JAIPUR NATIONAL UNIVERSITY

SUMITTED BY- SURJIT JHA

SUMITTED TO – MR/MRSSUBJECT- GREECE CRISIS

Greece CRISIS

Every crisis reveals unexpected consequences of economic

policies. The current Euro crisis should be no exception. As EU governments grapple with the

crisis.

There are number of lessons to be learned.

LESSONS ARE

1. Currency zones don’t solve the problem of International (or Regional) payments imbalances.

2. The “structuralists” got it wrong, the “economists” got it right

3. There is no French-German Compromise on Policy Convergence

4. Increased Competition reduces inflation, but does not guarantee Growth Convergence.

What is the Problem? For Greece -- For the Euro zone

PROBLEMS ARE

1. Currency zones don’t solve the problem .2. The “structuralists” got it wrong, the

“economists” got it right.3. There is no French-German Compromise on

Policy Convergence.4. Increased Competition reduces inflation, but

does not guarantee Growth Convergence.5. A Common Currency does not eliminate the

need for internal adjustments.

The creation of the European Central Bank as the issuer of the common EU currency meant that the

zero-risk sovereign debts of Euro zone governments where no longer fully sovereign in the sense that they could always be redeemed by the issue of additional

debt or national currency. With the advent of the Euro, the debt of national governments became the

equivalent of private debt.

INTEREST RATE CONVERGENCE

On entry into the Euro a high debt economy such as Italy should have had a fiscal surplus higher than a low debt country to achieve an equivalent credit

rating. However, the common interest rate set by the ECB, and the failure of financial markets to price

government debt according to sustainability meant that highly indebted countries saw their debt service decline, and thus reduce the necessity to run higher

surpluses. Indeed, pre-Euro introduction market speculation to profit from the capital gains on high

coupon debt that was expected to occur with interest rate convergence produced that result.

EURO Eliminates Zero Risk Assets in EU

Differential Impact OF Capital Flows

• Northern” economies attracted investments in “productive” sector

• “Southern” economies attracted investment in real estate

• Positive relationship between FDI and trade balances for “North”

• Negative relationship for the “South”

THANK YOU