Economic Crisis in EurozoneWhat Monetary and Fiscal Policy

Does the Eurozone Need?

19 countries

28 countries

506

335

316

Population

(Million)

16.4%

12.4%

17.5%

% of World GDP

$16.8

$ 12.7

$ 17.9

GDP(Trillion)

$ 53,000

$ 39,400

$ 35,440

GDPper capita

EU

Eurozone

US

GDPOECD 1.8%Euro Area

0.8%U.S.

2.2%UNEMPLOYMENT

OECD 7.9%Euro Area

11.9%U.S.

7.4%FISCAL

BALANCEOECD -3.9%Euro Area

-2.6%U.S.

-5.1%INFLATIONOECD 1.5%Euro Area

1%U.S.

1.6%

2014

Source : Eurostat

© EuroGeographics Association for the administrative boundaries

http://ec.europa.eu/eurostat/tgm/mapToolClosed.do?tab=map&init=1&plugin=1&language=en&pcode=teina225&toolbox=types

General Govt. Gross Debt

Unemployment Rate

Background of Financial Crisis

Eurozone USRegional imbalances intensified and leverage in some euro area Member States became excessive.

Risks to government debt sustainability, which lies at the heart of the sovereign debt crisis in a number of euro area countries, but also elsewhere.

In the United States, balance sheet problems lay with households, following the housing and credit boom.

Financial panic that gripped capital markets worldwide after the collapse of Lehman Brothers.

Source: https://www.ecb.europa.eu/pub/pdf/other/art2_mb201205en_pp95-112en.pdf?83cb7037d4b11ad7bab69a4dd31e0c06

Organizational Structure of Monetary & Fiscal Policies

Eurozone (19 countries) US

European Central Bank

19 differentcountries

U.S.Government

Supported by

19 former central banks

Monetary Fiscal FiscalFederalReserve

7 Boards of governors

Monetary

Federal OpenMarket

Committee FederalReserve Bank

Fiscal & Monetary Policies

Policies Tools/Strategies Examples of Action

Fiscal

Tax Cut

GovernmentSpending

Transfer Payment

Austerity

Structural Reform

Deficit Reduction

Monetary

Interest Rate

Reserve Ratio

Open MarketOperation

Lowering Interest Rate

Operation Twist

Long Term Refinancing Program

Quantitative Easing

Fiscal Policies in Eurozone and US

20152010 2011 2012 2013 2014

Austerity

Lehman Brothers

bankruptcy

2009

EUROZONE

US

Deficit Reduction

TransferPayment($800B)

ExtendTax-cut

“Tax Relief Act”

FiscalCliff

Increasethetax

Avoided Structural Reform

Greater Flexibility

in the Stability and Growth Pact

Monetary Policies in Eurozone and US

20152010 2011 2012 2013 2014Lehman Brothers

bankruptcy

Operation

Twist 1

Operation

Twist 2

Long TermRefinancing

Program

OutrightMonetaryTransactio

n

SecuritiesMarket

Program

TroubledAssetRelief

Program

LoweringInterest

Rate

LoweringInterest

Rate

2009

EUROZONE

US QE3$1.6T

QE1$1.73T

QE2$0.6T

“Whatever it takes”

QE$1.2T

Source: Economist, http://www.project-syndicate.org

What is QE(Quantitative Easing)?

1

Central bank creates money

2

to buy bonds from financialinstitutions

3

which reduces interest rates

%

5

…so they spend more andcreate jobs…

$ 4

leading business and peopleto borrow more

6

to boost the economy

$Source : BBC, http://www.project-syndicate.org

Result in US and Eurozone

OECDEuro AreaU.S. Source : Eurostat

Policy Proposal for Eurozone

QE

Benefits

• Lower long-terminterest rates

• Causes currenciesdepreciation

• Ease credit crunches• Raises equity prices

Drawbacks

• Most firms in EU borrowmoney from banks(*Most firms in US issue and sell bonds to finance)

• Long-term interestrate has alreadybeen very low

• Structure(19 countries vs. 1 US)

Economic Growth(& 2% Inflation Rate)

3. Long-term Fiscal Investment• Subside education

program• Healthcare• Regenerate fiscal space• Population balance• Generate confidence

among C,I,G sectors

1.Fair Distribution• Buy bonds in relation to the

outstandingdebt of each country (Greece)

• Improve immigration policy to promotemobility of jobs in Eurozone2. Tax Restructuring

• Consumers: Shift income taxto consumption tax

• Biz: Investment tax credit• Households: Giving a tax

credit for mortgage interest payment

QE

Policy Proposal for Eurozone

Monetary Policy could work only with a fiscal policy synergy to Keep euro zone together