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The report is created in response to EUROZONE CRISIS (EZ) faced by its member states in 2010. The crisis traces its origin from the global financial crisis in 2007. Amongst the EZ member states (countries using EURO as their currency), economy of Greece was badly hit that left it with sovereign debt problems. WHY DID THE CRISIS AFFECT GREECE, THE MOST? It is because Greeces economy before joining the EZ was weak and was also not fulfilling the economic criteria to be a permanent member of the Euro region. This led Greek government to tough reductions in government spending and imposes higher taxes to reduce Budget Deficits and Public Debt levels. The economy was not able to solve internal crisis that banged global financial crisis on Greeces door. This arised the question of stability of EURO. Many countries came forth to bail-out (loan) Greece with lower interest rates (German & French banks amongst them), International Monetary Fund(IMF), European Central Bank(ECB) also played major role in financing Greece. The idea of eliminating Greece from EZ also came forward. The reason behind was the crash of Euro in one country may hamper the economies of other country since other than Greece, 15 other nations are also using the same currency. As the crisis expanded, the name of PIIGS (Portugal, Italy, Ireland, Greece & Spain) countries also came into light. These countries were also convicted of following Greeces path. It was not possible to make all the countries default. Hence, possible measures in the direction of reforming EZ were undertaken by the supreme bodies by creating more political integration with economic governance and thereby improving competitiveness of EZ member states.

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In the year 2008, the global economy was hit by one of the worst financial crisis, unpredictable in history. It was triggered by the sub-prime crisis in the US. Even before the world could recover completely, the Euro zone crisis has hit the global economy. The crisis is already having an impact on the world order. As of now, no one really knows how long the crisis will continue, and the damage it will do to global economies. Portugal, Ireland, Italy, Greece and Spain have huge debt-GDP ratios and unsustainably huge fiscal deficits. EUROPEAN COUNTRIES PRONE TO SOVEREIGN DEBT CRISIS In my project, I have emphasized on Greece and have analysed the impact on Europe as a whole. As Europe is a major trade partner with China and North America, it would have an impact on the global economy. In addition to the slowdown, governments could cut their budgets and reduce their spending, leading to unemployment. These factors may take the Euro zone into a deep recession. European countries have embarked on deficit-cutting policies that may damage growth prospects by drawing demand out of the economy. According to the Organization of Petroleum Exporting Countries (OPEC), the worsening Euro zone crisis will hit demand for oil. It will further reduce the region's demand for oil and could impact consumption in emerging economies that are driving the increase in global fuel usage.

The demand for oil from the European members was expected to fall by 1.60 lakh barrels per day in 2012 and there is a risk of the Euro zone economy contracting this year. If the situation were to worsen, the effect on the oil markets will be seen through a decline in demand for oil in Europe. There will be a spill-over effect on demand for oil in the emerging economies as well. Further, the World Bank has in a recently-released report, downgraded its estimate of global economic expansion in 2012. The World Bank warned that both developed and developing nations will witness the effects of a global economic downturn because of the Euro zone crisis.

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We want European Union, a United States of Europe. -Helmut Kohl, German Chancellor
The European Economic Community (EEC), also known as the European Common Market (ECM) and now known as EUROPEAN UNION (EU) is an economic and political union of 27 member states which are located primarily in Europe. The European Union (EU) was founded in 1957 with the aim of creating 'an ever closer union between the peoples of Europe'. The EU operates on a mixture of supranational and intergovernmental models, where nation states pass the right to decide on certain issues to the EU but retain the power for independent action in others. The EEC, which originally comprised six nations- namely, Belgium, France, Federal Republic of Germany, Italy, Luxembourg and the Netherlands- was brought into being on January 1, 1958 by the virtue of the Treaty of Rome, 1957.

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The European flag

The 12 stars in a circle symbolise the ideals of unity, solidarity and harmony among the peoples of Europe.

The objectives of the treaty are: Elimination of customs duties among member states. Elimination of obstacles to the free flow of import and/or export of goods and services among member nations. Establishment of common customs duties and united industrial/ commercial policies regarding countries outside the community. Free movement of capital and people within the block. Acceptance of common agricultural policies, transport policies, technical standards, health and safety regulations, and educational degrees. Common measures for consumer protection. Common laws to maintain competition throughout the community and to fight monopolies or illegal cartels. Regional funds to encourage the economic development of certain countries/ regions.

