Eurozone crisis

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Eurozone crisis

The euro (symbol: €; banking code: EUR) is the currency of 17 EU member states. It was launched on 01.01.1999 virtually, but physically launched from 01.01.2002. The currency is the second most traded currency after the US dollar. The currency is used by around 332 million people daily. €915 million in circulation, highest combined value of Bank notes in circulation in world.

The countries that use the euro are Finland, Austria, Belgium, Cyprus, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. If you are planning a trip to Europe then the euro is the currency you will need for most of the locations you visit. There are additional countries that will accept the euro even though there is no formal agreement to do so. It is managed and administered by Frankfurt based European Central Bank.

In 1969 Commission and EEC head of State propose monetary union «Werner report» by the end of 1970 by «Bretton Woods Systems». But collapsed. The Bretton Woods's system had already begun to show signs of strain in the late 1950s, and by 1968-69 a new era of currency instability threatened when market turbulence forced a revaluation of the Deutschmark and the devaluation of the French franc. This endangered the common price system of the common agricultural policy - which was, at that time, the main achievement of the European Community.

The Werner group submitted its final report in October 1970, setting out a three-stage process to achieve EMU within a 10-year period. The final objective would be irrevocably convertible currencies, free movement of capital, and the permanent locking of exchange rates - or possibly a single currency. To achieve this, the report called for closer economic policy coordination with interest rates and management of reserves decided at Community level, as well as agreed frameworks for national budgetary policies.

To retrieve the situation, in March 1972, the Member States created the `Snake in the tunnel' as a mechanism for managing fluctuations of their currencies (the snake) inside narrow limits against the dollar (the tunnel). It was immensely hit by oil crises, policy divergence and dollar weakness; within two years the snake had lost many of its component parts and was little more than a Deutschmark zone comprising Germany, Denmark and the Benelux countries.

All the nine currencies were pegged to one another with a corridor (tunnel) of ±2.25% to prevent excessive volatility of their currencies in the death theories of Bretton woods. In 1973 as the collapse of the currency took place snake with several currencies leaving and joining.

By 1977, only the Netherlands, Belgium, Luxembourg, and Demark continue to peg the D-Mark, France exits the snake system.

A revolutionary step was taken 1979 as Germany and France agreed to create the European Monetary System (EMS), which was a huge step towards the unification of currency. All the EEC members join EMS but UK (joined-1990) System of fixed exchange rates with currency base (ECU) and a corridor of ± 2.25%, but there was an Exception for Italy as the bandwidth was ± 6%. So the full bandwidth was 12% for them.

During this period at least 18 realignments had taken place (revaluation of D-Mark and devaluations of other currencies) between 1979 and 1986; after wards no more re alignments to prevent then higher rates weak economies, lower rates strong economies. This was the really a huge work towards the goal on ONE currency.

In 1992 a massive economic imbalances had built up due to the very different and competiveness of the EMS economies, only to be further compounded by German Unification. The interest rate of Germany went record high of around 10% which really created a huge impact. The world was facing a huge Oil crisis, since the Iraq and Kuwait War started. The Japan economy was also in recession. Hence in September 1992 Defacto Collapse of the EMS System (Black Wednesday). On 13.09.1992 Italy devalues by 7%, which was more than that of the designated bandwidth. The most impact came when 16.09.1992 UK declared that they exit EMS. The next the disastrous decision was taken the next day of UK announcing their exit by France to exit the EMS. In August 1993 «Brussels Compromise» resets EMS with a new corridor of ± 15%. They did not give the name but can be called as EMS-2. In year 1989, European Union council agrees to deepen integration through Economic and Monetary Union (EMU).

In 1993 Treaty of Maastricht contains roadmap accession Criteria (Convergence Criteria) and Institutional arrangements for EMU.

In 1998 Councils decides that 11 out of 12 eligible EU members are allowed to join although only France, Luxembourg Ireland and Portugal fulfill all four Convergence Criteria. Greece was admitted 1 year after «credibly» demonstrating convergence.

January 1^st 2002: EURO BECAME LEGAL TENDER in 12 states.

