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Europe In Crisis A Brief History of the Eurozone Crisis and a review of the mechanisms and
methodology to combat the crisis
Paul Allegra
4/29/2013
Europe in Crisis
Paul Allegra
4/29/13
Preface & Introduction
The original paper had been developed as a primer or a brief on the Euro-Crisis for distribution to institutional brokerage clients.
I began the first drafts during the winter of 2011-12 and then realized that revisions would be necessary to maintain relevance as the
pace and nature of news from the Crisis began to increase in both frequency and gravity.
I became a chronicler of the crisis in my daily client distributions (some may recall the subject title: Europe Notes as it appeared in
their e-mail inboxes).
In November and December of 2012, I completed the first form of the brief to coincide with the Greek Bailout. More revisions
followed into the early-spring of 2013; most of the charts and data had been harvested from a Bloomberg terminal and serve as
“snapshots” of economic events or indicators during that time.
As with all things Wall St, we are merely looking at past-performance, not a concrete predictor of future events.
I never intended this project to become a detailed, professional history.
The purpose of the project was to try to help clients, prospects, co-workers, and friends to understand the mechanisms and
constructs of the Eurozone as well as the issues that may arise.
The paper was never intended to be a dissemination of certified research or financial analysis; to re-state it is merely a starting point
for those interested in the topic.
My interest in the Euro-crisis begins with my studies in European History at Monmouth University in West Long Branch, NJ (at the
time, it was known as Monmouth College). Prof. Thomas Pearson, Prof. Phil Donohue and several others cultivated this interest with
concentrations in 19th and 20th Century European History, Russian History and other European-centric studies. I highly recommend
the works, research, and lectures of Prof. Pearson for those wishing to gain a solid background in this field of study.
After graduating with a BA in History, I entered Seton Hall University School of Law. I enrolled in a semester abroad at the University
of Parma, Italy. A reminder of those days is the 1000 Lire note I still keep in my wallet. In subsequent visits to Europe, since the
adoption of the Euro, I have retrieved “Marco Polo” from my wallet and presented the note at various cash registers. The majority of
responses from shop owners have been that of a longing nostalgia for “the good old days” or most the most common response
“Marco Polo, where have you gone?”.
Europe in Crisis
Paul Allegra
4/29/13
As part of the curriculum, I was given brief exposure to the structural formation of the European Economic Community (EEC), and
the treaties establishing the European Union (EU). This was in 1989 and talk of “Euro-Dollars” was becoming the central topic in
European Law, Politics, Commerce and Culture. During that period, I had attended lectures in Firenze regarding the progress
towards the “Euro-Dollar”.
I recall one professor’s statement that the “Euro-dollars were not intended for immediate public enjoyment”.
Looking back on the formative days of the Euro, the unified currency was a subsequent part of a two-tier currency system prior to
mass integration.
Euro members would at first retain their local currency for consumer transactions; however Eurodollars would serve as the
preferred currency for industrial level transactions between nations or large corporations on a global market scale. Rather than wait
to see if a two-tier system of adoption would work, within a ten year period Euro members would embark on a rapid transition
towards a common currency (while each member retained their own vestiges of internal treasury and central bank mechanisms).
The reason for the shift to the “euro-dollar” had been promoted as a means to “level-the-playing-field” between industrialized
nations. This was a move towards Pan-Europeanism and as Philip Bagus points out in “The Tragedy of the Euro” it was a means to
neutralize the monetary actions of the German Bundesbank.
My European professors also informed me that the unified currency was sharply directed towards tightening competition with the
United States. Again, these were Law and Public Policy Professors that probably had a very limited background in economics or
finance.
Europe in Crisis
Paul Allegra
4/29/13
Introduction
Pan-Europeanism is a foreign concept among Europeans. Maybe the strata of cultural distinctions in customs and language as well
as geography made this proposition a forgone conclusion. Unifying Europe, either militarily or through diplomacy had always
resulted in economic failure or bloodshed (mostly, bloodshed). The common denominator of unified Europe often reveals itself as a
deeper political crisis either in construct or evolution.
Why does a fiat currency stand a better chance at unification than military conquest or physical empire building?
The current political crisis would reveal itself as the solutions to the economic crisis demanded treaty modifications through
amendments, and new treaties demanding the birth of political creatures under the veil of a Unified Banking System.
The failure does not materialize in the form of an abrupt collapse of economies, the requisite “smoking- impact-crater”, but emerges
in different but interconnected smaller crisis’ among the member states. At the center of it all is a political bureaucracy that
addressed short-term means to stabilize the currency rather than securing the solvency of the underlying economies of the member
states. The controlling bureaucracy refuses to consider whether membership in the currency should be revised or terminated. This
has resulted in solidifying a form of institutionalized, protracted economic mediocrity.
The Euro project fails if at least one of the current 17 members either leaves on their own accord or are expelled by their partners.
Maintaining the Union at all costs is the battle cry of the unelected officials within the center of the storm. Every few months, we are
treated to Herman Van Rompuy proudly announcing, “Europe has turned the corner!” Even the casual observer notices that Europe
has turned the corner so many times, it has figuratively spun round in circles.
The push for more nations to join the Euro endures amidst the crisis. Admittedly, the system needs more repairs. Imagine the Euro is
a bus with faulty brakes. Rather than pull into the shop and repair or replace the brakes, Bus Driver Jose Manuel Barroso is pulling up
to the next stop to take on more passengers. With the new passengers come a new set of serious fiscal problems or a compounding
effect on existing economic problems.
Recently we have learned that Poland and Latvia have voted to delay their adoption of the Euro. Maybe they are having second
thoughts…
Europe in Crisis
Paul Allegra
4/29/13
The immediate effect of the crisis has been a sharp incline in unemployment levels and stagnation in youth unemployment. This is
quite alarming when you see Spain and Greece staring at a projected 30% unemployment by the end of 2013 with Youth
Unemployment in each of those countries around 50%! The crisis is leaving an indelible mark on the next generation of earners.
Historically, the Great Depression pales in comparison. Is it possible that the construct of the common currency is the disease rather
than the cure?
While economists argue over the validity of debt to GDP levels and the purpose of debt within competing economic theories, it is
undeniable that debt levels need to be included in the overall examination. I have included Debt to GDP in analysis of each member
state.
Now and for always, Bail-outs will be associated with the common currency. Default or expulsion can never be an option.
When Greece looked like it was out of the woods, it was as if another few layers of a rotten onion were peeled away. The world
could no longer independently view the economic conditions of Italy, Spain, Portugal, and France, but Southern Europe as a whole
would become the defacto crisis region. It was not because of a treaty or political script that created the boundary of dubious
distinction, but a series of conjoined economic symptoms; a result of the construct and evolution of Euro membership. The
Maastricht Criteria cements the “cookie-cutter” approach to membership. While it can be argued that there is enough “wiggle-
room” for states to balance their books, we’ve realized that the accounting used to meet the Maastricht criteria varied from state to
state. In some instances, states in crisis were accused of false accounting since they did not share a set standard. In the case of
Greece, the level of tax delinquency and evasion was discovered after the fact.
