EUROZONECRISIS

By Heena Bakshi

What is the EUROZONE DEBT CRISIS ??

Failure of Euro , the currency that ties together 19 European countries(out of 28) in an intimate but flock manner.

• Over the past 3 years ,Greece ,Portugal ,Italy ,Ireland & Spain have all triggered down on the blink of financial collapse threatening the breakdown of the entire CONTINENT & rest of the WORLD.

How did it happened??In most of Europe’s history its been a war itself

SO

• The countries war with each other tend to do LESS business together.

• Allot of trade barriers and tariffs made things worst further.

• Business across borders needed a fee to exchange currency ;& also pay tariffs to buy and sell companies in other countries.

• Then came WORLD WAR II which devastated Europe.

Measures TakenTO

REBUILT Europe

• Trade barriers were removed; like Steel and Coal tariffs came down.

• Business was made easy across borders.

• 27(then) Countries signed the Maastricht Treaty that created the EUROPEAN UNION.

• On 1st January 1999, obstacle posed by European countries due to varying currencies was removed by the introduction of EURO.

• 17(then) countries adopted Euro as their currency discontinuing theirs.

Having A Look At The EUROZONE !A UNIFORM Monetary policy

controlled by The European Central Bank(then formed). Controlled by then formed European Central Bank(ECB).

SINGLE CURRENCY i.e. euro

Different Fiscal policies i.e. own fiscal policies of each and every Eurozone member country.

Now what went wrong that led to the current

CRISIS ??

Monetary Policy VS Fiscal Policy• As part of Eurozone , countries started taking loans at

much higher amount due to low interest rates.• Countries like Greece increased its DEFICIT SPENDING

to a sky high level as it was earlier getting the same loan at 18% and now at much lower 3%(same as Germany).

• These huge spending got possible only because of member country’s help like Germany paid back Greece’s loans and Greece was able to maintain its spending at the same pace through Germany’s credit cards(obviously, coz they shared same currency).

• But this only built up Greece’s debt burden.

What were the RESULTS !!• Countries like Greece were abnormally increasing its spendings in

adherence to its long list of promises to masses like jobs, pensions, etc.• Governments of Greece , Portugal and Italy were able accumulate huge

debts however they were able to repay these with more borrowed money.

• In Ireland and Spain, cheap credits created enormous housing bubble just as in the case of The United States.

• Credit flowed DEBT accumulated and the economies of Europe became TIGHTLY INTERTWINED.

• Things continued until credit was available and it was available until 2008, when US housing market collapsed bringing borrowing to a halt.

SO• Suddenly the Greek economy couldn’t function. It cannot pay

for the jobs and benefits that it created. Had 330 bn euro of debt in 2010.

• To avert calamity, the so-called troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates.

• The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases

• But it rather worsened the situation i.e. when a government cuts spending then it cuts many people’s incomes and so they will pay less tax and thus less income with the govt. to repay loans. Unemployment rate has risen to 25.6%.So there is even more risk of the country bailed out to repeat same mistake again.

• Greece defaults IMF’s $1.7 bn payment on 30 july 2015. It will now be cut off from access to IMF resources until the payment is made.

• Banks were remain shut for 2 weeks in june-july, people were not allowed a withdrawal of more than 60 euros a day.

The most recent update! Greece is now receiving much-needed funding from a third

Eurozone bailout - worth about €85bn ( $95bn). It is a three-year bailout programme (2015-2018), to be provided in instalments by the EU's main bailout fund, the European Stability Mechanism (ESM). It is based on an outline agreement reached at a special EU summit on 13 July.

The bailout aims to: put privatization back on track, modernize and slim down the state administration, tackle tax evasion and fraud, open up regulated professions to competition, and cut pension costs to make the welfare system sustainable.

• The highest ratios of government debt to GDP at the end of the first quarter of 2015 were recorded in Greece (168.8 percent), Italy (135.1 percent) and Portugal (129.6 percent), and the lowest in Estonia (10.5 percent), Luxembourg (21.6 percent) and Bulgaria (29.6 percent)”, the Eurostats report says.

SO WHAT ARE THE POSSIBLE DIRECTIONS THAT EUROZONE CAN MOVE ON TO ??

The first is the route of austerity, in particular, fiscal consolidation, including privatization. This is the default policy choice. A forgone conclusion is that this will impose social costs.

The second option, (rather an imperative), would be to go in for a closer fiscal union and a substantially enlarged European budget with a limited system of fiscal transfers from rich countries to the poor countries, a common form of protection for employment on the German lines with more flexibility, greater cross border investment even if this implies takeover of sick and ailing public sector units by companies from the richer Euro zone states.

The third option is the radical one, GREECE leaving the euro zone(the GREXIST). A breakdown of the currency may be a very expensive proposition. But if that were to happen, it could lead to insolvency of several Euro zone countries, a breakdown in intra zone payments.

What if Greece exists( if grexist happens)

• As Greece can't technically be expelled from the Eurozone, but it may have to bow out “voluntarily” if the European Central Bank cuts off the emergency loans that are now keeping the Greek banking system from collapsing. Were that to happen, Athens would need to start printing money in order to bail out its financial sector.

• If Greece return to its previous currency, the drachma, With Greece making up less than 2% of the Eurozone's gross domestic product (GDP), its exit might not have much of an immediate impact.

• Drachma will be face devaluation and inflation .It will not help Greece’s economy recover faster from the deep recession.

• It would only add to the debt burden without resolving Greece’s competitiveness problem, which stems primarily from regulatory barriers to competition, restrictive labor practices, and red tape that raise the cost of doing business. Greece ranks 100th in the World Bank’s “Doing Business” report.

SO WHAT THEN?As the result will be economic chaos and uncontrollable social explosion, then what is the way out??

What led Greece into this mess is its ineffective, incompetent, and corrupt political establishment, which viewed politics as a means of providing favours to special interest groups in exchange for vote-buying.

If you offer the printing press to this political system, it will just go back to business as usual.

It is by cutting off their access to cash, by remaining in the euro, that you can force political change along with economic change.

“Possible Effects of Eurozone debt crisis and the GREXST(if happened)

In INDIA”

• Can be an indirect effect(but not direct)• Interest rates on bonds will increase which may reduce

our FDI• We depend mainly on European capital goods

imports(heavy machinery) so this crisis may increase its demand in Europe thereby increasing its export price there.

• This may reduce world Oil prices and also increase Gold prices here.

• So with much strong central bank reserves we are rather on a safe side.

From Heena Bakshi