Since there were around 27 countries in EU and to trade among each other was a huge barrier as during Trade there was extra burden of currency conversion every time hence there was a need of ONE currency to trade. By having a single currency there was elimination of Fluctuations of Exchange rates and Exchange costs incur. It also eased and benefited in cross in conducting cross border trade among all the EU countries and even with the countries who did not adopt to regularize Euro into their countries, instead only traded with Euro either in importing and exporting. By having the single currency it also eased the tourists so that they do not need to bother for the currency conversion even traveling the globe.

To give more clout to EU to trade on global level as second most important currency in globe the single currency was required. It gave stronger presence of EU in global economy and tangible sign of European identity and also improved economy stability and growth.

Against the background of the current debt crisis important measures to improve the economic governance in the EU and the euro area in particular have been taken. EU Member States needed strengthen the stability and Growth Pact, and to introduce a new mechanism to prevent or correct macroeconomic imbalances and to increasingly coordinate structural policies. These are crucial steps to strengthen the «E» - the economic leg - of the EMU and to ensure the success of the euro in the long run.

??The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory??.

GDP=C + G + I + NX

where:

«C» is equal to all private consumption, or consumer spending, in a nation's economy

«G» is the sum of government spending «I» is the sum of all the country's businesses spending on capital «NX» is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

When we take the World Economic Growth the European GDP since the recession is slowing down the growth. The Euro Area is an economic and monetary union of 17 European countries which adopted Euro as their currency. France, Germany and Spain are the most important economies having a share of 74 percent of the Union?s GDP.

The sovereign debt and banking sector problems in the euro area are much than they were expected. The financial volatility has drastically increased, which is generating concerns about developments in the euro area.

??Inflation is a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase??. When inflation rises, every dollar you own buys a smaller percentage of a good or service. For example, when inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, one cannot by the same goods at the earlier price.

The inflation rate In the Euro Area was recorded at 2.20 percent in December of 2012. Inflation Rate in the Euro Area is reported by the Eurostat. In Euro Area, the inflation rate is calculated using the weighted average of the Harmonised Index of Consumer Price (HICP) aggregates. The main components of the HICP are: food, alcohol and tobacco (19 percent of the total weight), energy (11 percent), non-energy industrial goods (29 percent) and services (41 percent). The HICP aggregates are computed as the weighted average of each country's HICP components. The weight of a country is its share of household final monetary consumption expenditure in the total of the country's group. The local HICPs are supplied to the Eurostat by the National Statistical Institutes.

The continuously high rate of inflation is likely to suppress the consumer spending because the wages haven't been increasing as fast as prices. «The euro zone as a whole we still see a decline in 2013, but we do think that the turning point will be probably in the first quarter of this year,» Mr. Nowotny said. «For 2014 we do expect a clear revival of economic growth.»

Strengths, Weaknesses are the internal factors, Opportunities and Threats are considered as external factors. SWOT Analysis is mostly used for audit and analysis of the overall strategic position of the business and its environment. The main purpose of this is to identify the strategies and to create a specific business model that will best align an organization's resources and capabilities to the requirements of the environment in which the firm operates.

The economic crisis is affecting the euro zone for the past three years and this is affecting public opinion on euro zone. There are two main questions at this point of time. First question the role of euro and economic crisis affecting public opinion. Second question the need for economic reforms. Survey?s have been conducted and the different findings have stated that single currency as a tool has not helped to overcome economic crisis. But the people have agreed with the reforms which that have taken place. The people or the society most importantly have understood that these steps are needed to get there countries back on track. The society have understood the problems and are now ready to take the steps towards the well being of euro zone. This is the strength of Euro zone.

The Euro zone?s current debt crisis is sending across the vibes for second recession and the European central bank had to take action. The European Central bank injected an unprecedented amount of liquidity into financial system. This had currently revived the Eurozone condition but it has led to two weak points firstly the resources with the European economy is trying to save the banking sector so far this has not worked in the favor of ECB. This is just patches that ECB is trying to gain time but it is costing them a lot of money. Secondly ECB is being funded by member states. The capital belonging to the ECB comes from the National Central Banks (NCBs). It is around €10,760,652,402.58 (as of December 2010). They have already spent 77,000 million Euros to acquire sovereign debts from the Greek, Portuguese, and the Irish. If Greece or any other countries defaults on its debts than ECB has to face lot of problems and this problem will be passed on to other European Nations. In 2011, the ECB funded € 489 billion to 523 European banks for three years at an interest rate of 1%, which is an unprecedented measure for the amount and period. This is called as Long Term Refinancing Operation (LTRO)

New Rules to Reinforce the Fiscal and Monetary System

The European Union is working on its important pillars by trying to work on its stability pact and the banking sector. ??On 9^th December 2011 European leaders proposed and agreed to work on new fiscal pact which was signed 2^nd March 2012??. This has opened more doors for more opportunities in Euro zone to become Economic and Political Power. The new fiscal's rules are designed to prevent countries from entering into structural deficits. Secondly they have to make their banking system healthy.