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1951: The European Coal and Steel Community is established by the six founding members 1957: The Treaty of Rome establishes a common market 1993: Completion of the single market 1993: The Treaty of Maastricht establishes the European Union 1995 : The EU expands to 15 members 2002: Euro notes and coins are introduced 2004: Ten more countries join the Union

1. On 9 May 1950, the Schuman Declaration proposed the establishment of a European Coal and Steel Community (ECSC), which became reality with the Treaty of Paris of 18 April 1951. This put in place a common market in coal and steel between the six founding countries (Belgium, the Federal Republic of Germany, France, Italy, Luxembourg and the Netherlands). The European project was an attempt to overcome the nationalist conflicts of the first half of the twentieth century, especially the rivalry between Germany and France that had contributed to both world wars. 2. The Six then decided, on 25 March 1957 with the Treaty of Rome, to build a European Economic Community (EEC) based on a wider common market covering a whole range of goods and services. Customs duties between the six countries were completely abolished and common policies, notably on trade and agriculture, were also put in place during the 1960s.
On 9 May 1950, French Foreign Minister Robert Schuman first publicly put forward the ideas that led to the European Union. So 9 May is celebrated as the EU's birthday.

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3. The worldwide economic recession in the early 1980s brought with it a wave of euro-pessimism. However, hope sprang anew in 1985 when the European Commission, under its President Jacques Delors, published a White Paper setting out a timetable for completing the European single market by 1 January 1993. This ambitious goal was enshrined in the Single European Act, which was signed in February 1986 and came into force on 1 July 1987. 4. The political shape of Europe was dramatically changed when the Berlin Wall fell in 1989. This led to the unification of Germany in October 1990 and the coming of democracy to the countries of central and eastern Europe as they broke away from Soviet control. In 1992, the Maastricht Treaty transformed the European Community - turning it into the European Union (EU), giving it new roles in the areas of foreign and domestic policy.
The Berlin Wall was pulled down in 1989 and the old divisions of the European continent gradually disappeared.

5. This new European dynamism and the continents changing geopolitical situation led three more countries Austria, Finland and Sweden to join the EU on 1 January 1995. 6. By then, the EU was on course for its most spectacular achievement yet, creating a single currency. The Euro was introduced for financial (non-cash) transactions in 1999, while notes and coins were issued three years later in the 12 countries of the euro area (also commonly referred to as the euro zone). The euro is now a major world currency for payments and reserves alongside the US dollar. .

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7. Scarcely had the European Union grown to 15 members when preparations began for a new enlargement of EU. In the mid-1990s, the former Soviet-bloc countries (Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia), the three Baltic states that had been part of the Soviet Union (Estonia, Latvia and Lithuania).

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I. The decision-making triangle:
The Council of Ministers of the European Union, which represents the member states, is the EUs main decision-taking body. When it meets at Heads of State or Government level, it becomes the European Council whose role is to provide the EU with political impetus on key issues. The European Parliament, which represents the people, shares legislative and budgetary power with the Council of the European Union. The European Commission, which represents the common interest of the EU, is the main executive body. It has the right to propose legislation and ensures that EU policies are properly implemented.

The European Union is more than just a confederation of countries, but it is not a federal state. It is, in fact, a new type of structure that does not fall into any traditional legal category. Its political system is historically unique and has been constantly evolving over more than 50 years.

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II. Other institutions and bodies:

(a) The Court of Justice The Court of Justice of the European Communities, located in Luxembourg, is made up of one judge from each EU country, assisted by eight advocates-general. They are appointed by joint agreement of the governments of the member states for a renewable term of six years. The Courts role is to ensure that EU law is complied with, and that the Treaties are correctly interpreted and applied. (b) The Court of Auditors The Court of Auditors in Luxembourg was established in 1975. It has one member from each EU country, appointed for a term of six years by agreement between the member states following consultation of the European Parliament. It checks that all the European Unions revenue has been received and all its expenditure incurred in a lawful and regular manner and that the EU budget has been managed soundly. (c) The European Economic and Social Committee When taking decisions in a number of policy areas, the Council and Commission consult the European Economic and Social Committee (EESC). Its members represent the various economic and social interest groups that collectively make up organised civil society, and are appointed by the Council for a four-year term. (d) The European Investment Bank The European Investment Bank (EIB), based in Luxembourg, provides loans and guarantees to help the EUs less developed regions and to help make businesses more competitive. (e) The European Central Bank The European Central Bank (ECB), based in Frankfurt, is responsible for managing the euro and the EUs monetary policy.

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'If we do not want to stop completely or even reverse integration, we have to say where the borders of Europe are.' - Angela Merkel, German Chancellor, May 2006 Facts and Figures

The accession of new countries in 2004 and 2007 created 130 million new EU citizens, and the total population of the EU was, at the beginning of 2010, approximately 501 million.

Upon joining, average GDP per head in the 2004 accession countries was 52.9% of the EU-15.

Arguments For

A wider EU will mean greater security and wealth for everyone and will help prevent another European war.

The membership process encourages countries to become more democratic and respect the rule of law.

Western Europe needs cheap labour from the new member states to fill gaps in the job market.


Enlargement works to the detriment of existing member states: EU development aid will flow to the poorer accession countries and lower taxes in these countries could mean businesses re-locate there.

Migration from Eastern Europe to the EU-15 will take jobs from citizens of these countries. Letting a Muslim country like Turkey or Bosnia into the EU could undermine Europe's culture. No referendum has ever been called on enlargement.

