Euro Crisis

The Euro crisis is really crucial.It spreads from Greece to Italy,Portugal,Ireland etc.Recall that on the inception of Euro,Greece,Portugal,Spain  were comparatively poor countries and could not follow ERM correctly.The convergence criteria of Euro-12 was disturbed by them.The common monetary and fiscal policy of ECB was not completely  followed by them.Not only that Britain followed two –speed Europe which means that it joined in the ERM but also it did not accept the single currency Euro.The debt GDP ratios of those countries were mounting.EC did not alert them sufficiently.After the collapse of USSR,new members from the  East Europe joined in Euro group but they were unable to maintain convergence criteria and thus remained out of Euro. These are the unmanageable situation to EMS and to EC. A huge investment went to new members. The capital market started to weaken.The Euro/$ rate started to go against the Euro.  The demand for Euro in the international market fell.The EC began to maintain the macro economic indicators for Euro-12,Euro-15 and Euro-25/27 etc.The multilateral policies were going on in the same domain.The financial crisis began in USA that clouded over EU also.It hit the EU economy downward.No V-shaped recovery was not found even now.The bond/share/ equity  market started to adverse.The industrial set back quickened and exports dwindled.The liquidity crisis of Euro accelerates.The demand for dollar superseded Euro.The most affected countries were spotted as Greece,Portugal and Italy.The 85 billion Euro funding to Greece uptil 2014 or IIF's opinion of private sector participation or tax on Eurozone by banks amounting to 10 billion Euro package may somehow give relief to them but could not avoid the total contagion effect.

Capital says that Greek deposits have fallen by about 14% over the last year and Irish deposits are 30% below their peak.A large scale buy back of Greek debt  was placed to European Financial Stability Facility (EFSF ) which will be given greater flexibility to operate the €440 billion bail-out fund to rescue Greek.But, it was prosponed. The  latest plan to solve the debt crisis, according to the FT, is for a tax on banks to raise €30 billion to help with the Greek bailout. But the proposal would surely create a disincentive for banks to own the government debt of other peripheral euro-zone countries. But a second bail-out from the euro zone that was supposed to tide Greece over until 2014 has yet to materialise  (although it did get a €12 billion ($17 billion) tranche of loans to keep going until September). The Greek Parliament has approved the additional funding until 2014.

 Portugal is still raising some money from short-term debt auctions. The prospect of a tax on bondholders in troubled countries would only increase the pressure to sell once a country (such as Italy or Spain) started to get into trouble.

Greece’s main hope for short-term export competitiveness is that the euro depreciates. Instead it has appreciated against most major currencies (though not the Swiss franc). The euro has climbed 5% against the dollar this year. Its rise has barely been halted by renewed fears of a Greek default. It is surprising that the Euro gained against US dollar,Japanese Yen,Chinese Yuan during January –July 19^th ,2011 but not at the cost of Italy ,Greece,Portugal or Spain.Its a positive sign in international trade yet it lost in trade balance and current account balance too. However,Euro bond may gain a new momentum.

Fig-1 , Exchange rate against the Euro (% change,Jan-July 19,2011)

Italy has the biggest sovereign-debt market in Europe and the third-biggest in the world. It has €1.9 trillion ($2.6 trillion) of sovereign debt outstanding which is  120% of its GDP that is  three times as much as Greece, Ireland and Portugal combined—and far more than the €250 billion or so left in the European Financial Stability Facility (EFSF). Italian bonds jumped by almost a percentage point in two trading days: on July 12th they breached 6%, their highest since the euro was created.Spain and Italy back outside of the crisis perimeter. But, Spain sold €1.8 billion in 10-year debt at an average yield of nearly 6%. If yields creep much higher than that, Spain's debts will become unmanageable without euro-zone assistance. Meanwhile, evidence of a euro-zone economic slowdown grows.Hence ECB's intervention on monetary policy is urgent.Control on foreign capital flows,cutting government expenditure and increasing tax  rate in Keynesian way along with high tariff on imports may give some positive results.Moreover,interest structure should be reviewed.Internal debt finance may effect partially. Cutting the  non-developmental expenditure speedily  may boost the package. Control on Derivative finance will rise value of Euro comparatively. Lastly ,GDP growth hike and decrease in real estate financing will improve the situation slowly and steadily.

               Table -1 , Trade,exchange rate,budget balances and interest rates.

The above Table showed that the trade balance and current account balance of Greece and Italy went unfavourable and too high as percent of GDP.Their budget deficits remain also too high as percent of GDP.The interest rate is above the Euro zone.The Euro area is not comfortable against Japan and China.

                                       Table-2,Output,prices and jobs (% change on year ago)

The above Table confirmed that the growth rate of Euro area is far behind the China.The growth rate of Greece is negative although Italy achieved a marginal positive growth rate.Industrial output is falling in Greece and increasing  in Italy less than 2%.Both the countries faced high unemployment rate with inflation rates higher than Euro area. According to the latest data, construction in the euro-zone is falling, manufacturing output growth is slowing (and declining outright in parts of the periphery), and the contribution to growth from government is falling around the continent. The ECB's decision to boost interest rates has prevented the decline in the euro that might be expected to accompany an intensification of the debt crisis.In other words, every potential driver of euro-zone growth is contracting or weakening. And the governmental response is more fiscal austerity and an increase in interest rates. A return to recession seems unavoidable. I don't think that's likely to make the debt crisis any easier to manage.A dearer euro will hurt euro-zone exports at just the moment export growth is most needed. But there will be more trouble ahead. All these debates—around the new Greek program, private sector involvement, the amount of funding necessary, the talk of 'selective default' may be too expensive for Greece and too little or inadequate to effectively deal with the management of Greek debt. Europe, is needed for a new "stress test" results which will be announced in a few days.It is hopeful that Britain has reversed its previous position on the development of a two-speed Europe  choosing much deeper fiscal integration. Britain believes the following: (a) a big leap towards fiscal union is the only way of saving the single currency, (b) Britain has a strong interest in the survival of the single currency, (c) Britain must play no part in bailing out the single currency and will stand aloof from fiscal integration, thus (d) our national interest now lies in allowing Europe to divide into markedly different zones of integration, with us on the outside.
Thus the EU finance minister usually reported that ,“I think we have to accept that greater euro zone integration is necessary to make the single currency work and that is very much in our national interest,” he says. “We should be prepared to let that happen.”
The chancellor is hopeful but key decision is left for Euro-27.