Germany. Tallinn's priority has been to sustain high growth rates - on average 8% per year from 2003 to 2007. Estonia's economy fell into recession in mid-2008 with GDP contracting 14.3% in 2009, as a result of an investment and consumption slump following the bursting of the real estate market bubble and a decrease in export demand as result of economic slowdown in the rest of Europe. Estonia rebounded nearly 8% in 2011 and the Estonian economy now has one of the higher GDP growth rates in Europe. Estonia adopted the euro on 1 January 2011.

Finland

Finland has a highly industrialized, largely free-market economy with per capita output almost as high as that of Austria, Belgium, the Netherlands, and Sweden. Trade is important with exports accounting for over one third of GDP in recent years. Finland is strongly competitive in manufacturing - principally the wood, metals, engineering, telecommunications, and electronics industries. Finland excels in high-tech exports such as mobile phones. Except for timber and several minerals, Finland depends on imports of raw materials, energy, and some components for manufactured goods. Because of the climate, agricultural development is limited to maintaining self-sufficiency in basic products. Forestry, an important export earner, provides a secondary occupation for the rural population. Finland had been one of the best performing economies within the EU in recent years and its banks and financial markets avoided the worst of global financial crisis. However, the world slowdown hit exports and domestic demand hard in 2009, with Finland experiencing one of the deepest contractions in the euro zone. A recovery of exports, domestic trade, and household consumption stimulated economic growth in 2010-11.

France

The French economy is diversified across all sectors. The government has partially or fully privatized many large companies, including Air France, France Telecom, Renault, and Thales. However, the government maintains a strong presence in some sectors, particularly power, public transport, and defense industries. With at least 79 million foreign tourists per year, France is the most visited country in the world and maintains the third largest income in the world from tourism. France's leaders remain committed to a capitalism in which they maintain social equity by

means of laws, tax policies, and social spending that reduce income disparity and the impact of free markets on public health and welfare. France's real GDP contracted 2.6% in 2009, but recovered somewhat in 2010 and 2011, before stagnating in 2012. The unemployment rate increased from 7.4% in 2008 to 10.3% in 2012. Youth unemployment shot up to 24.2% during the third quarter of 2012 in metropolitan France. Lower-than-expected growth and high unemployment costs have strained France's public finances. The budget deficit rose sharply from 3.4% of GDP in 2008 to 7.5% of GDP in 2009 before improving to 4.8% of GDP in 2012, while France's public debt rose from 68% of GDP to 90% over the same period. Under President SARKOZY, Paris implemented some austerity measures to bring the budget deficit under the 3% euro-zone ceiling by 2013 and to highlight France's commitment to fiscal discipline at a time of intense financial market scrutiny of euro-zone debt. Socialist Party candidate Francois HOLLANDE won the May 2012 presidential election, after advocating pro-growth economic policies, the separation of banks' traditional deposit taking and lending activities from more speculative businesses, increasing the top corporate and personal tax rates, and hiring an additional 60,000 teachers during his five-year term. The government's attempt to introduce a 75% wealth tax on income over one million euros for two years was struck down by the French Constitutional Council in December 2012 because it applied to individuals rather than households. France ratified the EU fiscal stability treaty in October 2012 and HOLLANDE's government has maintained France's commitment to meeting the budget deficit target of 3% of GDP during 2013 even amid signs that economic growth will be lower than the government's forecast of 0.8%. Despite stagnant growth and fiscal challenges, France's borrowing costs declined during the second half of 2012 to euro-era lows.