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Membership European Enlargement Original Members France Germany 1973 Expansion Britain Denmark & Ireland 1980s Expansions Portugal Spain 1995 Expansion Austria, Finland & Sweden 2004 Expansion Poland The Baltic States The Czech Republic & Slovakia 2007 Expansion Bulgaria & Romania Candidate Countries Croatia, FYR Macedonia, Albania Serbia, Montenegro and Bosnia-Hercegovina Slovenia & Hungary Cyprus & Malta Greece Italy Benelux Nations



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'A fully robust and fully operational single market is the main vehicle for economic union.' - Mario Monti, Internal Market Commissioner The single market (sometimes called the internal market) describes the EU project to create free trade within the EU and to mould Europe into a single economy. A single market can describe any area where people are free to trade goods, invest their money and move to look for work without facing legal, technical or physical barriers. The EU single market is designed to create economies of scale, allow the establishment of Europe-wide commerce and enable faster growth by setting the same rules across the EU. In June 1985, the Commission, under its then President, Jacques Delors, published a White Paper seeking to abolish, within seven years, all physical, technical and tax-related barriers to free movement within the Community.

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The aim was to stimulate industrial and commercial expansion within a large, unified economic area on a scale with the American market.The enabling instrument for the single market was the Single European Act, which came into force in July 1987. Facts and Figures

The EU single market has the largest GDP of any economy in the world. In November 2010, the EU Commission had 1091 pending infringement proceedings against the member states in relation to the single market. This was a reduction of 11% on the previous six months.

" Almost half of the infringement proceedings launched by the Commission relate to the environment and taxation (470 out of the 1091 in November 2010).

In 2010, the 'Eurotariff' limited the cost of making a mobile phone call within the EU to 32 pence, and it limited the cost of sending a text message to 9 pence.

Arguments For

By standardising national regulations, the single market makes it easier to do business in the EU and contributes to faster economic growth.

Economic ties are good for European stability because they make conflicts like World War II unthinkable today.

A single market helps ensure an open, liberal Europe.


National governments continue to resist single market measures, so the system can't work properly.

A single market can never operate across an area with such different cultures and levels of wealth.

The single market hasn't removed regulations - it has just moved them to a European level.

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'The single currency is the greatest abandonment of sovereignty since the foundation of the European Community - the decision is of an essentially political nature.' - Felipe Gonzlez, Spanish Prime Minister

EU Economic and Monetary Union (EMU): enshrined in the Maastricht Treaty (1992). Members of the EMU have diminished control over trade and monetary policy and give up some economic powers to supranational bodies. Full integration into the European Union EMU involves adopting the EUs single currency, the Euro. Supranational: form of organisation through which decisions are made by international institutions, not by individual states The Euro is the currency used in the 16 member states of the EU that have signed up to full Economic and Monetary Union (EMU). People in all of these countries use the same coins and notes and business amongst companies in Eurozone states takes place in the single currency. For many people, the most noticeable benefit is that money does not have to be changed when travelling within the Eurozone.

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Facts and Figures

The Euro is also the official currency in Monaco, San Marino, the Vatican City, Guadeloupe, French Guyana, Martinique, Runion and Madeira.

Just over 27% of world foreign exchange reserves are held in Euros.

Arguments For

The Euro makes trade and travel between Eurozone countries cheaper and easier. The Euro creates greater economic stability in the countries that use it because it takes control of monetary policy out of the hands of politicians and gives it to the ECB. This encourages confidence among investors.

The Euro is a symbol of European identity and a vital part of the process of political integration.


The Eurozone is not an optimal currency area; the economies that make it up are too different to make the Euro work properly. This could result in more severe unemployment during recessions and more inflation during booms.

EMU can't work because so many members fail to meet the SGP rules. This will eventually create uncontrollable splits.

A national currency is a symbol of identity: adopting the Euro means symbolically and practically giving up sovereignty.

The Euro is primarily a political, not an economic, project.

Before analysing the Eurozone, it is important to understand what changes for a country when it joins an Economic and Monetary Union (EMU), such as the Eurozone. The process (outlined below) sees states move from having full control over their monetary and economic policy, to giving over full control of their monetary policy (and partial control of economic policy) to supranational bodies.

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The process of joining an EMU:

NOTE : The UK is part of the EU single market but opted-out of the Eurozone. However, new member states must join both the single market and, once they fulfil the convergence criteria, the Eurozone.

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The Eurozone is the nickname commonly used to describe the member states that use the EUs single currency, the Euro. The idea of creating a single currency for the European Community was first mentioned in the 1970 Werner report, which led to the establishing of the European Monetary System (EMS), the forerunner of the Economic and Monetary Union (EMU).