When Cyprus cried for help in 2012, the Troika appeared to drag their feet towards developing bailout solutions for the island
nation. It seemed as though Cyprus was to become the sacrificial lamb for the Euro-system; we now see it as an ominous symbol for
the rest of the developed world. The size of the Cyprus bailout was relatively small when compared to the staggering size of bailouts
in Greece and Spain. It was the method of taking, or more bluntly, the confiscation of funds by the Cypriot government to satisfy the
recommendation of the Troika. The world was immediately informed by the financial news outlets that unnamed Russian Oligarchs
would bear the brunt of the pain, thus dishing out some nebulous form of social justice and bailing out a nation in one stroke.
Cypriot bank accounts were delineated and categorized for a severe taking. Accounts with a balance of €100,000 or greater would
be sheared of up to 40% of their assets!
While Russian millionaires and billionaires undoubtedly would have been penalized in Cyprus, their holdings around the rest of the
world probably made this theft appear fractional and more akin to the overall cost of doing business. It was the European
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Paul Allegra
4/29/13
pensioners and local Cypriot businesses that were punished beyond repair. Europeans in retirement had either personally relocated
to Cyprus or moved their money to Cypriot institutions to enjoy a tax break of some sort. Cypriots that had saved over €100,000
were now financially ruined, not because of a stock market crash or a bond default, but by a government agency that drew a line at
€100,000.
For Americans to truly understand this obvious theft: imagine if New York passed a law saying that all 401-K, Public Pension, or IRA
Accounts with greater than $130,000 that reside in a New York based brokerage or bank account would be subject to an automatic
penalty of 40% of total assets. The proceeds of that penalty would be used to cover any tax delinquencies or financial shortfalls
incurred by the state. If you had $260,000 in your IRA and maybe another 8-10 years until your retirement, the wealth-penalty
would leave you with $156,000, and no recourse for remuneration of any kind… not even offering you a new toaster for your
troubles.
After the Cyprus theft, the Troika went into immediate publicity “damage control” mode. “Cypus is not a template!” we were
informed (repeatedly) for days following the “bailout”. It was too late. Euro-skeptics like Nigel Farage warned the world that no
money is safe in a European Bank or Institution. I believe Marc Faber warned after this that “not even gold will save you from what
will happen”. Which brings up gold. We were informed by the Cypriot government that there was no indication of intention for
Cyprus to sell a portion of its gold to meet their end of the bailout. A day later, gold finished a correction of approximately 200
points into $1300 per ounce at the spot. We were then informed by ECB President Mario Draghi that Cyprus had been instructed to
sell some of its gold reserves to meet their part of the €20 billion bailout.
As April 2013 drew to a close, Italy finally arrived at a consensus for a government, another issue that was left unresolved within the
scope of the Euro crisis. Italy’s big problem, we were told, was the lack of parliamentary consensus (the inability to form a
government). This would be a set-back for any Eurozone recovery efforts. The financial news media tried to explain Italian politics in
simplistic terms. Italian political science falls into the same “easy to digest” category as “Chinese Algebra”.
Again, it seems to be part of a larger shell-game. The problem was not Italy’s debt to GDP, or the imminent threat of a pension
system collapse, or the failure to collect taxes and reign in tax evasion…
No, the problem was Italy lacking a consensus government!
It begs the question: if Italian political consensus is necessary to economic surety, what happened in all the preceding consensus
governments that lead Italy towards the brink of collapse?
Europe in Crisis
Paul Allegra
4/29/13
The next few years are pivotal for the current state of the European Union and the Eurozone. It will be interesting if the bureaucrats
finally get their beloved Banking Union, the panacea that Herman Van Rompuy and Jose Manuel Barroso demand for Europe’s ills.
One thing is certain, once this goes to press; no doubt I will have to start on another revision, as another brush fire in Europe is likely
to flare-up.
Europe in Crisis
Paul Allegra
4/29/13
PART I
Chapter I
Development & Construct
European Monetary Union or The Eurozone is made up of 17 EU Member nations utilizing the
same currency: The Euro: €
These countries exchanged their sovereign currency for the Euro based on improving commerce and travel between European nations and as an
attempt to “level the playing field” to compete directly with the US Dollar and other reserve currencies. Theoretically, the Eurozone would
collectivize the industrial, commercial and fiscal strengths and weaknesses of all member nations.
The European Union (EU) has 27 members.
The European Union was formed through a series of Treaties starting with the Treaty of Rome in 1957 which established the European
Economic Community (EEC).
In 1992 The Maastricht Treaty formalized the European Union (EU) and created the uniform currency – The Euro (then referred to as the Euro-
Dollar). The Euro was on a course to be completely integrated into each member nation between 1999 thru 2005.
In 2007, The Lisbon Protocol formalized the administration and function, and regulation of the member nations with regard to the shared
currency.
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Paul Allegra
4/29/13
The Maastricht criteria There are five criteria set out in the Treaty of Maastricht that must be met by European countries if they wish to adopt the European Union's
single currency, the euro.
1) Inflation of no more than 1.5 percentage points above the average rate of the three EU member states with the lowest inflation over the
previous year.
2) A national budget deficit at or below 3 percent of gross domestic product (GDP).
3) National public debt not exceeding 60 percent of gross domestic product. A country with a higher level of debt can still adopt the euro
provided its debt level is falling steadily.
4) Long-term interest rates should be no more than two percentage points above the rate in the three EU countries with the lowest inflation
over the previous year.
5) The national currency is required to enter the ERM 2 exchange rate mechanism two years prior to entry. (source: Reuters)
NCB’s : National Central Banks Each Eurogroup member has their own National Central Bank (NCB). These NCB’s are held to fiscal benchmarks and limitations as dictated by the
Maastricht treaty.
The ECB: The European Central Bank (The Eurosystem) The European Central Bank (the ECB) is charged with setting the rates and dictating monetary policy.
The ECB Council consists of six Executive Board members and the governors of the national central banks of the 17 euro area countries.
The ECB is completely independent from euro area governments in its policy decisions. The primary objective is to maintain price stability over
the medium or near term, which the ECB defines as inflation “below but close to 2%”.
The EU Treaties prohibit the ECB from funding euro area governments directly.
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Paul Allegra
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Chapter II
Mechanisms and Organizations
Emergency Liquidity Assistance (ELA) The ELA can be used to provide support to temporarily illiquid institutions and markets.
A credit institution cannot assume automatic access to central bank liquidity.
The ELA is applied on a case-by-case basis and only in extreme circumstance, but it is presumed to be limited in scope compared to what Europe
is currently experiencing.
ECB Midterm Loans On December 21st 2011 the ECB awarded € 489 billion in three year loans to 523 banks:
Source – Bloomberg :
“The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark interest rate -- currently 1 percent -- over the
period of the loans. “
“The ECB is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and
households. In addition to the longer-term loans, the ECB has widened the pool of collateral banks can use to secure the funds.
The theory: the banks would be loaned euros at a lower rate (1%) and would be encouraged to purchase the sovereign debt of other nations
within the EU (read: PIIGS).
The reality: European Banks have become risk-averse. Purchasing debt from one or more of the PIIGS would be a remote concept when far
safer, short term vehicles yielding a “touch” over the loan rate (greater than 1%) are available. This enables a “carry-trade” for the bank to invest
cheap money with no incentive to take on risky loans or risky debt purchases.