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Germany

The German economy is the fifth largest economy in the world in PPP terms and

Europe's largest, is a leading exporter of machinery, vehicles, chemicals, and

household equipment and benefits from a highly skilled labor force. Like its

Western European neighbors, Germany faces significant demographic challenges

to sustained long-term growth. Low fertility rates and declining net immigration

are increasing pressure on the country's social welfare system and necessitate

structural reforms. Reforms launched by the government of Chancellor Gerhard

SCHROEDER (1998-2005), deemed necessary to address chronically high

unemployment and low average growth, contributed to strong growth in 2006 and

2007 and falling unemployment. These advances, as well as a government

subsidized, reduced working hour scheme, help explain the relatively modest

increase in unemployment during the 2008-09 recession the deepest since World

War II and its decrease to 6.5% in 2012. GDP contracted 5.1% in 2009 but grew by

4.2% in 2010, and 3.0% in 2011, before dipping to 0.7% in 2012 a reflection of low

investment spending due to crisis induced uncertainty and the decreased demand

for German exports from recession stricken periphery countries.

Greece

Greece has a capitalist economy with a public sector accounting for about 40% of GDP and with per capita GDP about two-thirds that of the leading euro-zone economies. Tourism provides 15% of GDP. Immigrants make up nearly one-fifth of the work force, mainly in agricultural and unskilled jobs. Greece is a major beneficiary of EU aid, equal to about 3.3% of annual GDP. The Greek economy grew by nearly 4% per year between 2003 and 2007, due partly to infrastructural spending related to the 2004 Athens Olympic Games, and in part to an increased availability of credit, which has sustained record levels of consumer spending. But the economy went into recession in 2009 as a result of the world financial crisis, tightening credit conditions, and Athens' failure to address a growing budget

deficit. The economy contracted by 2.3% in 2009, 3.5% in 2010, 6.9% in 2011, and 6.0% in 2012. Greece violated the EU's Growth and Stability Pact budget deficit criterion of no more than 3% of GDP from 2001 to 2006, but finally met that criterion in 2007-08, before exceeding it again in 2009, with the deficit reaching 15% of GDP. Austerity measures reduced the deficit to about 8% in 2012. Deteriorating public finances, inaccurate and misreported statistics, and consistent underperformance on reforms prompted major credit rating agencies to downgrade Greece's international debt rating in late 2009, and has led the country into a financial crisis. Under intense pressure from the EU and international market participants, the government adopted a medium-term austerity program that includes cutting government spending, decreasing tax evasion, overhauling the health-care and pension systems, and reforming the labor and product markets. Athens, however, faces long-term challenges to push through unpopular reforms in the face of widespread unrest from the country's powerful labor unions and the general public. In April 2010 a leading credit agency assigned Greek debt its lowest possible credit rating; in May 2010, the International Monetary Fund and Euro-Zone governments provided Greece emergency short- and medium-term loans worth $147 billion so that the country could make debt repayments to creditors. In exchange for the largest bailout ever assembled, the government announced combined spending cuts and tax increases totaling $40 billion over three years, on top of the tough austerity measures already taken. Greece, however, struggled to meet 2010 targets set by the EU and the IMF, especially after Eurostat - the EU's statistical office - revised upward Greece's deficit and debt numbers for 2009 and 2010. European leaders and the IMF agreed in October 2011 to provide Athens a second bailout package of $169 billion. The second deal however, calls for Greece's creditors to write down a significant portion of their Greek government bond holdings. In exchange for the second loan Greece has promised to introduce an additional $7.8 billion in austerity measures during 2013-15. However, these massive austerity cuts are lengthening Greece's economic recession and depressing tax revenues. Greece's lenders are calling on Athens to step up efforts to increase tax collection, privatize public enterprises, and rein in health spending, and are planning to give Greece more time to shore up its economy and finances. Many investors doubt that Greece can sustain fiscal efforts in the face of a bleak economic outlook, public discontent, and political instability.