The Maastricht Treaty (1992) made EMU a part of EU law and set out a plan to introduce the single currency (the Euro) by 1999. The Maastricht Treaty also established certain budgetary and monetary rules for countries wishing to join the EMU (known as the convergence criteria)
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Convergence criteria: countries need to fulfil 4 criteria before they can join the Euro, including: keep the budget deficit below 3% of GDP. keep public debt below 60% of GDP demonstrate long-term price stability ; and ensure interest rates remain within certain limits for at least 2 years

In 1998, 11 member states (Germany, France, Italy, Belgium, Luxembourg, the Netherlands, Spain, Portugal, Ireland, Austria and Finland) undertook the final stage of EMU when they adopted a single exchange rate, which was set by the European Central Bank (Britain, Sweden and Denmark negotiated an opt-out from this final states of EMU). The new Euro notes and coins were launched on 1 January 2002.

European Central Bank (ECB): central bank of the Eurozone. It controls the monetary policy of all the member states that use the Euro.

There are currently 16 EU states in the Eurozone. Greece joined the initial 11 members in 2001, Slovenia joined in 2007, Cyprus and Malta in 2008, and Slovakia joined in 2009. Estonia is due to join the Eurozone in 2011. All future members of the EU must adopt the Euro when they fulfil the convergence criteria.

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A number of Eurozone states were particularly badly hit by the economic downturn. In April 2010, Eurozone unemployment reached an all-time high of 15.86 million (10.1% of the Eurozone population). In 2009 alone, 14 Eurozone states breached EU rules limiting public debt and annual budget deficits as defined by the Stability and Growth Pact (SGP). The Stability and Growth Pact (SGP): outlines rules on public finances, including: - Limiting public debt to 60% of a states GDP. -Limiting the annual budget deficit to -3% of GDP.

The rules are intended to encourage good economic management: - Stable prices, low inflation and low interest rates; - More resilience to external economic 'shocks'. The Euro doesnt create economic stability on its own, but stability was meant to be achieved by states sticking to the SGP rules. This graph shows the

deterioration of the Eurozones finances since the beginning of the financial crisis. The

average budget deficit in the Eurozone fell from just above 1% in 2007 to a predicted peak of 6.5% in 2010. The area in red shows the limit for budget deficits set by the Stability and Growth Pact (-3%)

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In the same year, Spains unemployment rate reached 19%, and its annual budget deficit grew to more than 11% of Gross Domestic Product (GDP). Italys public debt reached 1.812 trillion in April 2010, its highest ever level. In response to the global economic crash, member states across the EU proposed tough austerity measures to try to reduce their budget deficits and public debt. The Spanish Government proposed to cut public sector pay by 5%. Italys Prime Minister, Silvio Berlusconi, introduced measures to reduce Italys budget deficit to 2.7% by 2012. In June 2010, Germanys Government also promised to reduce its public spending by 80 billion over the next 4 years. The measures to cut public spending led to protests and strikes across the EU, including in Spain, Italy and France.

This graph shows how the average public debt level in the Eurozone has increased dramatically since the

beginning of the financial crisis. In 2007, public debt in the Eurozone was just over 65% of GDP, whereas by 2010 debt levels were predicted to rise to 85% of GDP (and to nearly 90% by 2011). The part of the graph in red shows the projected excess over the limit for debt levels set by the Stability and Growth Pact (60%).

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The EU member state most severely hit by the global economic crisis was Greece. When the Eurozone was established, Greece was initially refused membership of the single currency area, due to its weak economy and failure to meet the required economic criteria. The Greek Government was told to implement a series of austerity measures to improve its economy.

In 2001, the EU revised its opinion and Greece became the 12th country to join the Eurozone. However, concern about the strength of Greeces economy remained as many argued that the country had not adequately reformed its economy or reduced its public spending, including the huge military budget. There was also suspicion (which was later confirmed) that Greece had doctored its economic data to cover up its poor financial situation
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When the global economic crisis hit, Greeces dire finances became apparent; in November 2009, the countrys public debt was predicted to rise to 124.9% of GDP (300 billion) during 2010, the highest level in the EU. The Greek Government also announced that its 2009 budget deficit would be equivalent to 12.7% of its GDP, more than four times higher than the maximum allowed under the EUs Stability and Growth Pact. One problem Greece faced was that it needed to borrow 50 billion in 2010 just to service its debt, but banks and investors were worried that it might not be able to pay the money back. As a result, Greeces credit rating was downgraded, so it had to pay much higher interest on its borrowings than other Eurozone states.

At first, the Greek Prime Minister, George Papandreou, insisted that Greece would not need a bailout from Eurozone states and, in November 2009, Papandreou promised to cut Greeces budget deficit to 8.7% of GDP during 2010. To achieve this, he announced tough austerity measures for 2010, including a 10% reduction in social security spending, and a freeze of public sector wages. He also promised to
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reform the pension and tax systems to make sure wealthier people paid more, and to fight corruption and tax evasion. However, despite Greeces proposed public spending cuts, in March 2010, EU Economic Affairs Commissioner Olli Rehn asked the Greek Government to take further measures to tackle its budget crisis. The countrys credit rating was repeatedly downgraded, eventually reaching junk-status (below BBB, according to ratings agency Standard & Poors) in April 2010.