The fluctuating Oil Price.

The increase in oil price can negatively affect the economic recovery in Europe. The barrel of oil is priced in dollars to buy it the Eurozone members had to convert euro into dollars. As the Eurozone currency is facing crisis situation and due to which the value of euro is going down which is creating a difficult situation for the member countries. Particularly during winter time the demand for energy rises due to heating needs in most countries. On 4^th January 2012 European governments agreed, in principle, to ban imports of Iranian oil. However, some Eurozone member states are concerned about economic impact of an embargo at a time when Europe is struggling with massive debt problems. Still, in retaliation Iranian Vice-President Mohamad Reza Rahimi warned that no oil would be allowed to pass through the Strait of Hormuz if the West applied sanctions on oil exports. Brent oil, a European crude company currently trading at $113 a barrel, could break $200 if Iran closed the Strait of Hormuz

As a consequence, the price of oil is putting an extra burden on the feeble economy of the EU, particularly during the winter time when the demand for energy rises due to heating needs in most countries. By the same token, the Eurozone has enjoyed during the past years a preferred position as the value of the euro has been extremely high, which has helped pay the energy cost.

The events starting in 2007 as a liquidity problem in the US mortgage credit market and their rapid transition to a global crisis have deeply affected the EU and its members soon later. Greece, Ireland, Portugal and Spain were the first affected countries by the crisis. There were some other essential reasons for crisis as a coincident in United States after Lehmann collapse, high rate of government debt and house prices, increasing unemployment rate of countries also was a very strict problem.

As before mentioned, the inflow of capital and subsequent increases of public and private debt over the past decade into the Eurozone countries was a key factor in current crisis. As these countries prepared to adopt the euro and transitioned from national currencies to the euro, their bond spreads fell dramatically. However, as the public and private sectors in these countries took advantage of access to new, cheap credit, the capital inflows were not always sufficiently used for productive investments in the economy that could generate the resources with which to repay the debt. As a result, debt levels started rising. In some countries, this debt was concentrated in the public sector, such as in Greece, where public finances were severely mismanaged. In other countries, debt accumulated in the private sector such as in Ireland and Spain, which had serious banking and real estate bubbles.

The unsustainable nature of these debts was exposed during the global financial crisis of 2008-2009, when capital markets froze up and it became difficult for governments, households, and firms to access new loans and roll over existing debt. Additionally, the financial crisis and ensuing recession strained public finances, as government spending increased and tax revenues fell. In some cases, the government assumed private sector debt, perhaps most notably in Ireland, where the government guaranteed bank debt. Some governments verged towards default on their debt.

A government guarantee for Irish banks created a budget deficit of over 30% in 2010, causing public debt levels to rise by more than 40% between 2009 and 2010. Portugal's economy has suffered from a lack of competitiveness, and was the slowest growing economy in the Eurozone during the «boom» decade preceding the global financial crisis. Spain ran budget surpluses in the mid-2000s, and had relatively low public debt levels, but capital inflows fueled an unsustainable real estate bubble. Italy has a long history of high public debt, consistently running debt levels in excess of 100% of GDP in the «boom» years leading up to the financial crisis, making it vulnerable to tighter credit conditions.

Greece was one of the most strictly affected EU members by the global economic crisis. 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 adjusted its opinion and Greece became the 12th country joining the Eurozone. In this period Greece has increased debt faster than other EU members to finance generous public sector pay, welfare, and retirement benefits, while collecting a lower share in taxes due to widespread tax evasion. As a result, Greek goods have become increasingly expensive and uncompetitive, causing loss of market share and further reducing revenues. When Greece adopted the euro as its currency, and 2008, Greece's reported budget deficits averaged 5% per year, compared to a Eurozone average of 2%, and current account deficits averaged 9% per year, compared to a Eurozone average of 1%. In 2009, the budget deficit is estimated to have been more than 13% of GDP. Many attribute the budget and current account deficits to the high spending of successive Greek government. Greece's reliance on external financing for funding budget and current account deficits left its economy highly vulnerable to shifts in investor confidence.

