Will the Euro Disappear

8/3/2019 Will the Euro Disappear

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Will the euroWill the euro disappeardisappear??

Khaoula CHBANI

Mohamed ETTALBI

Zakariae BEN ELKADI


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SUMMARYSUMMARY

y I Introduction

y II The Euro crisis

y III The euro crisis protagonists

y IV Possible scenarios for the future

y V Conclusion


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INTRODUCTIONINTRODUCTION

Definition and history of

Euro

y Official currency of the euro

zone : 17 european countries

y Adopted on 1999, effective

since 2002


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Euro mecanisms

y Deficit


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Advantages of Euro

y Facilitate economic exchanges among the EU

y Elimination of transaction costs

y Control over exchange rate and interest rate

y Uniformization of prices in EU


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TheThe EurozoneEurozone crisiscrisis

Debt

The debt crisis is threatening a various countries of the Eurozone

since 2008, different stories but the problem stays the same public

finances.

The blooming debt is one of the most manifested Eurozone crises;

its a problem due to the loss of competitiveness that happened after the

adoption of the euro by the GIIPS.


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y In Greece:

Greece didnt have a balanced budget even before joining the Eurozone.

Joining the euro zone caused an economic boom due to the low cost of

borrowing,

the rating agencies keep downgrading the countrys debt, its actual grade is CC the

lowest grade of any government in the world.


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y In Ireland: having a large real estate bubble didnt help the country to avoid

the debt crisis. When the crisis hit on 2008, the financial situation of this

country gets worst and the measures taken by the government didnt help

much.

y In Portugal: the crisis was well managed in the first part of economic

crises, but due to the forecasts of no growth in long term, in 2010 thegovernment was obliged to ask for a bail out due to its financial situation.

y In Spain: there was also a real estate bubble which affects its growth.

y In Italy: the country has a slow growth and a large debt, which was

downgraded by S&P.


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InflationInflation

The actual inflation rate 3% is the highest since October 2008; inflation refers

to a general raise of prices, adding this problem to the debt crisis may

generate a recession in the Eurozone.


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Budget deficitBudget deficit

The mean reason of budget deficit is that the countries GIIPS have been

living beyond their means during the bubble period.


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Measures taken to address these issues

European financial solidarity

The EU has always opted for solidarity to face the financial crisis, to

express this solidarity the

European Financial Stability Facility (EFSF)

Mission: provide loans to countries having financial crisis,

bail out

Greece 109bn euros,

Ireland 85bn euros

Portugal 78bn euros.


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Government austerity measures

Responding to the debt crisis the countries adopted a round of austerity

measures, these measures can affect pensions, the taxation system.

y In Greece : the government passed two austerity packages,

a new property tax,

Jobs and spending,

Selling state assets.

y in Portugal:The austerity measures adopted were:

Pay cut for top earners in the public sector,

A VAT rise of 1% and income tax hikes for high-earners,

The military budget,

two high-speed rail projects have been postponed.


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y In Italy : the measures adopted by the government affected

healthcare fees,

regional subsidies,

family tax benefits,

pensions of high-earners.

y In Spain:

tax rise for the rich,

spending cuts,

Pay cut for the Government workers,

The retirement age is being raised to 67,the tax on tobacco is to rise to 28%,

Selling state assets ( the Spanish national lottery and a minority stake in the

country's airport authority)


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THE EURO CRISIS PROTAGONISTSTHE EURO CRISIS PROTAGONISTS

European union and its institutions

y European Commission and Parliament:

Help the indebted countries (160B EU

R for for for for Greece)

Reschedule some countries debt

Impose regulations:Stability pact

y BCE:

Support countries in difficulty (ex: Portugal and Moodys)

Protect the other countries from the crisis


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Countries inCountries in debtdebt: Ireland, Portugal,: Ireland, Portugal,G

reeceG

reecey Perform political reforms (New elections in Portugal)

y Take economic measures:Greece: Public austerity plan

y Other countries take also measures to avoid crisis: Italys public

austerity plan and Spains golden rule


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The France-Germany Tandem

y Take the initiative of new reforms: Golden rule, financial transactions

taxation, economic government of euro zone, etc.

y Block measures that seem excessive or premature: example of european

obligations, EU budget augmentation, etc.


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International institutions and rating agenciesy FMI

Helps financing aid plans for countries in debt: 22,5B EUR to Ireland in

2010, 78B EUR to Portugal, 30B EUR to Greece in 2011.

y Rating agencies

Decline the rating of countries in crisis: Moodys : Portugal BAA to BA2

Greece: B3 to CAA, Fitch : Ireland (AA to A+).