Hungary

Hungary has made the transition from a centrally planned to a market

economy, with a per capita income nearly two-thirds that of the EU-27

average. The private sector accounts for more than 80% of GDP. Foreign

ownership of and investment in Hungarian firms are widespread, with

cumulative foreign direct investment worth more than $70 billion. In

late 2008, Hungary's impending inability to service its short-term debt -

brought on by the global financial crisis - led Budapest to obtain an

IMF/EU/World Bank-arranged financial assistance package worth over

$25 billion. The global economic downturn, declining exports, and low

domestic consumption and fixed asset accumulation, dampened by

government austerity measures, resulted in an economic contraction of

6.8% in 2009. In 2010 the new government implemented a number of

changes including cutting business and personal income taxes, but

imposed "crisis taxes" on financial institutions, energy and telecom

companies, and retailers. The economy began to recover in 2010 with a

big boost from exports, especially to Germany, and achieved growth of

approximately 1.7% in 2011. At the end of 2011 the government turned

to the IMF and the EU to obtain financial backstop to support its efforts

to refinance foreign currency debt and bond obligations in 2012 and

beyond, but Budapest's rejection of EU and IMF economic policy

recommendations led to a breakdown in talks with the lenders in late

2012.

Ireland

Ireland is a small, modern, trade-dependent economy. Ireland was among

the initial group of 12 EU nations that began circulating the euro on 1

January 2002. GDP growth averaged 6% in 1995-2007, but economic

activity has dropped sharply since the onset of the world financial crisis,

with GDP falling by over 3% in 2008, nearly 7% in 2009, and less than 1%

in 2010. Ireland entered into a recession in 2008 for the first time in

more than a decade, with the subsequent collapse of its domestic

property and construction markets. Property prices rose more rapidly in

Ireland in the decade up to 2007 than in any other developed economy.

Since their 2007 peak, average house prices have fallen 47%. In the wake

of the collapse of the construction sector and the downturn in consumer

spending and business investment, the export sector, dominated by

foreign multinationals, has become a key component of Ireland's

economy. Agriculture, once the most important sector, is now dwarfed

by industry and services. In 2008 the former COWEN government moved

to guarantee all bank deposits, recapitalize the banking system, and

establish partly-public venture capital funds in response to the country's

economic downturn. In 2009, in continued efforts to stabilize the

banking sector, the Irish Government established the National Asset

Management Agency (NAMA) to acquire problem commercial property

and development loans from Irish banks. Faced with sharply reduced

revenues and a burgeoning budget deficit, the Irish Government

introduced the first in a series of draconian budgets in 2009. In addition

to across-the-board cuts in spending, the 2009 budget included wage

reductions for all public servants. These measures were not sufficient. In

2010, the budget deficit reached 32.4% of GDP - the world's largest

deficit, as a percentage of GDP - because of additional government

support for the banking sector. In late 2010, the former COWEN

government agreed to a $112 billion loan package from the EU and IMF

to help Dublin further increase the capitalization of its banking sector

and avoid defaulting on its sovereign debt.

Italy

Italy has a diversified industrial economy, which is divided into a developed

industrial north, dominated by private companies, and a less-developed,

highly subsidized, agricultural south, where unemployment is high. The

Italian economy is driven in large part by the manufacture of high-

quality consumer goods produced by small and medium-sized

enterprises, many of them family-owned. Italy also has a sizable

underground economy, which by some estimates accounts for as much

as 17% of GDP. These activities are most common within the agriculture,

construction, and service sectors. Italy is the third-largest economy in

the euro-zone, but its exceptionally high public debt and structural

impediments to growth have rendered it vulnerable to scrutiny by

financial markets. Public debt has increased steadily since 2007, topping

126% of GDP in 2012, and investor concerns about the broader euro-

zone crisis at times have caused borrowing costs on sovereign

government debt to rise to euro-era records. During the second half of

2011 the government passed three austerity packages to reduce its

budget deficit and help bring down borrowing costs.

Luxemburg

This small, stable, high-income economy - benefiting from its proximity to

France, Belgium, and Germany - has historically featured solid growth,

low inflation, and low unemployment. The industrial sector, initially

dominated by steel, has become increasingly diversified to include

chemicals, rubber, and other products. Growth in the financial sector,

which now accounts for about 27% of GDP, has more than compensated

for the decline in steel. Most banks are foreign-owned and have

extensive foreign dealings, but Luxembourg has lost some of its

advantages as a favorable tax location because of OECD and EU pressure.