In response, Greece said it wanted to cut its budget deficit to 2.8% of GDP by 2012 and the Greek Government promised to save an extra 4.8 billion by cutting public sector pay (cutting salary bonuses by 30% and freezing state-funded pensions in 2010) and increasing taxes (on fuel, tobacco, alcohol, and raising VAT from 21% to 23%).

There were widespread protests against the austerity measures in Greece. On 24 February and 11 March 2010, 50,000 people - including Greek transport workers and civil servants took part in general strikes. The situation deteriorated further in May 2010, when three people were killed in violent protests. What could the EU do to help Greece? EU member states discussed several possible solutions. The first possible solution was to let Greece default on its debt. However, this was opposed by member states whose banks held Greek debt (including the UK) because they would lose money.

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Moreover, members of the Eurozone were worried that allowing Greece to default would undermine investor confidence in the Euro. A second possible solution, proposed by France, was to arrange a bailout for Greece from the European Central Bank (ECB), the EU, or the International Monetary Fund (IMF). However, some states, including Germany, were concerned that a bailout (particularly involving external international institutions such as the IMF) would further undermine the credibility of the Euro and signal the failure of the great economic monetary union experiment. A third possible solution was for Greece to leave the Eurozone and return to its old currency, the Drachma.



ISO code FR


Moodys rating Aaa

Moodys outlook STABLE

Fitchs rating AAA

Fitch outlook STABLE

S&P rating AA+












3. 4. 5. 6. 8. 9. 10. 11.


UK US Italy Switzerland Spain Portugal Greece Ireland

Aaa Aaa A2 Aaa A1 Ba2 Ca Ba1







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THE $110 BILLION GREEK BAIL-OUT Despite initial reluctance, in April 2010, the 16 Eurozone countries agreed to lend Greece 30 billion worth of low interest loans during 2010 they insisted it was not a direct bailout but a funding mechanism to be used as a safety net if Greeces problems worsened.

However, it quickly became apparent that Greece would need further funds and stronger financial backing from the EU. Therefore, on 2 May 2010, Eurozone states and the IMF agreed a bailout package for Greece in the form of a Stabilisation Mechanism - a fund that low interest loans could be drawn from. The fund was worth a total 110 billion, with Eurozone countries providing 80 billion and the rest (30 billion) coming from the IMF. In a move to restore confidence in the Euro, the fund was made available to all Eurozone members. Greece withdrew the first loan on 18 May 2010.

The Stabilisation Mechanism loans had a much lower interest rate than private bank loans, but came with tough conditions in order to protect member states that had given huge quantities of money to the fund. For Greece, these conditions included: allowing auditors from the IMF and the EU to assess its national budget and judge the success of its austerity measures; and imposing important structural changes to its economy on an annual basis for the duration of the loan. The decision to bailout Greece was controversial because a number of EU treaties forbid the explicit bailing out of member states (the Maastricht Treaty specifically prohibited bailouts, and the Lisbon Treaty created a no-bailout clause. Bailouts had originally been banned in order to prevent states from breaking the SGP rules, and then being propped up by other member states. However, to allow the Greek bailout, the no-bailout clause was overruled and the Lisbon Treatys exceptional occurrences clause was used instead. The Greek debt crisis caused concern that further Eurozone states with weak economies would default. For example, Spain, Portugal, Italy and Ireland all had big budget deficits. Ultimately, fear that the Greek economic crisis would infect other states undermined the credibility of the EUs single currency worldwide. In May 2010, the Euro fell in value against the dollar to its lowest level for 4 years. Many began to question whether, in such a time of economic turmoil, the economically stronger northern
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European states, such as Germany, Finland and France, would act to support the economically weaker states, in order to save the European Unions EMU. The 690 billion European Financial Stability Facility (EFSF)

As concern about the stability of the Euro grew, the 16 Eurozone states agreed to set up a Eurozonewide fund to remove the fear that weak Eurozone states wouldnt be able to repay their debt. The resulting fund, the European Financial Stability Facility (EFSF) was established in May 2010. Eurozone states provided 440 billion, in conjunction with the IMF, which provided an additional 250 billion.

The EFSF established a safety net for the 16 Eurozone states (but not the full 27 member states of the EU) particularly those in dire financial straits, by giving them access to a total of 750 billion emergency funding (this includes the Eurozone and IMF contributions along with 60 billion from the Stabilisation Mechanism described above).

To raise the funds, the EFSF is able to sell bonds to investors guaranteed by Euro area members. The amount raised in bonds sales can then be lent to Eurozone member states. If a country does draw funds from the EFSF, the IMF will begin an investigation and the country will no longer have an obligation to contribute to the facility (i.e. Greece has not contributed). The EFSF has the status of a registered company owned by members of the Eurozone and is based in Luxembourg.