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Greece euro-withdrawal

The incentive to a voluntary departure from the euro area means that

Greece will be free to devalue its currency, to make its economy more

competitive and to set its own interest rate. But this option doesnt

mean that expulsion or withdrawal of Greece is an easy measure totake.

The expulsion way out is not conceivable (at least for the moment)

because it will affect negatively the European solidarity principle,

however, a voluntary departure is almost possible especially if Greece

comes out with an arrangement with ECB and the other countries of

Euro zone to accompany its withdrawal.

Possible Scenarios for the future


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In case of withdrawal of Greece, problems of Euro Zone will not be

resolved, because this measure can ruin the economies of Greeces

creditors which could not get back their investments on Greek debts.

Therefore, the focus now in the financial markets is on whether Greece

can sort its problems out and, if not, there will be some sort of

international intervention.

In European capitals concerned by the euro zone crisis, the hope is that

this talk about departure will be just speculation.


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ReenforcementReenforcement ofof EuropeanEuropean solidarity: towards asolidarity: towards a

EuropeanEuropean federation?federation?Greece debt crisis shows to European governments that the main reason

of the European sovereign crisis is that each country has its own financial

policy, which makes the task of ECB to control the monetary market very

difficult.

The idea of European Federation isnt to rule out. USA could be a good

example to follow; the Federal Reserve FED controls and regulates the

US financial market, although the states are relatively independents.


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Basically, the EU is has to face an existential crisis which it doesn't have the

entire institutional tools to solve. One way to come up this deadlock

would be to go back to the member states and get their approval to revise

the entire treaty governing the federation. But that approach is extremely

difficult, even hard any delay or dilution of the common rescue fund or

centralized budget authority could have disastrous effect for the European

economy and the pocketbooks of its citizens.


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Complications in Spain and Italy: dislocation of Euro ZoneComplications in Spain and Italy: dislocation of Euro Zone

Italy and Spain are confronted with serious financial problems related to

their high debt levels, Italy will likely default but Spain could escape.We are

talking about dislocation of Euro Zone, because these two countries have

big economical statures in Europe, particularly Italy which is the third

largest economy in the Eurozone

Contagion of debt crisis in those countries could be the beginning of the

end of Euro Zone according to the experts.


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Italy:

Italy couldnt hold up its debt even if rates fall back unless Roma sharply

increases growth in the next three years.

Even hard Italy has managed to run tight budgets and, plans to eliminate its

deficit by 2014, with its massive debt it won't be able to survive if it can't

raise its growth rate.


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Spain:

The situation in Spain can be considered as better than in Italy because its

debt is much lower.

Even under the extreme bad scenario, Madrid's debt ratio would rise to

no higher than 75% of GDP.

The Spanish economy was highly affected by the financial crisis of 2008and the current European sovereign debt crisis but there is a real chance

that Spain could avoid default and debt restructuring


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CONCLUSION

what will happen if Euro disappears?

ECB would have to return all of its gold to the European States in

proportion to their contributions.

Old European currencies would have to reappear and Euro reserves

converted back to the mix passed to the ECB from the beginning of the

Eurozone.

The worlds Forex Markets would be in disorder.

Confidence in currencies would probably disappear. There would be a

huge demand for all hard assets


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REFERENCESREFERENCESy http://www.vie-publique.fr/decouverte-institutions/union-europeenne/action/euro/qu-

est-ce-que-pacte-stabilite-croissance.html

y http://www.touteleurope.eu/fr/actions/economie/euro/presentation/crise-economique-dans-la-zone-euro-2010.html

y http://www.imf.org/external/french/np/sec/pr/2010/pr10462f.htm

y http://www.federalreserve.gov/pf/pdf/pf_4.pdf

y http://www.ft.com/home/europe

y http://www.bbc.co.uk/news/business-14934728y http://www.bbc.co.uk/news/business-14396557

y http://www.businessweek.com/2000/00_40/b3701027.htm

y http://www.eubusiness.com/news-eu/spain-finance-debt.bx4

y http://www.reuters.com/article/2011/09/02/markets-bonds-supply-idUSL5E7K212820110902

y http://www.nakedcapitalism.com/2011/07/eurozone-leaders-fiddling-as-rome-starts-to-burn.html

y http://www.presseurop.eu/en/content/news-brief-cover/734781-could-federation-save-euro

y http://www.spiegel.de/international/europe/0,1518,761201,00.html

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Will the Euro Disappear