group c_economic environment presentation

Group C : Raya Abou Fadel

Clara Albertí Duarte Correia Max Freiberger

Ria Jethi Alasdair Pressney Francesco Riggio

WHAT MONETARY AND FISCAL POLICY DOES THE EUROZONE NEED ?

19 members !334 million citizens !Euro introduced in 1999 !Euro convergence criteria “Maastricht Convergence Criteria – Stability and Growth Pact”

!!!!!

QUESTION 1: MACRO ANALYSIS

INTRODUCTION OF EUROZONE

Eurozone Inflation Rates

HCI

P (%

)

-1

0

1

2

3

4

2009 2010 2011 2012 2013 2014

-0,12%

1,95%

3,03%

2,49%

0,73%0,38%

PRICE INFLATIONQUESTION 1: MACRO ANALYSIS

sources: www.statista.com; unctadstat; www.global-rates.com, www.tradingeconomics.com

http://statista.com

ECONOMIC GROWTHGDP Growth Rate in Eurozone

GD

P G

row

th c

ompa

red

to

prev

ious

year

s (in

perc

enta

ges)

-5

-3,75

-2,5

-1,25

0

1,25

2,5

Years

2009 2010 2011 2012 2013 2014-4,46

1,95 1,59

-0,66 -0,43

0,83

Average Annual Growth Rate in 2009 - 2014An

nual

grow

th ra

te (i

n pe

rcen

tage

s)

-5-3,75-2,5

-1,250

1,25

Austria Cyprus France Germany Greece Portugal Spain

-1,006-1,143

-4,279

0,7290,122

-0,722

0,581



http://statista.com

UNEMPLOYMENT

Unemployment rate 11,5% = approximately 18.394 million people !Population of approximately 322.88 million

November 2014

0

0,03

0,06

0,09

0,12

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2009 2010 2011 2012 2013 2014

Peak in unemployment in February 2013 (12%)

Unchanged at 11,5% for last 4 months



http://statista.com

Time

GD

P G

row

th (

in p

erce

ntag

es)

-8-7,12-6,24-5,36-4,48-3,6

-2,72-1,84-0,96-0,08

0,81,682,563,444,32

2009 2010 2011 2012 2013 2014

PortugalBelgium

Ireland

GreeceFrance

Germany

Spain

Spain Germany France Greece Ireland Belgium Portugal

GOVERNMENT IMBALANCES



This is an interactive graph to be shown at the presentation

http://statista.com

MONETARY AND FISCAL POLICIES IN THE EU

MONETARY POLICYEU FISCAL POLICY

25 MEMBERS23 MEMBERS

EURO AREA

QUESTION II - DESCRIPTION OF MONETARY AND FISCAL POLICIES

ECONOMIC GOALS EU“Maastricht Convergence Criteria – Stability and Growth Pact”

Price stability (2% inflation objective)

Interest rates (long-term <2%)

Government deficit (<3% of GDP)

Public Debt (<60% GDP)

Exchange rate stability

sources: adapted from ECB

sources: IMF website

QUESTION II - DESCRIPTION OF MONETARY AND FISCAL POLICIES

MONETARY POLICIES IN THE EU2010 European Financial Stabilization Mechanisms (EFSM) provide funds to Greece, Ireland and Portugal !2012 European Stability Mechanisms (ESM) 500 bn in financial assistance !2013 European Fiscal Compact requires domestic self-correcting mechanisms !2014 Single supervisory systems prevent future bank bailout needs

Date AgreedEuropean Financial

AssistanceIMF Financial Assistance

Total Financial Assistance

Greece May 2010 €80 billion €30 billion €100 billion

Ireland December 2010 €45 billion €22,5 billion €67,5 billion

Portugal May 2011 €52 billion €26 billion €78 billion

Greece July 2011-February 2012 €130 billion €130 billion

FISCAL POLICIES IN THE EU

MONETARY POLICIES IN THE EUQUESTION II - DESCRIPTION OF MONETARY AND FISCAL POLICIES

2009 - April

Perc

enta

ge G

row

th

-1,25

0

1,25

2,5

3,75

5

Inflation Interest rates

4,9

0,6

sources www.tradingeconomics.com

This is an interactive graph to be shown at the presentation

FISCAL POLICIES IN THE USQUESTION II - DESCRIPTION OF MONETARY AND FISCAL POLICIES

Transform the nation's energy transmission, distribution and production systems 6%

Repair and make key energy efficiency retrofits 3%

Weatherize modest-income homes 1%

Science facilities, research and instrumentation 2%

Expand broadband internet access 1%

Highway construction 6%

Modernize federal and other public intrasfructure 6%

Clean, water, food control and Environment restoration investments 4%Transit and nail

2%

Local School district 8%

State Fiscal Relief 15%

Pell Grant 3%

Higher education modernization 1%

Health I.T 4%

Preventative care 1%

Increased unemployment benefits and job training 8%

Healthcare for newly employed 8%

Food Stamps 4%

Temporary increase in the Medicaid matching rate 17%

State and local Law Enforcement 1%

sources: US House Committe on Appropriations

OPEN MARKET OPERATIONS

QUANTITATIVE EASING

MORTGAGE BACKED SECURITY

MONETARY POLICIES IN THE USQUESTION II - DESCRIPTION OF MONETARY AND FISCAL POLICIES

ALTERNATIVE I - FISCAL UNION

PROS CONS

EFU would work well with EMU

Local problems need local solutions

Closer Economic Union would make Eurobonds rival US

treasuries

Undemocratic and not accepted by citizens

Integrated Management the entire EU Economy

QUESTION III - OUR POLICY PROPOSAL TO BE IMPLEMENTED IN THE EUROZONE

sources: ECB, finance.yahoo, www.ec.europa.eu,www.bu.edu

ALTERNATIVE II - QUANTITATIVE EASING

PROS CONSLower interest rates

(long term)Only buys more time -

doesn’t solve the problem

Encourage investors Upward effect on commodity prices

Prompt more borrowing and less saving

Forces investors to step into riskier investments

Creates inflation Creates inflation

Worked really well in US and UK

ECB mandate



ALTERNATIVE III - AUSTERITY

PROS CONSPermits flexibility within states

Empirical evidence in recent years

Credibility for governments Economic contraction

Reducing crowding-out effect No currency depreciation

Reduce public deficit Political implications

Calm financial markets Vicious cycle

Fiscal consolidation unavoidable



OUR PROPOSAL

1. Add “Stable, Sustainable GDP Growth” as a ECB/EU Economic Policy mandate

II. Continue Austerity Measures

III. Start QE (Quantitative Easing)

Why? GDP is as important as inflation, debt and deficit Austerity Sustainability Solvency Growth in Austerity Countries

group c_economic environment presentation

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