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When the Eurozone was designed, a get-out clause was not established because: the EUs political aim of working towards an ever closer union (set out in the 1957 Treaty of Rome) was designed to be irreversible; a get-out clause might have encouraged irresponsible economic behaviour from Eurozone states; given that some states already had opt-outs on aspects of EU integration, the EU would look increasingly likea pick and mix, with individual states having a different relationship with the EU. An Exit Clause inserted into the Lisbon Treaty (2007) allows member states to leave the EU altogether. However, there is no mechanism for states to only leave the Eurozone whilst remaining a member of the EU.

ANALYSIS : The EU does not have a comprehensive mechanism for states that want (or need) to leave the Eurozone: no member has ever tried to leave the Eurozone, and there are no specific rules or procedures for how to do it. This meant there was no clear route for Greece to leave the Eurozone if it wished, or to be expelled by the other Eurozone members.


This effect could be even worse if Greece also leaves the euro. Such a move might be a repeat of the collapse of Lehman Brothers, which sparked a global financial crisis that pushed Europe and the US into deep recessions. Greek banks are exposed to the sovereign debts of their country. They would need new capital, and it is likely some would need nationalising. A crisis of confidence could spark a run on the banks as people withdrew their money, making the problem worse.There has been much public opposition to the austerity programme. Europe's banks are big holders of Greek debt, with perhaps $50bn-$60bn outstanding.
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ANALYSIS: An "orderly" default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. A "disorderly" default could mean much of this debt not being repaid - ever.Either way, it would be extremely painful for banks and bondholders.The real risk is that a unilateral default by Greece could lead to a financial panic, as investors fear that other, much bigger eurozone countries may ultimately follow Greece's example.


This is most clearly evident in the case of Greece where assembling the rescue packageincluding the IMF contributiontook too long and by very divisive politics in Germany and Greece, particularly, delayed and reduced the incentive on the policy makers to act in a more decisive way. ANALYSIS: Europe is getting to the point where it is pushing the right buttons to deal with the very deep crisis of the euro. Unfortunately, it took too long getting there and as the result of this, the cost is going to be significantly higher. But they are getting there, the most recent package (750 billion euros) is obviously a very substantive reaction and the decision by the European Central Bank to its units liquidity operations and even to purchase government bonds has also been a step in the right direction, although a very controversial one.


ANALYSIS: Portugal is definitely at risk. It has a very high debt, not as high as that as Greece. It has a very large fiscal deficit and most importantly Portugal has been going extremely slowly, just about the slowest rate of growth in the Euro zone for many years, so the likelihood that it can grow itself out of dept seems very very low. It has many of the same loss of competitiveness characteristics that we observe in the other vulnerable countries. At the same time, I think the Portuguese government is clearly moving toward taking some significant action, so this remains an open question, its a risk, but it remains an open question.

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ANALYSIS: Spain, in a sense, is the most worrisome situation at the moment. Its imbalances are actually not as extreme, by any stretch as those of Greece. Certainly its debt to GDP ratio is still relatively low, although it is rising very rapidly. Spain is a special concern because the total debt of Spain is over twice that of Greecethis is a significant economy. The greatest vulnerability of Spain is that it has lost competitiveness, along with all the others, but at the same time, its economy has become far too dependant on non-tradable sector, the sector that is sheltered from international competitionhousing, services, restaurants, barsactivities that are generally nontradable have become too big of a part of the economy and not enough of the economy is oriented toward external markets.

It appears that the Italian government does have control over its finances. That is what it has demonstrated in recent years. However, I would not exclude that possibility that particularly should the crisis spread to Spain in a major way that the markets will become very nervous about Italy. ANALYSIS: Now, Italy is a mixed case because on the one hand it has clearly seen very large losses in competitiveness, like the other vulnerable countries, and at the same time, its debt to GDP ratio is very high. Its about as high as that of Greece. On the other hand, unlike Greece in recent years, at least Italy has seemed to get a handle on its fiscal deficit and its fiscal deficit is modest compared to other countries in Europe. It's about half, let's say, the British deficit, or half the Spanish deficit.

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According to figures from the Bank for International Settlements, UK banks hold a relatively small $3.4bn worth of Greek sovereign debt, compared with banks in Germany, which hold $22.6bn, and France, which hold $15bn. When you add in other forms of Greek debt, such as lending to private banks, those figures rise to $14.6bn for the UK, $34bn for Germany and $56.7bn for France. ANALYSIS: The UK government's direct contribution to any Greek bailout is limited to its participation as an IMF member.However, any knock-on from Greece's troubles would worsen the UK's exposure to Irish debt, which is larger.And if it led to a major financial crisis, as well as a deep recession in the eurozone - the UK's main trading partner - the damage to the UK economy would be substantial.


