EUP – The Euro

The second graph shows the debt of GDP. For all countries, the debt has increased since 2008.

Before the crisis, countries have positive figures.

2 opportunities to finance a deficit for a country:

• Print more money (American issue)
• Borrow money (just on the capital market): it will result in debt.

All those deficits together built the debt.

Because of the higher debt, you have to pay more interests.

--> Vicious circle

What are the main causes for a deficit to increase?

--> Banks in trouble

--> Economic growth low à Low wages à Tax revenues will decrease

--> More unemployment à More social benefits have to be paid

The situation is straightforward --> Mess of the government (always have a high government debt)

Before, it was the shining example of the EU.

Situation cannot be compared with Greece...

Causes:

• Lies, damned lies and statistics
• Expenditures
• Private debt à public debt
• Recession

Debt crisis: Cause or result?

The crucial issue : Is a debt crisis a cause or a result ?

For Ireland, it is a result. So reducing the debt is not only the situation. (Because not a cause).

For Greece, it is a cause.

Graph 1: shows the current account deficit or surplus (in blue), change in the current account deficit (in brown)

Spain: They didn’t have a current account deficit before 1998. Spain started the EU area with a trade balance (no deficit).

Germany: It started with a trade deficit in 1998. But after the introduction of Euro, it turned into a surplus.

Graph 2: The first point doesn’t mean that every wage is equal in every country.

• German wages decreased by almost 10% in 10 years.
• Italian wages increased by almost 20% in 10 years.
• Spanish wages increased by 12% in 10 years.
  • For the export position of Spanish and Italian companies, that means of a lot.

Banks are in trouble. It is maybe due to a lack of supervision.

Banks had too much freedom à result into a mess

Banks had too much freedom à result into a mess

à The recession itself

The graph shows the change in 2012 (in blue), the forecast.

It is the result of previous problems. But it is also a cause

It is the result of previous problems. But it is also a cause

• Too little, too late?
• Ability to come to decisions
• Monetary union without political union
• Towards a more federal EU?

• Countries: Austerity policy[1]
  • Austerity à Restores Confidence à More growth
  • Austerity à
    • Lower growth à Recession
    • Lower growth à higher deficits
• EU – measures
• Economic growth
• Exit

[1] used by governments to reduce budget deficits during adverse economic conditions. These policies may include spending cuts, tax increases, or a mixture of the two

• Deficit < 3%
• Debt < 60%

The relation between the 2 is a matter of trust, confidence.

If the debt increases, at a certain point, investors start to doubt whether the government will be able to pay all the money back. If investors have doubts, they will lose confidence à Government bonds will decrease, interest rates (financing costs) will increase, especially Italy, Spain and Greece.

Moreover: problem of contagion. Because the Greek situation is not very good, investors will have doubts about other countries.

Contagious? So investors will start selling Italian, Spanish… bonds. Investors see a potential danger.

→Solution: Austerity measures

Austerity or growth?  Or Austerity and growth?

• Austerity  --> Restores confidence àMore growth (1^st point of view)
• Austerity --> (2^nd point of view: opponent of austerity)
  • Lower growth --> recession
  • Lower growth ->> higher deficits
• Growth --> (3^rd point of view: opponent but another vision)
  • precondition for austerity: growth will solve the problem
  • Growth : increase tax revenues --> decrease expenditures --> decrease deficit
  • Less austerity required

1. Growth: Tax Revenues ↑ + Expenditures ↓ = Deficit ↓
2. Growth: Debt % = Debt / GDP

• Bail-out:
• European Stability Mechanism[1] (ESM) – Conditional!
• Restructuring (Greek) debt
• Measures taken by ECB
  • Securities Market Program
  • Long Term Refinancing Operations
  • Outright monetary Transactions
• Fiscal Compact Treaty
• Banking Union
  • Single supervisor
  • Single resolution authority
  • Joint deposit-insurance scheme
  • Bail-in instead of bail-out
• Eurobonds?

[1] is an international organisation located in Luxembourg which was established on 27 September 2012 as a permanent firewall for the eurozone to safeguard and provide instant access to financial assistance programs for member states of the eurozone in financial difficulty

• Pro
  • Regain monetary independence
    • Depreciations possible
    • Lower interest rates
    • Less need for austerity
• Con
  • Technically difficult
  • Bank-run + Capital outflow likely
  • Won’t solve structural problems
  • Contagion