The European Financial Stability Fund (EFSF) – The Firewall
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Paul Allegra
4/29/13
The EFSF can issue bonds and other debt instruments to help refinance the funds needed for loans to countries in financial difficulties.
The EFSF is designed to be a temporary institution and will be liquidated on the earliest date after June 30, 2013 on which there are no longer
loans outstanding to a euro area member country and all debt instruments issued by the EFSF and any reimbursement amounts due to
guarantors have been repaid in full.
The EFSF was assigned a “magic number” of € 1 trillion to address not only Greece’s debt, but assist Italy and other nations. Commentators and
analysts have suggested that € 1 trillion is not enough to put out the fire or ring-fence the debt contagion.
Reaching the magic number has run into political snags. The EFSF cannot be leveraged to reach € 1 trillion. The EU Treaties forbid this as well as
the constitutions of certain member nations.
The European Stability Mechanism (ESM) The purpose of the ESM shall be to mobilize funding and provide stability support under strict conditionality, appropriate to the financial
assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if
indispensable to safeguard the financial stability of the euro area as a whole and of its Member States. For this purpose, the ESM shall be entitled
to raise funds by issuing financial instruments or by entering into financial or other agreements or arrangements with ESM Members, financial
institutions or other third parties.
The initial maximum lending volume of the ESM is set at EUR 500,000 million, including the outstanding EFSF stability support.
All euro area Member States will become ESM Members. As a consequence of joining the euro area, a Member State of the European Union
should become an ESM Member with full rights and obligations, in line with those of the Contracting Parties.
The ESM will cooperate very closely with the International Monetary Fund ("IMF") in providing stability support. The active participation of the
IMF will be sought, both at technical and financial level. A euro area Member State requesting financial assistance from the ESM is expected to
address, wherever possible, a similar request to the IMF.
Like the IMF, the ESM will provide stability support to an ESM Member when its regular access to market financing is impaired or is at risk of
being impaired. Reflecting this, the ESM loans will enjoy preferred creditor status in a similar fashion to those of the IMF, while accepting
preferred creditor status of the IMF over the ES.
The ESM will enjoy the same seniority as all other loans and obligations of the beneficiary ESM Member, with the exception of the IMF loans.
(Source: Treaty of the ESM, Article 3)
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Paul Allegra
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The Troika “The Troika” is the name given to the partnership of the three independent organizations that have assumed advisory and audit responsibilities
during the crisis: the European Central Bank (ECB), the European Commission (EC), and the International Monetary Fund (IMF). The advice
serves as an economic roadmap for a troubled nation to meet minimum bailout obligations as determined by the findings of the Troika.
The obligation could be a financial action that projects towards a bailout goal or a set of legal strictures to act towards good faith in receiving the
bailout. Examples would be Greece promising to reign in tax evasion or Cyprus adhering to Anti-Money Laundering strictures as conditions
towards receiving bailout funds. The Troika routinely assesses the adherence to the conditions as well as keeps track of financial and economic
benchmarks prior to authorizing a tranche of bailout funds.
The European Commission (EC) The European Commission represents the interests of the EU as a whole. It proposes new legislation to the European Parliament and the
Council of the European Union, and it ensures that EU law is correctly applied by member countries.
The Commission has the right of initiative to propose laws for adoption by the European Parliament and the Council of the EU (national
ministers). In most cases, the Commission makes proposals to meet its obligations under the EU treaties, or because another EU institution,
country or stakeholder has asked it to act. From April 2012, EU citizens may also call on the Commission to propose laws (European Citizens’
Initiative).
Before making proposals, the Commission consults widely so that stakeholders' views can be taken into account. In general, an assessment of
the potential economic, social and environmental impact of a given piece of legislation act is published along with the proposal itself.
The principles of subsidiarity and proportionality mean that the EU may legislate only where action is more effective at EU level than at national,
regional or local level, and then no more than necessary to attain the agreed objectives.
Once EU legislation has been adopted, the Commission ensures that it is correctly applied by the EU member countries.
(Source: ec.europa.eu)
The International Monetary Fund (IMF) Provides:
Policy advice to governments and central banks based on analysis of economic trends and cross-country experiences;.
Research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets;.
Loans to help countries overcome economic difficulties;
Concessional loans to help fight poverty in developing countries; and
Technical assistance and training to help countries improve the management of their economies.
(Source: IMF.Org)
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Paul Allegra
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CHAPTER III
ECB Toolbox
Interest Rate Manipulation: After a series of rate hikes in 2011, The Current Benchmark Rate has since been cut to 0.75%.
The Eurosystem offers credit institutions two standing facilities which have also been reduced:
Marginal lending facility in order to obtain overnight liquidity from the central bank, against the presentation of sufficient eligible assets;
Deposit facility in order to make overnight deposits with the central bank. By cutting the rate to 0% the ECB wanted to encourage bank lending
and reduce the propensity for “carry-trades”, trades where an institution would borrow and pay interest in order to buy something else that has
higher interest without loan default risk.
Benchmark Rate Marginal Rate Deposit Rate
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Paul Allegra
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Securities Markets Programme (SMP): Interventions by the Eurosystem in public and private debt securities markets in the euro area to ensure depth and liquidity in those market
segments that are dysfunctional. The objective is to restore an appropriate monetary policy transmission mechanism, and thus the effective
conduct of monetary policy oriented towards price stability in the medium term. The impact of these interventions is sterilized through specific
operations to re-absorb the liquidity injected and thereby ensure that the monetary policy stance is not affected. (source: ECB.INT)
The ECB had used the SMP to buy up the bonds and debt instruments in an effort to stabilize debt stricken member nations. It is controversial
since it increases the overall debt portfolio of the central bank.
Securitization The pooling of financial assets, such as residential mortgage loans, and their subsequent sale to a special-purpose vehicle, which then issues
fixed income securities for sale to investors. The principal and interest of these securities depend on the cash flows produced by the pool of
underlying financial assets. (source: ECB.INT)
Long Term Refinancing Operations (LTRO): LTROs have a three-month maturity; considered to be important liquidity windows for smaller and medium size banks.
LTRO’s involve the central bank lending money at a very low interest rate to euro zone banks.
The injection of cheap money means that banks can use it to buy higher-yielding assets and make profits, or to lend more money to businesses
and consumers – which could help the real economy return to growth as well as potentially yielding returns.
Banks can use assets such as sovereign bonds as collateral for the loans. (source: CNBC)
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Paul Allegra
4/29/13
PART II
Nations in Crisis
CHAPTER IV
Greece
Joined EU in 1981; Adopted the Euro in 2001
From 2001 until 2006-07, Greece saw progressively lower interest rates, expanding credit and strong economic growth.
Greece’s household savings rate fell from 3.2% in 2000, pre-EMU, to minus 3.2% in 2006.
Personal household spending increased; by 2007 the debt-to-income ratio of Greek households had quadrupled to 65%.