The economy depends on foreign and cross-border workers for about

40% of its labor force. Luxembourg, like all EU members, suffered from

the global economic crisis that began in late 2008, but unemployment

has trended below the EU average.

Netherlands

The Dutch economy is the sixth-largest economy in the euro-zone and is

noted for its stable industrial relations, moderate unemployment and

inflation, a sizable trade surplus, and an important role as a European

transportation hub. Industrial activity is predominantly in food

processing, chemicals, petroleum refining, and electrical machinery. A

highly mechanized agricultural sector employs only 2% of the labor force

but provides large surpluses for the food-processing industry and for

exports. The Netherlands, along with 11 of its EU partners, began

circulating the euro currency on 1 January 2002. After 26 years of

uninterrupted economic growth, the Dutch economy - highly dependent

on an international financial sector and international trade - contracted

by 3.5% in 2009 as a result of the global financial crisis. The Dutch

financial sector suffered, due in part to the high exposure of some Dutch

banks to U.S. mortgage-backed securities. In 2008, the government

nationalized two banks and injected billions of dollars of capital into

other financial institutions, to prevent further deterioration of a crucial

sector.

Portugal

The economy grew by more than the EU average for much of the 1990s, but

the rate of growth slowed in 2001-08. The economy contracted 2.5% in

2009, before growing 1.4% in 2010, but GDP fell again in 2011 and 2012,

as the government began implementing spending cuts and tax increases

to comply with conditions of an EU-IMF financial rescue package, agreed

to in May 2011. GDP per capita stands at roughly two-thirds of the EU-27

average. Portugal also has been increasingly overshadowed by lower-

cost producers in Central Europe and Asia as a destination for foreign

direct investment, in part because its rigid labor market hindered

greater productivity and growth. However, the government of Pedro

Passos Cohelo has enacted several measures to introduce more

flexibility into the labor market, and, this, along with steps to reduce

high levels of public debt, could make Portugal more attractive to

foreign investors. The government reduced the budget deficit from

10.1% of GDP in 2009 to 4.5% in 2011, an achievement made possible

only by the extraordinary revenues obtained from the one-time transfer

of bank pension funds to the social security system.

United Kingdom

The UK, a leading trading power and financial center, is the second largest

economy in Europe after Germany. Over the past two decades, the

government has greatly reduced public ownership and contained the

growth of social welfare programs. Agriculture is intensive, highly

mechanized, and efficient by European standards, producing about 60%

of food needs with less than 2% of the labor force. The UK has large

coal, natural gas, and oil resources, but its oil and natural gas reserves

are declining and the UK became a net importer of energy in 2005.

Services, particularly banking, insurance, and business services, account

by far for the largest proportion of GDP while industry continues to

decline in importance. In 2008, however, the global financial crisis hit

the economy particularly hard, due to the importance of its financial

sector. Sharply declining home prices, high consumer debt, and the

global economic slowdown compounded Britain's economic problems,

pushing the economy into recession in the latter half of 2008 and

prompting the then BROWN (Labour) government to implement a

number of measures to stimulate the economy and stabilize the financial

markets; these include nationalizing parts of the banking system,

temporarily cutting taxes, suspending public sector borrowing rules, and

moving forward public spending on capital projects. Facing burgeoning

public deficits and debt levels, in 2010 the CAMERON-led coalition

government (between Conservatives and Liberal Democrats) initiated a

five-year austerity program, which aimed to lower London's budget

deficit from over 10% of GDP in 2010 to nearly 1% by 2015.

Conclusion

Compared with the economies of its individual member countries, the euro area is a

large and much more closed economy. In terms of its share of world GDP it is the

world’s largest economy after that of the United States.

As in other highly developed economies, the service sector has the largest share of

total output, followed by the industrial sector, while the share held by agriculture,

fishing and forestry is relatively small. Also in terms of population the euro area is

one of the world’s largest economies, with more than 330 million

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