ANALYSIS: Potentially, this has an important impact on the United States. There are two main sets of impacts. The first set of impact is to trade. Europe is a very important trading partner of the United States; it is the worlds largest trading block. If Europe does not grow and furthermore if the euro is extremely weak, its more difficult for the United States to export its way out of its problems. As there is an objective, a stated objective on the part of the Obama administration to double exports in five years to become less reliant on domestic demand and more reliant on world demands.

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The more important risk to the United States comes to the financial angle and in one word, the concern is about fear. Will we have a return of the credit crunch that sank the global economy eighteen months ago because banks become very concerned about lending to each other or banks lending at all, given the fact that European banks are of course laden with European government debt, as you would expect after all this was supposed to be the safest possible investment

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THE EUROZONE CRISIS, WAS IT INEVITABLE? The structure of the Eurozone: did it cause the crisis?
Some argue that a sub-optimal EMU will always be subject to crises because it doesnt have a central body to direct activity. They argue that the Eurozone has a coordination problem and that the Eurozone crisis was inevitable because it doesnt have the political structures to coordinate member states economic actions by setting rules to prevent countries from pursuing their self-interest in damaging ways. Below is a list of problems that amount to a coordination problem in the Eurozone.

1) Excessive borrowing. When not coupled with economic growth, excessive borrowing can make government debt dangerously large (a lack of growth makes it harder for borrowers to pay back loans and interest). In the Eurozone, governments can sell bonds to investors with the implicit guarantee that the ECB and other Eurozone states will pay the debt if the country defaults. The ECB and Eurozone states support the guarantee because they would not want investors to think the Euro is a weak currency, and the implicit Eurozone guarantee encourages investors to buy bonds. However, this means that countries can borrow money (through selling bonds) when they have little chance of paying it back. In recent years, therefore, countries have been able to borrow cheaply and excessively.

The German Chancellor, Angela Merkel, faced a political backlash during the Greek bailout, as many Germans felt that Greece had been allowed to borrow too much money without its economy being able to grow enough to pay the money back, due to the implicit Eurozone guarantee.

2) Conflict over who is responsible for bank bail-outs. In a sovereign state, this responsibility clearly lies with the national government that controls the central bank. However, no such clear line of responsibility exists in the Eurozone. For example, some banks survival might be considered necessary to ensure wider financial stability, but depositors in one country would undoubtedly feel unhappy about bailing out important banks in other countries.

3) Problems when separate countries pursue different macroeconomic policies (this may be particularly apparent between developed and underdeveloped countries). Some countries may want to

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promote growth by lowering interest rates and, in doing so, increasing inflation. However, other countries may want to keep inflation low to consolidate growth. Consolidating growth: when a country decides to reduce spending and borrowing so that the growth achieved can be supported by a reduction in the countrys deficit and debt. This problem may get worse as the EU admits more members into the EMU from eastern and north-eastern Europe. For example, Estonia is due to join the Eurozone in 2011.

4) National economic growth occurring at a faster rate in one country than in other countries. If a countrys economy grows and demand increases, prices will rise and supply will be encouraged, which will reduce demand. This process may be accompanied by an appreciation of the countrys currency. If a countrys currency appreciates, imports from countries with weaker economies - whose currency has not appreciated at the same rate - will be more attractive. This would allow weaker countries to increase their output, which would appreciate their currency. However, this process cannot occur in the Eurozone because there is a single currency rate. The result is that the single currency may not suit members of the EMU because the natural mechanism of currency movements cannot operate to help redress imbalances in trade and the internal economy. Some countries may benefit from using the Euro in the short term, as perhaps Germany has done. However, Germany has been criticised for supporting policies that closely linked the value of the Euro to its own trading needs (i.e. its high-quality export industry), while not favouring other countries in the Eurozone.

5) Trade imbalances. A trade imbalance is a surplus or a deficit . A trade deficit occurs when the value of a countrys imports exceeds the value of its exports. A trade surplus is when the opposite occurs. When applied to the Eurozone, this is a problem because countries cannot control their monetary policy to attempt to redress this balance (e.g. by devaluing its currency to make exports cheaper). Some people argue that trade imbalances are normally self-correcting; when a country runs up a trade surplus it creates international demand for its currency because it is viewed as a good investment. This would lead to the currency appreciating, which would make its exports less competitive, and in turn the country will begin to lose its surplus. Other countries would then increase their exports as they have a weaker currency and so the process begins again. However, some argue that this self-correction has not occurred in the Eurozone because of the single currency. .