On April 23, 2010, the Greek government formally requested the activation of a financial assistance mechanism that was formulated by Eurozone leaders during a series of meetings in March 2010 and early April 2010. The package could reportedly provide some €30 billion (approximately $40 billion) in bilateral loans from Eurozone countries this year, at an interest rate of about 5%. Overall, the parties are reportedly discussing a three year deal (2010-2012) worth some €90 billion (approximately $121 billion) in loans. In order to complete activation of the mechanism, the European Commission and the European Central Bank must give a positive assessment of the Greek request and each Eurozone country would need to approve the agreement. While Germany is expected to give its assent in the end, the debate remains especially contentious in Berlin, where a parliamentary vote would be needed to approve the loan. Germany would reportedly provide the largest bilateral loan, expected to be about €8.4 billion (approximately $11.2 billion) this year, followed by France, which is expected to loan about €6.3 billion (approximately $8.4 billion). Ahead of an official decision, both of these countries have been pressuring Greece to lay out detailed deficit reduction measures for 2011 and 2012, indicating that their willingness to lend money is conditional on Greece sticking to a severe austerity plan.

The crisis has contributed to a weakening of the euro's foreign exchange value, and some observers fear that a deepening crisis could spread across European bond markets and draw in countries such as Spain, Portugal, Italy, and Ireland. Greece's total outstanding debt (approximately €300 billion, or $399 billion) would add about 3% to the debt of the other Eurozone member states, and it is unlikely that the full amount would need to be committed.

Greece has requested financial assistance from the IMF, expected to be worth €15 billion ($20 billion) this year. In addition to providing financial assistance, the IMF also stands ready to provide the Greek government with technical assistance in handling the crisis.

However, in return for all this help, the EU and IMF insisted that Greece embark on a major seriousness drive involving severe spending cuts, tax rises, and labor market and pension reforms. These have had a devastating effect on Greece's already weak economic recovery. The latest Greek budget predicts that the economy will shrink by 6.5% this year and by a further 4.5% in 2013. Greece has already been in recession for four years, and its economy is projected to have shrunk by a fifth between 2008 and the end of this year. Without economic growth, the Greek government cannot boost its own tax revenues and so has to rely on aid to pay its loans.

The EU does not have a comprehensive mechanism for states that want 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. When the Eurozone was designed, a get-out clause was not established because: The EU's 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 like a `pick and mix', with individual states having a different relationship with the EU.

Since The European economy is extremely weak at the moment. Additional to it the money supply is not used for transactions, but indeed it is being saved mainly in central bank accounts. In such a situation, there is little danger of higher price increases due to bond purchases. In addition, the ECB would have sufficient time to sell bonds again and thus getting up liquidity.

Of course there are political complications to be considered. In some of the countries of the euro area - such as Greece and to a certain extent Italy - excessive public spending or insufficient taxation are major elements that contributed to the current crisis. In these cases, ECB should not give unlimited and unconditional loans at low interest rates. In turn the crises hit countries need to cut the public expenses drastically and increase the tax. They even need to be stricter in collecting the debt taxes from the public and private firms in order to elevate the income of government. Maintain reforms to lower the deficit, including expanding the tax base, increasing the minimum pension age, reducing social welfare benefits and cutting massively on public wages.

Increasing competition within manufacturers and decreasing the barriers to entry to help lower the price of non - tradable. Lowering the severance costs that employers must pay to the terminated employees that create labor market inflexibility.

Rely increasingly on exports and undertake huge measures, considering wage reduction in the private as well as the public sector to restore competiveness, inspite of political challenges and intervention of third party. And promote further rebalancing of the economy from services and financial sector towards export of goods.

Explain the severity of situation to citizens in order to build the public will necessary for the mentioned adjustments. Talking to citizens will reduce the gap and will promote harmony between policy makers. Distribute the adjustments in a transparent and fair way to ensure that specific groups do not feel unjustly hit, and that the most vulnerable are protected.

monetary european debt currency

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