Formation of European Union (EU)

 European Union (EU) is an economic and political union of 27

member states which are located primarily in Europe.

 EU Generates 21% of the world GDP

 “The Treaty of Maastricht” is formally known as “the Treaty of

European Union (TEU)”

 It was signed on 7th Feb,1992 & was enforced on 1st Nov,1993,in

Netherlands

 The European Union is composed of 27 sovereign Member States:

Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark,
Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the
United Kingdom.
Formation of Eurozone
 Eurozone established in 1999 and adopted
a single currency by 11 EU member
states– EURO (€)

 Monaco, San Marino, and Vatican City are

three non-EU members which adopted the
EURO

 EU member states qualified, but not yet

using the Euro currency: Denmark,
Sweden, United Kingdom
Members of Eurozone
Criteria to join Eurozone
 Five criteria are required for countries to
qualify for Eurozone :
 Inflation rate below 2%
 Long-Term Interest rates
 Exchange rate Fluctuation
 Budget Deficit, below 3% of GDP
 Public Debt, < 60% of GDP
Reasons for Introducing €uro & Its
Administration
 Majority of international trade with other EU members

 An introduction of common currency has :

 Removed exchange rate risks
 Cut the cost of transactions
 Encouraged firms to trade across national borders

 Monetary Stability in Europe

 Forced EU states to adopt responsible economic policies

Reasons for Introducing €uro & Its
Administration (Contd…)

 Euro is managed by Frankfurt-based European Central

Bank(ECB) & the Euro system

 ECB has the sole authority to set monetary policy

 Euro system participates in :

 Printing & Minting of notes and coins
 Distribution of the same in all member states
 Operation of Euro zone payment systems
Advantages & Disadvantages of Introducing €uro
Advantages
 Elimination of exchange-rate
fluctuations
 Price Transparency
 Transaction Costs
 Increased Trade Cross-borders
 Increased cross-border
employment
 Expanding markets for business
 Financial market stability
 Macroeconomic stability
 Lower interest rate
 Structural reforms for European
economies
 Unites Europe
Disadvantages
 Cost of transitioning 12
countries currency over to
a single currency
 Training for employees,
managers & consumers
 Countries cannot adjust
interest rates
 Countries cannot adjust
exchange rates
 Restricted government
spending
 Political shock
 Loss of cultural identity
DEBT CRISIS
GDP
Government Debt to GDP
Inflation rate
Current Account Balance
Euro Dollar rate fluctuation
Fitch & S&P
Recovery from
downgrades
Subprime crisis
Greek bonds

S&P rates Greek

bonds as “junk”

Start
of the
Subp
rime
crisis
Euro falls to a four
year low against
the dollar
Country wise exposure - Banks
AUSTERITY MEASURES BY GREECE

 On 5th March 2010, the Greek parliament passed the

Economy Protection Bill, expected to save 4.8bn-€uros
trough a number of measures including:

 Public sector wage reductions

 Limit of pension reduced to 800€ per month up to 13th & 14th
month pension installments
 Extraordinary taxes imposed on company profits
 A financial stability fund has been created
 Average retirement increased to 65 from 61 for public sector
employees
 Public-owned companies to be reduced from 6000 to 2000
REMEDIAL MEASURE BY EU & IMF
 A Bailout plan by several of the international community
were :

 European governments & the IMF stunned the global stock

markets with a 750bn-€uro($975bn)package

 27 EU nations will together contribute 500bn-€uro which will be

joined by IMF with another 250bn-€uros

 Major contribution by 16-nation Euro zone block promising a

440bn-€uros in loan guarantees

 The European commission is providing 60bn-€uros immediately

THE FUTURE OF €uro
 The future of €uro has certain threats:

 Differences among European countries

 Investors increasingly shunning offerings

 UBS advising investors to sell €uro, after the Greek

Debt Crisis

 Strong growth in the US & a tepid recovery in Europe

has led €uro lose 9% in Dec’09-10
THE FUTURE OF €uro (Contd…)

 Foreign central banks assessing the risk of a possible

collapse of the Euro zone

 Euro zone countries likely to abandon €uro to gain back

control over interest & exchange rates

 The estimated 2009 deficit rose from 5.1% to 12.1% as

reported to the European Commission
EFFECTS ON INDIAN ECONOMY
 IMPACT ON EXPORTS:
 EU accounts for 21% of the total Indian exports
 PIGS contribute only 4%
 Indian exports mainly textiles, pharmacy products,
Gems, etc.. which do not have much impact of the crisis

 IMPACT ON FOREIGN FUND FLOWS:

 International investors lost trust in US & Europe due to a
series of crisis
 Majority of institutional investors choose Indian markets
with stable fiscal policy
THANK YOU