Contents:

History of Eurozone

Eurozone Crisis

Causes of Eurozone crisis

Data collection about debts

Impact on member countries

Impact on Global economy

Impact on Indian economy

Remedial measures analysis

 EUROZONE:

Prominent states
are:
1. France
2. Germany
3. Greece
4. Ireland
5. Italy
6. Portugal
7. Spain
8. Netherlands
9. Finland
10. Austria
History of Eurozone leading to crisis:

1. In 1999, 19 countries formed alliance to

compete economically with US.
2. Adopted EURO as their common currency.
3. To strengthen economies of EU.
4. Smaller economies borrowed at lower
interest rates.
5. Unable to employ independent monetary
policy.
3% Borrowing Rule:

1. Statement: No country of EU is allowed

to borrow >3% of economic output as
debts.
2. To avoid accumulation of huge debt.
3. Italy and Germany were first to break
this rule.
What is Eurozone Crisis?

Financial woes caused due to over

expenditure by European Nations.
When that country faces insolvency, the
concerned nation begins to get swallowed up
by what is known as the Sovereign Debt
Crisis.
Crash of Icelands banking system spread to
Greece in 2008.
Greece's debts had reached 300 billion
euros, the highest in modern history
Spain, Portugal, and the other nations later
followed Greece.
Causes of Eurozone Crisis:

Slow economic growth

Declined tax revenues
Increased expenditure.
Corrupt government officials.
Heavy salaries of service sector.
To pull their economies from the
Greatest Depression of 1930s.
Greatest Depression:

Started with stock market crash of

October 29, 1929 (Black Tuesday).
Between 1929 and 1932, worldwide GDP
fell by about 15%.
Industry dependent economies were hit
badly.
Negative effects lasted till World War
II.
It even had effect on India (Initiative
for Salt Satyagraha movement).
Data Collection:

The debt of European

countries affected in the
European Debt Crisis are as
follows:
Bailouts:

Euro members and IMF agreed to 100 bi

Euro bailout package to Greece.
In return, Greece increased taxes and
put deep cuts in pensions and service
pay.
In 2011, 109 bi Euro bailout package was
again given to Greece.
Due to fear of default, PIIGS acronym
was given for member countries.
Default:
Failure to pay interest or principal on a loan or security
when due.

National default occurs when a country fails to repay its

debts.

When a country defaults, its economy shrinks and it

devalues its currency.

PIIGS Countries:
Portugal

Italy

Ireland

Greece

Spain
Impact on other member countries:

1. Greece:
Adjusted economic data which made it
pioneer in Eurozone.
Spent more on Olympic Games,2004.
High unemployment rate resulted in lost
tax revenues.
Debt was more than 2*Eurozone limit of
60% of GDP.
Impact on other member countries:

2. Portugal:
Third country in series of crisis.
Mismanaged cohesion funds leads to
bankruptcy.
78 billion bailout package for
Portugal.
Average rate on bail out loan is 5.5%.
Agreed to cut its budget from 9.8% of
GDP in 2010 to 3% in 2013.
Impact on other member countries:

3. Spain:
Bailing out is tougher here.
WHY???
Reason for crisis is borrowing by
private sector instead of
Government.
They didnt break 3% borrowing rule but
still they are facing crisis.
Biggest Rider of Eurozone:

Low unemployment.
Low inflation
Balanced budget
Large trade surplus
Why??
Adopted Beggar thy neighbourpolicy.
Utilized fundamental freedoms
Of EU law
Fixed Exchange rate of Euro.
Impact on Global economy:

Default by key nations will keep banks

at risk.
This may ultimately lead to Financial
Tsunami.
Financial Tsunami: Period of economic
difficulty faced by markets and
consumers.

Ex: Private banks holding Greek debt had

to accept losses of up to 70%.
Impact on Indian economy:

Indian exports to Europe could witness a

slump of 10%.
Withdrawal of FPI from India by Eurozone
members.
Export driven sectors such as textiles
and software are likely bear the brunt.
22-28 % of revenues of Indias top tech
majors come from Europe
Remedial measures:

Emergency loans have been extended.

Establishment of EFSF to provide
emergency loans.
Austerity measures
Decreasing tariff for foreign industries
Restructuring of debt
Reconstruction of Currency:

Only solution for heavily indebted countries.

Difficult due to terms of EU membership.
Ultimately leads to collapse of Euro.
Spending Cuts:

Further spending cuts leads to increased

unemployment.
With lower wages people will be unable
to clear debts.
Complete financial collapse could be the
result of this.
Role of Germany:

Supports continuation of Euro.

Wont use its capital to bail out
weak countries in Eurozone.
Suggested imposing hard cap limit on
EU nation.
This idea come under substantial
criticism.
German view: Greek view:
European Stable Mechanism:

Bail out fund released by Euro zone

finance ministers.
Members who cant get investors to buy
its debt can apply for loans.
Nearly half of the money comes from
Germany and France.
Permanent firewall for Eurozone
Economics of Eurozone Crisis:

Insolvency of Greece.
Contagion of Portugal, Spain and Italy.
Macro-economic differences between
members.
Interim measures:
Bailout programmes for Greece.
EFSF and EFSM establishment.
Conclusion:
Crisis will not cease till all debt obligations are
cleared.

Because of their dependency on each other, lender is in a

threat of going into debt crisis.

Need for creating ministry of finance with creation of

Eurobonds.

Macro-economic co-operation is needed in order to avoid

internal imbalances.
References
http://www.investopedia.com/terms/e/european-sovereign-
debt-crisis.asp

http://www.networklanguages.es/blog/euro-crisis-summary

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 JAYANTH UMA

ABHIJEET HIMANSHU

PRANJAL PRUTHVIK

SHIVAM MANASWINI

SURYA LALAN