In that same timeframe, Greece’s current account deficit also rose to 14-15% of GDP, despite there being only very small inflows of direct
investment to finance it. This was one direct result of the big increase of consumer spending. Greece was also making itself uncompetitive, with
inflation each year being 1-2% above the euro country average, and there were signs that foreign tourism to Greece was falling back even
before the crisis struck. Source: Tony Norfield (Economics of Imperialism)
Greece Debt to GDP
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Paul Allegra
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Inconsistencies in the data The Greek government had to revise its deficit for 2009 up from 6-8% of GDP to 12.7%, and then to 15.4%.
The Greek Bailouts May 2010, the European Union and IMF provided 110 billion euros of bailout loans to Greece to help the government pay its creditors.
A second, 130 billion-euro bailout was agreed to in February 2012 in coordination with the largest debt-restructuring in history.
The PSI Deal (Private Sector Involvement): approximately 206 million euro write-down was accepted by Private Sector Bondholders.
The proscribed write-down was 53.5% of the face value of Greek governmental bonds held, the equivalent to an overall loss of around 75%.
The Collective Action Clause: the Greek government had threatened to retroactively introduce a collective action clause to enforce
participation.
Private sector participation reached 83.5% of Greek bond holders.
Greece has pledged Austerity in exchange for bailouts and the PSI deal: • 22% cut in minimum wage from the current €750 per month.
• Holiday wage bonuses (two extra months of full wage being paid each year) are permanently cancelled.
• 150,000 jobs cut from state sector by 2015, of which 15,000 shall be cut by the end of 2012.
• Pension cuts worth €300 million in 2012.
• Changes to laws to make it easier to lay off workers.
• Health and defense spending cuts.
• Industry sectors are given the right to negotiate lower wages depending on economic development.
• Opening up closed professions to allow for more competition, particularly in the health, tourism, and real estate sectors.
• Privatizations worth €15 billion by 2015, including Greek gas companies DEPA and DESFA. In the medium term, the goal remains at
€50 billion.
Athens is having difficulty meeting the terms of the bailouts Greece has fallen behind with its budget cuts and is asking lenders for more time to meet the conditions of the 130 billion euro aid package.
“Athens must reduce its budget deficit below 3 percent of GDP by the end of 2014, from 9.3 percent of GDP in 2011 -- requiring almost
another €12 billion in cuts and higher taxes on top of the €17 billion successive governments have cut from the budget shortfall.” (Source
Spiegel Online)
The Institute of International Finance, has estimated the cost to Greece, if it exited the Euro, at around €1 trillion.
http://www.telegraph.co.uk/finance/financialcrisis/9268040/Eurozone-debt-crisis-how-a-Greek-exit-from-the-euro-might-unfold.html
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Paul Allegra
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Chapter V
PORTUGAL
Joined EU in 1986; Adopted the Euro in 1999
Portugal enjoyed a growth rate of 6.6% per year from 1986-1991. Growth slowed and became “anemic” in the last decade. From 1999 to
present Portuguese Growth has been caught in a rapid decline.
Falling Inflation and Currency Revaluation “For 1984-85 the average rate of inflation, measured by the CPI, was 21.76%, in 1990-91 it was 11.56%, and 2.59% in 1999-2000.
From 1977 to 1990 the Portuguese Central Bank applied a policy of bank credit rationing with a crawling-peg exchange rate policy.
In the last years of that reform (1990) there were many exceptions to the target level of banking credit and interest rates and credit needed to
reflect market conditions.
In 1991 the Bank of Portugal started a policy of targeting the value of the exchange rate of the Deutsche Mark, equivalent to a policy of
revaluing the Portuguese Escudo to control and reduce the inflation rate. This is a policy that presents potential long-run drawbacks that can
hamper growth in the future. This kind of policy is more effective to control inflation in the short run than the conventional monetary policy, but
has greater costs in the long run resulting from the loss of price competitiveness. (Source: http://www.doiserbia.nb.rs/img/doi/1452-595X/2011/1452-595X1102195A.pdf
Falling Interest Rates In 10 years, nominal interest rates fell to a quarter and real interest rates to a fifth of their 1990 value.
Without the sliding Peg, Portugal was caught in an interest rate trap that promoted excessive household debt and a loss in global competition.
The policy of real exchange rate appreciation, EU structural funds and an impressive reduction of interest rates, altogether were major sources of
the Portuguese Crisis that explain its spread that manifested mainly in accruing indebtedness and lacking external competitiveness of the
Portuguese economy.
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Paul Allegra
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Rapid Increase in Debt The ratio of total debt from abroad to GDP has grown 4 times from 1996 to 2010 and the average real growth of debt from 1997 to 2001 was
20%.
The current percentage of Debt to GDP is 103%.
Dramatic Increase in Unemployment The Portuguese government forecasts the unemployment rate will rise to 15.5 percent this year and 16 percent next year. The government had
previously forecast an increase in the unemployment rate to 14.5 percent this year before declining to 14.1 percent in 2013. The jobless rate was
12.7 percent in 2011.
The Bailout Package: The country is scheduled to receive €78 billion in total loans until 2014 (as long as it keeps to fiscal targets).
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Paul Allegra
4/29/13
Chapter VI
Spain
Joined the EU in 1986; Adopted the Euro in 1999
Reduction in Interest Rates According to Treaty The Maastricht Treaty called for Spain to reduce its long-term interest rates. Borrowing Capacities immediately increased for both businesses
and individuals.
This expanded the class of real estate investors and speculators similar to the US Sub-Prime Crisis. The housing demand in Spain escalated.
Construction, Labor & Immigration: Boom & Bust Ignited by the increased housing demand, The construction market experienced a a parallel boom. Construction companies required unskilled
labor which prompted an increase in immigration to Spain. From 2000-2008, Spain’s population grew from 40 million to 45 million. From 1999
until 2007 the Spanish economy was responsible for more than one-third of all employment generated in the Eurozone. The housing demand
cycle continued with the immigrant population surge. Housing Prices increased sharply, as did the number of loans. By the time the demand for
housing had slowed in 2007, available housing was just reaching its peak. Construction accounted for 13 percent of total employment in Spain.
When prices began falling and housing demand halted. Almost overnight, unemployment jumped 10 percent.
Unemployment, Expanded Welfare and the Collapse of the Economy Unemployment escalated and Spanish welfare systems became lopsided. What was once considered a sustainable unemployment level quickly
exhausted welfare reserves of the Spanish government. The immediate loss of tax revenues from the real estate market exascerbated the
situation. A previous budget surplus of over 2 percent of GDP rapidly turned into a deficit of almost 4 percent of GDP, in violation of the
Maastricht Treaty.
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Paul Allegra
4/29/13
Spain Unemployment Rate
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Paul Allegra
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Youth Unemployment Across Europe Note: Spain and Greece in contrast to other European Nations. A Possible “Leading Indicator”.
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Paul Allegra
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The Spanish Banking System (Cajas) Cajas account for half of Spain’s banking system. They are Spain’s equivilant Regional S&L’s or Thrifts.
There are approximately 24,000 branches of cajas throughout Spain to serve its 46 million residents (one branch for approximately every
1,900 people).
The majority of cajas’ clients are families, small and medium-sized business, and non-governmental organizations.
Cajas made loans available to clientele that would not meet the lending requirements of larger institutions.