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Since the creation of the Eurozone, all Eurozone countries listed above (except Germany) have seen an increase in their trade deficit as a percentage of their overall GDP. It is clear that governments in some countries (in particular, Greece) have run up inappropriate trade imbalances that have seriously undermined their International Investment Position and their economy. Greeces trade deficit has come under close scrutiny and it has been argued that Greece was unable to deal with its deficit during the recent crisis because it cannot devalue its currency to stimulate its exports

Other factors which may have contributed to the Eurozone crisis:

The factors listed below detract from the claim that the Eurozone crisis was inevitable. Rather than suggesting that the crisis resulted from a coordination problem in the Eurozone, these factors could be used to argue that the crisis was the result of errors that could have been avoided. 1) Stabilising elements of the EMU were not rigorously enforced or adhered to. It has been argued that the Eurozone crisis could have been prevented if the Stability and Growth Pact rules had been strictly enforced. In June 2010, the ECB Chief, Jean-Claude Trichet, blamed Germany and France for contributing to the Eurozone crisis by breaching the EUs Stability and Growth Pact rules in 2004. However, to date, all Eurozone countries have either broken the SGP (according to figures published by Eurostat), or will break it in 2010 (according to the most optimistic forecasts by the European Commission).xl Some people argue that this proves the SGP rules are unworkable.

2) The role of the ECB. By underwriting loans to countries that would not be able to pay them back, or by setting interest rates low, to encourage investment and job creation, the ECB may have encouraged excessive borrowing.
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3) The global financial crisis. It is also important to remember that some of the problems faced by the Eurozone were caused by problems in the wider global economy and financial system. This may suggest that individual states financial regulation was partly at fault, and so full blame cannot be levelled at the EMU. 4) Countries borrowed too heavily and invested the borrowed money unwisely. Countries borrowed money whilst not using the funds to improve infrastructure and other elements of their economy that could improve growth and competitiveness. This created debt that could not be paid back.

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1) The data collected for the project is secondary data collection method. 2) The case study is extensively based on the data collected from internet source. 3) The roots of the crisis lay in the global financial crisis that began in 2007 which are briefed in the study. 4) Geographical boundary was the main constraint since the crisis occurred in far west, hence only secondary data was reliable. 5) The crisis impact on other countries in the eurozone itself is judged, the impact on the whole world is not taken into consideration.

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In order to examine where the Eurozone should go next, the following section picks out the main problems faced by the EUs EMU: 1. The lack of competitiveness of some Eurozone countries; 2. Trade imbalances; 3. Annual deficits and public debt; 4. Exposure to sovereign debt. As a result of these problems, the fates of the Eurozone countries are intertwined: if one member defaults on its debt, others will be affected; if one member runs a trade surplus it may mean another state has to run a trade deficit (as long as trade is between these countries); improvements in competitiveness for one country can be the result of reduced competitiveness in another. Because of this interdependence between Eurozone states, responses to these problems are not simple or uncontroversial, yet whatever response is taken will have important implications for the future of the EU and its EMU. Following are the suggestions for reforming the Eurozones EMU:

Reforming the Eurozone

1) The political integration: the Eurozone needs more political integration to give EU bodies greater economic control over Eurozone states, i.e. to establish more coherent economic governance between member states. A fiscal union would need to be coupled with a closer political union with central institutions that have the power to give binding macro-economic instructions to member states. This would enable a central authority to transfer funds to countries that need them, improving competitiveness which would be good for future debt levels. A central authority with expanded powers could be able to respond to any future problems. 2) The rules and sanctions argument: The Eurozone needs new economic rules backed up by effective political and economic sanctions. Political and economic sanctions: punishments for rule breakers. For example, governments that break the SGP rules on debt and deficits could lose payments from the Common Agricultural Policy (CAP) or face a ban on borrowing. Greater political sanctions could include a ban on voting rights or excluding states from certain EU or Eurozone discussions and decisions.
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3) The economic reform: it would be a mistake to dismantle the EMU because it will be easier to complete the economic reforms that are needed if countries remain in the Eurozone. Dismantling the EMU (to enable states to deal with the problems faster by devaluing their currency, making their exports more attractive) wouldnt sufficiently solve the current problems.

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If at this point, given how it's failing, Europe isn't capable of making a united response, then there is no point to the Euro. French President, Sarkozy, EU Crisis Summit, 2010

The Eurozone is the most adventurous economic endeavour the world has seen; never before have so many diverse and large economies been integrated both monetarily and economically. As result, the Eurozones future has huge implications for economic theory and practice. It is perhaps safe to say that the Eurozone is at a crossroads, where European economic integration is set to increase or perhaps fatally stall.

There have been suggestions that the Eurozone is on the way to economic recovery (e.g. the value of the Euro rose to a 3-month high against the dollar in August 2010). However, this recovery may be just the calm before the storm with many states due to implement austerity measures from 2011. Furthermore, economic recovery may only exacerbate the divisions in the Eurozone if countries recover at different rates; there are already signs that Germany is witnessing a return to economic growth, while Greece has yet to witness any significant improvement in growth prospects and Spain struggles to deal with massive structural problems. This suggests that the recovery could yet be two tiered, and could threaten an already battered sense of unity within the Eurozone. The picture, both economically and politically, is thus not clear, and the future of the Eurozone is still in doubt. We will defend the Euro, whatever it takes. EU Commission President, Barroso, press conference 2010

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1) 2) 3) 4)


International Business by K. Ashwathappa

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