Transcript Euro Crisis?

Euro Crisis?
Alexander Consulting Enterprise
4/8/2016
EMU
1.What is EMU?
Acronym for Economic and Monetary Union
2. How Does it Work?
All national currencies of member states convert into the EURO at
an irrevocably fixed rate. The EURO will float freely against
other main currencies (yen, $). National banknotes will cease to
be legal on 1 July 2002.
3. What is the role of the ECB?
The Governing Council of the European Central Bank (ECB) consists
of six executive board members responsible for current business and
the 11 ministers of the National Central banks. The ECB is
responsible for the money supply in Euroland.
Alexander Consulting Enterprise
4/8/2016
4. Does the EMU lead to a loss of sovereignty of its
member states?
A nation’s currency symbolizes national autonomy. Monetary policy
is a powerful economic instrument, that has an impact on inflation,
interest rates, governmental debt, short term unemployment, and
economic cycle
5. What happens if the economic cycles in different EMU
member states are out of synch?
The exchange rate weapon is ruled out. There is no redistribution
effect of federal taxes (For example: If one part of the U.S. moves
into recession, its tax payments (linked to income and sales) will fall
and federal benefit payments will rise). Adjustments in the EMU
will have to take place through:
- Relocation of workers
- Relocation of businesses
- Change of wages
- Transfer payments between EMU member states
Alexander Consulting Enterprise
4/8/2016
Greek Crisis
1. Timeline of the Crisis
Greece joins currency union in 2001
Low interest rates, low inflation,
access to capoital markets
No currency devaluation to
counteract increasing ULC
Economic boom financed with
cheap money
Domestic businesses are increasingly
loosing competitiveness
Hay fire of cheap money is burnt out. Economy is not competitive
Alexander Consulting Enterprise
4/8/2016
Increasing Loss of Competitiveness
Harmonised competitiveness indicators based on unit labour costs indices for the total economy:
2009 Q4
(period averages; index 1999 Q1=100)
The purpose of harmonised competitiveness indicators (HCIs) is to provide consistent and comparable measures of euro area
countries' price and cost competitiveness that are also consistent with the real effective exchange rates (EERs) of the euro. The HCIs
are constructed using the same methodology and data sources that are used for the euro EERs. While the HCI of a specific country
takes into account both intra and extra-euro area trade, however, the euro EERs are based on extra-euro area trade only.
Euro
BE
area
1. Period average
2. Percentage change versus
previous period
3. Percentage change versus
previous year
4. Percentage change since
1998 Q4
DE
IE
GR
ES
FR
IT
CY
LU MT
NL AT PT SI
SK
FI
108.1 107 89.6
125.3 112.6 113.3 104.5 113.1 112.8 117.7 109.8 112.7 95.1 ·
107.7 176.7 105.7
1.4
1.2
0.5
2.4
-1.0 1.1
0.8
-0.4 1.7
2.0
1.4
0.3
0.3 ·
-0.2 -1.8 0.6
6.3
2.4
3.8
-0.3
4.5
2.3
2.3
2.9
4.2
4.5
3.4 ·
4.3
3.1
4.0
5.9
-13.0 17.4
10.4 -5.2 ·
7.6
78.7 3.9
0.2
12.9 12.9 3.8
3.9
10.9 10.9 14.7 9.9
http://www.ecb.int/stats/exchange/hci/html/hci_ulct_2009-10.en.html
2012 numbers: http://www.ecb.int/stats/exchange/hci/html/hci_ulct_2012-10.en.html
Alexander Consulting Enterprise
4/8/2016
4.8
1. Timeline of the Crisis cont.
Hay fire of cheap money is burnt out. Economy is not competitive
Governmental spending to counteract increasing unemployment, low
consumption, and failing companies
Public debt explodes
Investors slowly start to react and buy less Greek bonds and increasingly
take out Credit Default Swaps to get insurance against default
Price of bonds falls and interest rate increases.
“Bad” speculators refuse to buy bonds despite skyrocketing interest rates.
Price of Credit Default Swaps goes through the roof and markets start to
freeze
EU and IMF commit € 750 billion to bail Greece out. EZB buys bonds
Alexander Consulting Enterprise
4/8/2016
2. Potential Solutions
1. Quasi Permanent Transfer Payments
(Model East Germany) Greek economy does not become
competitive. Long-term transfer payments (€ 60 billion per year?)
are necessary to keep up the standard of living.
2. Structural Reforms
This is the favorite model by European politicians. Debt relief
coupled with severe structural reforms to make the Greek
economy more competitive. This would lead to a drastic
decrease of the standard of living for years to come.
Alexander Consulting Enterprise
4/8/2016
2. Potential Solutions cont.
3. Exit the Currency Union
Investors of Greek bonds get a haircut. New currency will be
heavily devaluated.
Economy becomes
competitive. Exports, tourism,
and production for domestic
consumption increase.
Access to international capital
markets is obstructed. High interest
rates. Drastic increase of import
prices. Temporary decrease of
standard of living. Danger of
inflation.
4. ?
Alexander Consulting Enterprise
4/8/2016