Cajas were relatively unregulated; they were not required to disclose information such as collateral on loans, repayment history, and loan-to-
value ratios.
The Spanish bank regulators were oblivious to the functions and portfiolio depth of the caja system more importantly the cajas exposure to
the real estate and construction loans across the country.
By 2009, cajas owned 56 percent of Spain’s mortgages. Loan payments from property developers accounted for one-fifth of the cajas’ assets.
The Housing Market Crash The Spanish housing market crashed in 2009, mortgage and loan delinquencies increased as well as bankruptcy filings. in mid-2010, the Bank of
Spain estimated the amount of potential high-risk loan exposure to the banking system & the real estate market to be in the vicinity 180.8 billion
euros. Spanish banks were not sufficiently capitalized to absorb the losses. Larger banks could collectively absorb one thrid of the the losses
where cajas could not scratcth the surface.
Industrial Collapse, Bank Collapse By 2009, the construction industry owed billions of euros to the Spanish banking system. Many construction companies had already gone
bankrupt. The major spanish banks had delinquent loans including construction loans of approximately of 3.2 percent of their portfolios,
while troubled loans at cajas reached 4.4 percent.
In March 2009, the Spanish government announced it would commence with bailing out the cajas. Subsequently, investor confidece evaporated.
In Q1 2010, depositors withdrew 21.6 billon euros.
(Source: http://ebook.law.uiowa.edu/ebook/content/spanish-financial-crisis)
Europe in Crisis
Paul Allegra
4/29/13
The Bankia Bailout and the encouraged merger of cajas Bankia was the result of the merger of seven Spanish financial institutions. It became one of the largest banks in Spain with approximately 12
million accounts and 330 billion euros AUM. It was also the third largest lender in Spain in 2010-2012.
“The decision to nationalize BFA, and thus 45% of Bankia, came after Deloitte, the bank’s auditor, refused to sign off on the bank’s books, noting
€3.5 billion in inflated assets, explained Evans-Pritchard. As shares in Bankia tanked, the government took action, replacing former CEO Rodrigo
Rato, with strong political ties to Rajoy’s own People’s Party (PP), with experienced banker Jose Ignacio Goirigolzarri, a former BBVA executive.”
Ultimately the cost of the Bankia bail-out reached an estimated 19 billion euros. The ECB urged Spain to continue to merge cajas and write-
down losses.
However “toxic debt” may not have been entirely excercised from the books. Spain needs to Recapitalize the banks to support the financial system. If interest rates in Spain continue to rise, the cost of borrowing the funds
to recapitalize increases exponentially.
Spanish yields continue to escalate
10 Year Yield 5 Year Yield Debt as % of GDP
Europe in Crisis
Paul Allegra
4/29/13
Bailout Package: 100 Billion Euros are pledged for Spain to recapitalize its banks. It is estimated that the banks require loan-
loss reserves up to 150 billion euros.
The Terms: Strict monitoring of the banks that receive aid.
Banks must Sell Sour Assets.
Requires the Spanish government to present plans to reduce its budget deficit to three per cent of gross domestic product by 2015 Deficit
target for 2012 to be eased to 6.3%. Target for 2013 eased to 4.5%; falling to 2.8% in 2014.
The agreement calls for an initial disbursement of €30 billion immediately.
NOTE: Spain was aiming for 5.3% deficit this year, bringing deficit to within EU’s 3% ceiling in 2013
Europe in Crisis
Paul Allegra
4/29/13
Chapter VII
Ireland
Joined the EU in 1973; Adopted the Euro 1999
Corporate Tax Haven: The Celtic Tiger years 1994–2007:
Ireland offered a low corporate tax rate, attractive to international investment banks and institutions. Low ECB Interest Rates further
encouraged this expansion.
Irish Banks in turn began to increase borrowing as well as expand their real estate and equity portfolios.
From 2004 to 2008 Irish banks' foreign borrowings rose from €15bn to €110bn.
Increase in External Debt & Government Exposure Foreign cash flows into Ireland increased and assets from tax revenues fueled government spending and increased foreign investment.
From 2003-2007, Ireland's net external debt increased by €33 billion far less than the €95 billion increase in foreign borrowing by Irish banks. Real Estate investment exposures for private sector as well as goverment increased. It was estmated that 1/3 of all revenues were the result of
the Real Estate boom, approximately €14 billion in 2006 alone.
The State spent €9 billion in 2008 on capital projects, up from €4 billion in 2000. In 2007, as bank borrowing from abroad approached its peak,
government current spending surged 13%.
The government also cut income tax rates, widened tax brackets and increased tax credits.
The Irish government purchased mostly equities, for the State through the National Pensions Reserve Fund.
During the boom, average rates of public sector pay jumped by nearly 60%. Annual spending on social welfare and healthcare had gone up
by €21 billion.
Europe in Crisis
Paul Allegra
4/29/13
Ireland Debt as % of GDP
The Collapse In September 2008, Ireland was the first state in the eurozone to enter recession.
The Irish Stock Exchange (ISE) had apexed at 10,000 briefly in April 2007, but by February 2009 it fell to 1,987, a 14-year low.
The combination of the housing bubble, financial market turmoil, massive external debt
exposure and expanded state expenditures pushed Ireland rapidly towards the center the crisis.
The numbers of people claiming unemployment benefit in Ireland rose to 326,000 in January 2009.
National Asset Management Agency & Increasing debt spiral In April 2009, the government proposed a National Asset Management Agency (NAMA) to take over large loans from the banks, enabling them
to return to normal liquidity to assist in the economic recovery. The costs of the bank rescues, NAMA and government deficits over the period
look set to push Irish National Debt up to a ratio of 125% of GDP by 2015. The liabilities of the Irish banks represent a figure equivalent to
approximately 309% of GDP. (source: http://www.davy.ie/content/pubarticles/econcr20090217.pdf)
Europe in Crisis
Paul Allegra
4/29/13
The National Treasury Management Agency miscalculated the level of exposure In 2010, Ireland's NTMA state debt agency overstated conclusions : "no major refinancing obligations". It met the capital requirement for €20
billion in 2010 was matched by a €23 billion cash balance, and it remarked: "We're very comfortably circumstanced". However when the NTMA
began testing the market, they could not raise the minimum funds to continue independent support. Irish bond yields continued to rise in 2010,
Ireland could no longer borrow the capital to sustain bank support. The NTMA suspended market operations until conditions warranted. In
September the situation became dire and Ireland had to negotiate with the EU and the IMF. In July of 2012, The NTMA resumed market
operations with a series of short-term debt auctions.
The Bailout November 2010, Ireland had formally requested financial support from the European Union's European Financial Stability Facility (EFSF) and
the International Monetary Fund (IMF). The loan was believed to be in the region of €100 billion, of which approximately €8 billion was
expected to be provided by the United Kingdom.
The European Union, International Monetary Fund and the Irish state agreed to a €85 billion rescue deal made up of €22.5 billion from the
European Financial Stability Mechanism (EFSM), €22.5 billion from the IMF, €22.5 billion from the European Financial Stability Facility (EFSF),
€17.5 billion from the Irish sovereign National Pension Reserve Fund (NPRF) and bilateral loans from the United Kingdom, Denmark and Sweden.
