Slide 1 What is the euro zone

• It is an economic and monetary union (EMU) of 16 European Union (EU) member states

• They have adopted the euro as their sole trading currency. • Euro became a reality on Jan 1, 1998 , but came for the European

consumers on Jan 1 2002.• It currently consists of Austria, Belgium, Cyprus, Finland, France,

Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

Slide 2 Introduction to euro zone crisis

• It is the biggest challenge Europe has faced since 1990.• Due to global financial crisis that began in 2007-08 the euro zone

entered its first official recession in third quarter of 2008. • The official figures were released in 2009 Jan.• On 11 Oct 2008, a summit was held in Paris by the Euro group heads

of state and Govt. , to define a joint action plan for euro zone and central banks of Europe to stabilize the economy.

Slide 3How did it start?

• Started in – Oct 2009 in Greece• Its immediate causes lie with the US crisis of 2007-09.• Greece’s debt to gdp deficit exploded tken down other economies

with it especially that of spain irelend Italy and Portugal.Slide 4, 5 and 6 (if needed)Causes

• Greece: Sharp Budget Deficit • Large government and External Debts in PIIGS.• Greece credit rating downgraded.• Interest rates surged on government bonds.• Need for external aid from EU and IMF • The high debts and rising rate of interests was a matter of concern.

• Reasons for rise in External Debts • High household indebtness.• Large current account deficit:

Excessive growth in domestic demand. Increase in wage rates. Lower exchange rate risk.

• Weakening export competitiveness.• Reasons for rise in Internal Debts: • Rising Unemployment: Lower tax returns, higher budget deficits.

Debt to GDP in the Euro Area Countries and the US

(as % of GDP)

0

20

40

60

80

100

120

140

160

180

200

AT BE CY EE FI FR DE EL IE IT LU MT NL PT SK SI ES US

2007

2012 (Projected)

Slide 6 7 8 9 (if needed)Situation in the piigs economies in 2009/reason y these economies had the crisisGreece

Sovereign-debt crisis boiled over Debts too great Financial panic in Europe Around €213 billion-worth of Greek government bonds Foreign banks` lending €164 billion Public debt unclear

Spain Dependence on foreign finance Public debt 53% of GDP

Portugal Budget deficit 9.3% of GDP Public debt 77% of GDP Common weaknesses with Greece:

1. Small economy2. Competitiveness3. Foreign debts run up

Debt €198 billionItaly and Ireland got affected due to their high unemployment rate and high household indebtness.

(add these charts to separate slides so the slide numbers will change below this)

Slide 10 till 15Measures to mitigate this crisis undertaken-

the IMF & the ECB set up a tripartite committee (the

TROIKA) to prepare an appropriate programme.

First round of crisis response (May 2010 ): 3 years

package of €110 billion ,Contributed by IMF (€ 30

billion) and Euro zone (€ 80 billion).

ECB provided substantial liquidity support to Greek’s

private banks [b/w Jan 2010 to May 2011– €51 billion.

Again Euro zone provided loan - July 2011 € 109 billion.

Also pressure on national banks to sell gold reserves to

over come deficit.

Slide 11

ECB starts buying govt. debt from secondary market to reduce bond spread and to increase the confidence of investor . Between May 2010 to June 2011 ECB purchased €78 billion bonds ,out of which €45 billion from Greece govt.

Slide 12 EFSF(European Financial Stability Fund ) : The EFSF is intended to consist of a fund of €750 billion, which would be made up as follows:(a) €440 billion would be made available in loan guarantees from Euro zone Member States;(b) €60 billion would consist of emergency funds made available by the European Union itself; and(c) €250 billion would be provided under arrangements with the International Monetary Fund.

Slide 13EU also made a proposal to make a single authority responsible for tax policy and govt. spending.8.Austerity measure are outline in Feb 2010 (1st austerity measure)aimed to reduce government budget deficit to 3% of GDP by 2014. Freeze in the salaries of all govt. employees.10% cut in Bonuses & payment of overtime work.8% cut in public sector allowances .

Slide 142nd Austerity Measure :[May 2010]30% cut in Christmas & leave for absence.Further 12% cut in Bonuses & 7% cut in public and private employeeIncreases in VAT[10%] - 23%(goods & Services), 11%(Food) and 5.5%(stationery).Return of a special tax on high pensions.Equalization of men's and women's pension age limits.A financial stability fund has been created.Average retirement age for public sector workers has increased from 61 to 65.

Slide 153rd austerity measure:[Jan2011]Further cut in salaries by 8% for public employee.The 13th and 14th salaries paid to civil servants and public utilities employees were abolished & flat-rate vacation allowances totaling €1,000 a year were introduced for public sector workers earning less than €3,000 per month.Limit of €800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over €2,500 a month.10% rise in luxury taxes and taxes on alcohol, cigarettes, and fuel.

Slide 16 17 Forecast Slide 18 and 19 are also forecasts for this euro crisis.

Euro Area & US GDP with Forecasts

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

20062007

20082009

20102011

20122013

2014

Euro area United States

Source: European Economic Forecast - Autumn 2012

Euro Area & US Unemployment with Forecasts

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

20062007

20082009

20102011

20122013

2014

Euro area United States

Source: European Economic Forecast - Autumn 2012

slide 18• Governments are gradually bringing their spending in line with

revenues (working to balance budgets)• Government debt is on a path to stabilize and eventually decline in

the euro area• Improvement in public finances will help restore investor and

public confidence; however, it must be done in a way that does not choke off growth

60

65

70

75

80

85

90

95

100

05 06 07 08 09 10 11 12 13 14

% of GDP

Slide 19 In the long run we expect an increase in age related expenditure Limited saving in some of the piigs

slide 20 impact on india of this euro crisis

• India’s exports to Europe could witness a slump close to 10%.• Export driven sectors such as textiles and software are likely to bear

the brunt.• About 22-28 percent of revenues of India’s top tech majors come

from Europe whose revenues will definitely be affected.• Government’s overall target of $200 billion for the fiscal could be at

stake.Slide 21Solutions

Countries affected must: Grind down Wages Raise Productivity Slash Spending Raise taxes Transparent Banking system Endure such Austerity Drives for many years

Slide 22 Conclusion The usa’s sub prime crisis was the motivating factor of this crisisBut with the various measures taken by the euro zone this crisis seems to be under control and may hopefully lead to euro zone’ s economic growth slowly and steadily