HIRAL

PATEL SIRJAN GUPTA SWATI PRABHU RUPAL DIXIT SUMIT JAISWAL

111
113 115

117
119

 The

Euro and Economic and Monetary Union Managing the Euro

1999 2001 2002 2007 2008 2009 2011 2011

Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland
Greece Introduction of euro banknotes and coins Slovenia Cyprus, Malta Slovakia Estonia Estonia

 Fiscal

Policies - Broad Economic Policy Guidelines - Stability and Growth Pact - Inflation measurement

Confidence in the prospects of growth and stability of GIIPS economies Lower interest rates drove up domestic demand Increased price of domestic activities attracted investment in non-tradable sectors other than exports Export goods from historically stable countries like Germany, the Netherlands, etc more affordable

 Domestic

demand boom in the GIIPS induced rapid wage growth outpacing productivity labour costs erode external competitiveness borrowing costs and expansion of domestic demand boosted tax revenues

Increased

Lower

 US

consumer retrenchment directly affected the sales opportunities of European exporters of the European banking sector

Implosion Massive The

rate cuts by the US Federal Reserve

crisis hit emerging economies leading them to cut imports

Effect of global crisis on shipping and tourism

Large public deficits and large debts

Lack of transparency
Downgrading of debt Austerity Loan Agreement Danger of default Objections to proposed policies

 Ireland, Iceland

Italy, Portugal and Spain

Slovania The

UK Lithuania and Estonia

Latvia,

Belgium

 Currency

Devaluation not possible

Monetary

policy was too loose

Tourism

affected

 Stock

and debt market reactions Fiscal Austerity Moral Hazard Polarized Community World Trade Disrupted Credit Shortage Inflation, Hyperinflation and Social Security Disruptive Consequences

 Contagion Criticism

effect

of euro-model

Degradation
Pressure

of euro

building on the currency

 ECB

injected liquidity into European banks unable to obtain short-term funds in market. Reserve used Euro-dollar swaps to make dollars available to ECB to lend to banks.

Federal

ECB

did not lower interest rates until October 2008 because of its focus on inflation.
fell against the dollar due to safe haven flight to US Treasury securities.

Euro

 European

Financial Stability Facility (EFSF)

IMF Japans

financial assistance
from Germany

Investment

European Sovereign Debt Crisis :

Impact On India

There Are Five Principle Channels Through Which Th Developments In Europe Can Percolate To The Indian Economy. Those Channels Are : Trade Currency Investment Banking Commodity Price

Impact On India

Impact On India

Trade Channels :
Trade

Trade

Merchandise goods & commercial services. Major Exports To Germany, France, & UK. India Contributes Around 25% Of Commercial Services To European Countries. This Channel Did Not Affect Indian Economy Much.

Impact On India

Impact On India

Impact On India

Impact On India

Currency Channel :
Currency Channel Currency Channel

Depreciation Of Euro Against Currencies Including Rupee. Profit Margin Negatively Impacted for Indian Exporters. Imports Relatively Cheaper; Benefits Imports of Machinery & equipments. Appreciation Of Rupee Could Also Undermine Indias Export Competitiveness.

Impact On India

Impact On India

Impact On India

Impact On India

Banking Channels :
Banking Channels Banking Channels

Merchandise goods & commercial services. Major Exports To Germany, France, & UK. India Contributes Around 25% Of Commercial Services To European Countries. This Channel Did Not Affect Indian Economy Much.

Impact On India

Impact On India

Impact On India

Impact On India

Commodity price Channels :

Commodity Channels Global Commodity Prices

Directly Affects

Price Of Imports Cost Of Products

Commodity Channels

Oil Is One Of The Major Commodity Imported. Oil Imports In India Are Relatively Price Inelastic. Crude Oil Prices Were Raised To US$ 147/Barrel In July 2008 The Demand For Crude Oil & Primary Commodities Was & Was Soaring Higher, Where as The Price Became The Supply Constraint.

Impact On India

Impact On India

53 billion needed to avoid the increasing massive debt; an unachievable target even with foreign taxpayers' contribution

Proposed plans of buying back own debt by using EU/IMF bail out funds are not sufficient since: Debt is transformed, not removed Huge moral hazard concerns

No sources to meet 6.85 billion fund deficit 11% interest rate denies borrowing money as an option Greek economy expected to shrink by 4% in 2011 Tax evasion costs

Greek Funding gap 2011

Primary Budget Deficit Debt Repayments Interest payments on debt Total debt
EU bail out fund Unmet Fund deficit

bn 4.95 32.5 15.9 53.35

46.5 6.85

Lack of economic competitiveness is the core problem. Options to address it1. Completely reform the economy 2. Rely on permanent subsidies from stronger economies, or 3. Seek monetary independence, allowing for currency devaluation

2.4% inflation forces Germany to pressurize ECB to increase interest rates, which is detrimental for Greek economy

Any Questions, Comments, Suggestion or Doubt..!!