Eurogroup President Jean-Claude Juncker said that the deal includes €10 billion for bank recapitalisation, €25 billion for banking contingencies
and €50 billion for financing the budget.
Europe in Crisis
Paul Allegra
4/29/13
Chapter VIII
Cyprus
Joined the EU in 2004; adopted the Euro in 2008
Inextricably Linked to Greek Crisis Cyprus and its three main banks were downgraded in November 2011 by the three major credit ratings agencies, in no small part due to their
exposure to the Greek debt crisis as well as the declining situation in Cyprus. This downgrade was followed by the publication of the banking
sector’s January - September 2011 financial results, which revealed a write-down of nearly EUR 1.5 billion of Greek government bonds (GGB) by
the Bank of Cyprus, Marfin Laiki and Hellenic Bank, as well as rising impairments due to nonperforming loans (NPL) in the private sector. (source:
Phillip-Atticus.com & Navigator Consulting Group)
The Downgrade Fitch downgraded Cyprus to BB+, saying Cypriot banks could potentially need up to €4bn euros in capital primarily on the back of losses in
Greece. Cypriot NPL’s and Greece’s shrinking economy presented an inescapable catastrophe. The initial Greek exposures accounted for
approximately 25% of the Cypriot GDP. Familial linkage to the banking sector compounded the problem where traditional relief in bankruptcy
would not be an option.
In June of 2012, Cyprus formally requested a bailout. Although the amount requested pales in comparison to the aforementioned countries,
nevertheless, the policy of the Eurozone would again be tested.
The Bailout After several negotiations where Cyprus rejected the terms of bailout, an agreement was reached in November of 2012. The total amount was
the last piece of the puzzle to be determined.
“The country may need as much as 17.5 billion euros in aid, almost the size of its economy, based on the 10 billion euros- figure for the banks, 6
billion euros to refinance state debt from 2013 to 2016 and 1.5 billion euros to cover fiscal deficits <>. Cyprus is aiming for a rate of 2.5 percent
on its troika loans. An agreement with international creditors will require a fiscal adjustment of about 7.3 percent of gross domestic product
between 2012 and 2016. The country aims at a primary surplus of 4 percent of its economy by 2016.
The economy will shrink 2.4 percent this year and 3.5 percent next year, according to the 2013 budget, released on Nov. 22. The Cypriot
economy was estimated to be worth almost 18 billion euros in 2011, according to the Nicosia-based Cyprus Statistical Service.” (source:
http://www.bloomberg.com/news/2012-11-30/cyprus-troika-agree-bailoutterms-ecb-demetriades-says.html)
Europe in Crisis
Paul Allegra
4/29/13
Cyprus pledged “spending cuts of over €1.2 billion between 2012 and 2016 and widespread reform of the banking and public sectors…
It includes cuts in civil service salaries, allowances and pensions and increases in VAT, tobacco, alcohol and fuel taxes, taxes on lottery winnings,
property, and higher health care costs over the next three years. Civil service work hours are also expected to change in a move to cut down on
overtime.” (ibid)
The aim of the programme is to restore the soundness of the banking sector “by thoroughly restructuring, resolving and downsizing financial
institutions, strengthening of supervision, addressing expected capital shortfall and improving liquidity management,” while correcting excessive
government deficit and implementing structural reforms to support competitiveness and sustainable and balanced growth.
The programme calls for fiscal measures totaling 7.25 per cent of GDP or around €1.2 billion between 2012 and 2016. (ibid)
It comes with a warning that in the event the goals are not met, the “government should stand ready to take additional measures to preserve
the programme objectives, including by reducing discretionary spending.”
“Over the programme period, cash revenues above programme projections, including any windfall gains, will be used to reduce debt. If instead
over-performance materialises, to the extent that it is deemed permanent, this can reduce the need for additional measures in the outer years.”
For 2012, the government must achieve a deficit of no more than 5.8 per cent of GDP or around €1.1 billion... (ibid)
The Cyprus “Solidarity Fund” or The Great Cypriot Bank Heist Fancy technical language aside, The Euro Group bluntly called for a tax on all Cypriot bank deposits as part of a “Bail-in”. On March 19th, the
Cypriot Pariament immediately rejected this plan, however with time running out, decided to penalize accounts with assets over €100,000.
Penalties were originally considered in a “progressive tax” stratification whereby the maximum penalty of 10% would hit deposits above
€100,000 with reduced penalties further down the line. It was complicated and quick accounting revealed that Cyprus would not meet its goals if
it reduced the upper bracket penalty. Ultimately, the Parliament caved and settled on a 40% penalty on all accounts with deposits over
€100,000.
It was “justified” by the media and the bureaucracy as a victory over “Russian Oligarchs” rather than a penalty on common retirement savngs.
Looking back, the pension accounts were sacrificed and the Oligarchs wrote it off as the cost of doing business with the Euro Group, after all,
Luxembourg and Austria ofered similar “tax-shelters” as Cyprus.
It should be noted that immediately following the Cyprus penalty negotiations and the Anti-Money Laundering / Bank Secrecy rationale,
Luxembourg announced it would begin to loosen it’s bank secrecy rules and “share” some of its account informations with Eurozone and EU
regulators. http://www.bbc.co.uk/news/business-22089639
Europe in Crisis
Paul Allegra
4/29/13
Capital Controls and Chaos Fearing a bank run, Cyprus ordered all banks closed until they could figure out how to satisfy the terms of the bailout. With lines forming around
banks and ATM’s the Cypriot parliament debated varying levels of penalties on account holders. Capital Controls were put into place to prevent
money from being wire-transferred or physically leaving the island. There were dogs in the ports trained to “sniff” for money. A person could not
leave Cyprus with more than €3,000 on their person.
Many commentators raised a point of contention (myself included) that the Capital Controls may be in violation of the Lisbon Treaty, but further
review proves this to be inaccurate.
Lisbon Treaty: Title IV, Chapter 4, Articles 64-66 present a basic prohibition however Article 66 makes it plain that a circumstance such as
Cyprus would be extraordinary.
“Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the
operation of economic and monetary union, the Council, on a proposal from the Commission and after consulting the European Central Bank,
may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary”.
http://www.lisbon-treaty.org/wcm/the-lisbon-treaty/treaty-on-the-functioning-of-the-european-union-and-comments/part-3-union-policies-
and-internal-actions/title-iv-free-movement-of-persons-services-and-capital/chapter-4-capital-and-payments/334-article-66.html
“Cyprus is Not a Template” (… or is it?) “A last-ditch deal for a €10bn bailout was agreed in the early hours of Monday”, March 25th.
http://www.telegraph.co.uk/finance/financialcrisis/9951858/Cyprus-bailout-timeline.html
It was designed to “safeguard small savers, inflict heavy losses on uninsured depositors, including wealthy Russians, and keep the country in the
eurozone.” (ibid)
“Popular Bank of Cyprus, also known as Laiki and the nation's second largest bank, [was] shut as part of the deal, with the raid on uninsured Laiki
depositors expected to raise €4.2bn. “(ibid)
The Bank of Cyprus, the island's largest lender, survives but investors not protected by the €100,000 deposit guarantee will suffer a major
"haircut" – a forced loss on the value of their investment […] of up to 40pc. (ibid)
After the Bank Raid by the Eurogroup was exacted, the Cypriot banks reopened after a week of being closed.
“What we've done last night is what I call pushing back the risks.
If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise
yourself?'.
If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if
necessary the uninsured deposit holders.” Eurogroup head Jeroen Dijsselbloem via Reuters :
http://www.guardian.co.uk/business/2013/mar/25/eurozone-crisis-cyprus-bailout-deal-agreed#block-51506c6ab5795d794abf445a
Europe in Crisis
Paul Allegra
4/29/13
Damage Control The Eurogroup’s Dijsselbloem originally suggested that this method of “contribution” would be a template for bank recapitalizations going
forward. The immediate reaction from anyone with a stake in the health of any European domiciled bank account was horror. There was no
polite asking as the Eurogroup Head seemed to suggest, but a taking happened before any account holders received “a talking”.
The fear was that the Cyprus precedent meant the ESM (The European Stability Mechanism) was going to be shelved, and any future bank
recapitalizations would first seek penalty from pensioners or common private bank accounts.
As the Telegraph reported:
“The new policy will alarm hundreds of thousands of British expatriates who live and have transferred their savings, proceeds from house sales
and other assets to eurozone bank accounts in countries such as France, Spain and Italy…. Mr Dijesselbloem's comments will alarm countries like
Ireland and Spain that had been hoping to access the ESM in order to restructure banks without killing off their financial sector by inflicting huge
losses on investors.”
http://www.telegraph.co.uk/finance/financialcrisis/9952979/Cyprus-bail-out-savers-will-be-raided-to-save-euro-in-future-crises-says-eurozone-
chief.html
Immediately and with regularity, Eurozone leaders and International figures began decrying and dismissing Cyprus as a template as well as the
“way Cyprus was handled” as Mario Draghi criticized.
Noyer of the ECB, Lagarde of the IMF, and even Dijsselbloem made several attempts to assuage the markets that Cyprus was an isolated incident
requiring specific measures.
Euro-Skeptics were having none of that as the outspoken Nigel Farage warned: “Our message to expats now that the EU has crossed this line,
must be: Get your money out of there while you’ve still got a chance.”
http://www.express.co.uk/news/uk/386559/Get-all-your-money-out-of-Europe-now
Cyprus Instructed to Sell Gold Reserves Prior to the Dublin conference where the terms of the Cyprus Bailout would be consecrated by the Eurogroup, speculation rippled through the
commodities markets that Cyprus may consider selling a portion of its Gold reserves and apply it towards the bailout.
Gold began to sell-off on Wednesday April 10th. The Cypriot Parliament and Finance ministers denied that there was even talk of such a plan. As
gold continued to sell-off into Thursday it was projected that Cyprus may have been instructed by the Troika to sell up to €400,000.
Cyprus again denied any intention of selling any portion of its gold reserves.
http://rt.com/business/cyprus-sell-400-million-gold-reserves-finance-bailout-639/
Europe in Crisis
Paul Allegra
4/29/13
On Friday April 12th, gold sold off sharply towards $1300 per ounce. By noon EST, the President of the ECB, Mario Draghi “said the profits of any
gold sales by the Cypriot central bank must be used to cover losses it may sustain from emergency loans to Cypriot commercial banks. “The
decision is going to be taken by the central bank,”Draghi said after a meeting of euro-area finance officials in Dublin. “What’s important,
however, is that what is being transferred to the government budget out of the profits made out of the sales of gold should cover first and
foremost any potential loss that the central bank might have from its ELA.”
http://www.bloomberg.com/news/2013-04-12/draghi-says-any-cyprus-gold-sale-must-cover-emergency-loan-loss.html
While the Eurogroup seemed to have won a brief recapitalization battle, it lost significant ground in gaining back public confidence.
Cyprus is significant in that the apparent lack of universal rules and decorum associated with being a Eurozone member continues to harangue
the central bureaucracies. Slovenia was the latest Eurozone member to signal a “potential banking crisis” but after the way Cyprus was handled,
it seems that Slovenia is willing to go it alone. The Cyprus bailout methodology began to resemble mafia strong-arm tactics. Life imitates art and
that art just so happened to be a Martin Scorsese Film.
Europe in Crisis
Paul Allegra
4/29/13
PART III
Nations on the Edge
Europe in Crisis
Paul Allegra
4/29/13
Chapter IX
Italy
Joined the EU 1952 (EEC founding member); adopted the Euro 1999
Industrial Ouput and Recession Since early 2008, the country's total production has shrunk by about a quarter and industrial output has been falling consistently almost every
month.
Several other indicators such as net national income, consumer demand and standard of living, are also falling.
Unemployment The unemployment rate has increased from 8% to 10% over the last 12 months.
Youth unemployment has risen from 28% to 36%.
Many of the unemployed no longer bother to register, meaning they are not included in the statistics.
Unemployment Rate “Youth” Unemployment – 25 yo and under
Europe in Crisis
Paul Allegra
4/29/13
The Looming Debt Crisis Italy's debt, which is is currently at 120% of GDP is anticipated to eclipse the €2 trillion mark by the end of FY 2012.
Amid the deepening recession Italy's gross domestic product will most likely decrease this year.
The Italian central bank has said it will be satisfied if the decline in GDP does not exceed 1.5%
Debt as % of GDP
Austerity Measures Similar to other countries in crisis, Italy will raise Taxes and attempt to narrow the gap in government spending.
Italy must reduce tax evasion
Increase Taxes on the Assets of Wealthy individuals
Pension ages will rise to 62 for women and 66 for men.
The pension age for women will rise to 66 from 2018
The Austerity measures aim for €20 billion in savings through 2014, however, time and interest rates are not on their side.
Europe in Crisis
Paul Allegra
4/29/13
Italy Bond Yields: Unsustainable Borrowing Costs The similar pattern has emerged in each instance where as Ireland and Spain saw their bond yields head toward unsustainable levels prior to
requesting a bail-out or negotiate assistence from the Troika.
If Italy’s 5 year and 10 year yields breach and sustain past 7%, a bail-out would appear to become a forgone conclusion.
10 Year Yield 5 Year Yield
Europe in Crisis
Paul Allegra
4/29/13
Chapter X
France
EU Founding Member; adopted the Euro in 1999
A Growing Pension Deficit “..the pension system deficit would rise to €18.8bn in 2017 from €14bn last year and would be likely to exceed €20bn in 2020. The annual cost of
pension payments has risen to 14 per cent of gross domestic product.” http://www.ft.com/intl/cms/s/0/36397294-49ed-11e2-a625-
00144feab49a.html#axzz2FcJ39ZYI
Francois Hollnade was elected on promises of anti-austerity and government support of social programs (via spending and increased taxation).
Although the Sarkozy government had pushed through reform measures, they were too little and too late to address the deficit.
Astronomical Taxation and the Flight of Wealth In 2012, Hollande delivered on one of his promises: a 75% tax rate for individuals earning over €1 million. The obvious result sent wealthy
individuals and companies seeking haven in other countries. Most recently, Hollande demanded that Belgium (quickly becoming the “new home
of old French wealth”) would have to re-examine its treaties with France as well as consideration towards other member states. Critics of the
French tax code point to its construction and its frequent changes. It is amended almost once every year.
“The French income tax system has five tranches each with its own marginal tax rate from zero percent for the first 6,088 euros to 41 percent for
income over 72,317 euros.” http://www.cnbc.com/id/49881909/France039s_Complicated_Tax_System_May_Be_Main_Problem
The French Supreme Court eventually overruled the Wealth Tax as unconstitutional and subsequently, Hollande’s popularity began to recede.
http://www.reuters.com/article/2012/12/29/us-france-tax-idUSBRE8BS05M20121229
The Financial Transaction Tax In October of 2012, eleven Eurozone members voted to impose a Financial Transaction Tax. France immediately applied the tax to its equity and
fixed income instruments with similar “swap-offsets” available as in the case of Brazil. While these taxes can be applied to transactions that
occur within the country, or among instruments listed on French exchanges, France believed that the tax would be side-stepped in the ADR
market. An ADR Tax was activated in December of 2012. As of yet, the full impact of the 20 basis-point Tax has not come to any hard conclusion.
The theory was the tax would produce an automatic revenue boost. The jury is out on whether the Tax has reduced overall market participation
or provided enough of a revenue injection to sustain the French economy and its ballooning public benefit deficit.
Europe in Crisis
Paul Allegra
4/29/13
Youth Unemployment French Unemployment is currently at 10.3%. Youth Unemployment “has now climbed to 26 percent. For decades, regardless of their political
affiliation, lawmakers have been promising to create a better situation for young people. But exactly the opposite has happened. Labor laws
protect those who already enjoy steady jobs, while the economic crisis and recession have limited the number of new jobs created. Meanwhile,
housing has become both scarcer and pricier.
Some 23 percent of the country's 18- to 24-year-olds live in poverty, according to a study by the National Institute for Youth and Community
Education (INJEP). These are mainly high school or university dropouts who have little to no access to health care and limited chances of
improving their situations” http://www.spiegel.de/international/europe/high-youth-unemployment-and-poverty-in-france-breed-hopelessness-
a-872943.html
Youth Unemployment Unemployment
Europe in Crisis
Paul Allegra
4/29/13
As with Greece, Spain, and Portugal, France is now treading a similar path.
Critics of the Hollande government point towards the policy of Punishing Companies for Laying off workers as contributing to unemployment.
http://www.reuters.com/article/2012/06/07/oukwd-ukfrance-economy-unemployment-
idAFBRE8560BH20120607?pageNumber=1&virtualBrandChannel=0&sp=true
Hollande attempted to halt unemployment by imposing a penalty on companies needing to lay-off workers. In an almost childish-response to
economic crisis, Hollande and his socialist party believed that if companies were restricted from laying off workers, then unemployment would
halt and reverse. Failing to address the reasons behind the need for a company to layoff or restructure revealed Hollande’s inability to grasp
fundamental economic principles. Hollande’s popularity along with his approval rating has continued to drift lower.
If the companies cannot lay-off workers out of fear of penalty, then they will refrain from hiring new workers, or relocate.
Expansion of the Public Sector, While Industry Erodes “The country's industrial sector has lost 2 million jobs since the Mitterand era. In 2011, France had a trade deficit of €71.2 billion ($93.1 billion),
compared with a surplus of €3.5 billion in 2002. At the same time, the national debt has grown to 90 percent of the gross domestic product.
"Whenever a new problem popped up in the last 25 years, our country reacted by increasing spending," says banker Michel Pébereau.
Public sector spending now accounts for almost 57 percent of GDP, more than in Sweden or Germany. For every 1,000 residents, there are 90
public servants (compared with only about 50 in Germany). The public sector employs 22 percent of all workers.”
http://www.spiegel.de/international/europe/french-politicians-lose-touch-withreality-as-crisis-deepens-a-872413-2.html
Europe in Crisis
Paul Allegra
4/29/13
Chapter XI
Expanding The Union and The Monetary System
One must consider the impact an incoming Euro member with double-digit unemployment would have on the status quo.
Poland and Lithuania are taking imminent steps towards adoption of the Euro as well as several other nations in similar trajectories.
The Map (following page) illustrates the state of Pan-European Unemployment.
The geography of unemployment:
Only four countries in Europe are at or below 6 percent unemployment: the geographically contiguous countries of Germany, Austria, the Netherlands and Luxembourg.
The immediate periphery has much higher unemployment; Denmark at 7.4 percent, the United Kingdom at 7.7 percent, France at 10.6 percent and Poland at 10.6 percent. In
the far periphery, Italy is at 11.7 percent, Lithuania is at 13.3 percent, Ireland is at 14.7 percent, Portugal is at 17.6 percent, Spain is at 26.2 percent and Greece is at 27 percent
Europe, Unemployment and Instability | Stratfor
Europe in Crisis
Paul Allegra
4/29/13
Europe in Crisis
Paul Allegra
4/29/13
Conclusion
Towards the close of 2012, Greece had received capital injections in accordance with the terms of bail-out. Greek debt returns to the market
with haunting caveats of the past. Spain had also received tranches of aid, and began bank consolidation with additional measures to back-stop
the larger institutions. The specter of the Cyprus bailout casts a pall over the European economic horizon. This federation was supposed to be
advanced and superior to the American experiment, but structural flaws were quickly apparent. Critics refer to the European Monetary Union as
a return to Soviet style governance through bureaucracy and committee.
Unemployment remains to be resolved across Southern Europe as well as throughout the western world. 2013 and beyond presents a
continuation of budgetary policies that will attempt to either stabilize or slow the crisis.
Some critics believe current policies will accelerate towards another global recession, possibly worse than the current malaise.
Compared to the rest of the world, Europe is struggling to emerge.
The Eurogroup urges the accession towards a European Banking Union. The Banking Union measures were approved in December of 2012 by
the various parliaments. The intent of the Banking Union is to streamline Euro member access to the relief mechanisms, but the main goal is an
attempt to stratify budgetary policy across the Eurozone.
The fragile political structure within the EMU continues to be tested. Euro-skeptics have gained popularity throughout several EU member
states. Ultimately several issues must be resolved to maintain the Union however they remain interconnected.
A Banking Union may superficially address broad fiscal policy but it may not supersede parliamentary authority with regard to legislative
spending and budgetary outlays. These matters remain in the hands of local parliaments until they are surrendered to a central authority or
disqualified by some extra-governmental fiat as a construct of the current bureaucracy. Based on Cyprus, anything is possible.
Europe in Crisis
Paul Allegra
4/29/13
About the author:
Paul Allegra
BA History: Monmouth University ‘88
In 1989 Attended lectures on the “Euro” and the “EU” in Firenze as part of law school curriculum.
Returned to Monmouth University in 1991 to pursue a Masters in History, however was side-tracked for the next 20+ years into a career as a Wall Street
trader.
Spent 13 Years at Bear Stearns & Co, Inc. in the Global Equity Division where I had the dubious distinction of being the last trader in the room after Bear
Stearns collapsed in 2008!
Most recently, my career centered on International Equity and Currency trading.
