The history of EU and its current situation:

- How Greece economic instability is threatening the entire stability of EU.

Presented By,Rajashree SwainAsia Pacific Institute of ManagementNew Delhi

Introduction to EU ( An abstract to EU) Current EU economy ( An overlook to the

economy of countries under EU) The History of EU Economy ( 1945- Today) Greece Economy (Current, 2010-15 Govt.

debt crises, disadvantages towards EU) Recommendation Conclusion ( Allan GreenSpan)

AGENDA:

Prof. Shiladitya Dasgupta for his instructions. http://www.bbc.com/news/world-europe-33225461 http://themarketmogul.com/europe-existential-cris

is/

https://europa.eu/european-union/index_en https://

europa.eu/european-union/about-eu/history_en https://

en.wikipedia.org/wiki/Greek_government-debt_crisis

Special Thanks to..

Introduction to EU:

1. The European Union (EU) is a political and economic union of 28 member states that are located primarily in Europe.

2. It has an area of 4,475,757 km2 (1,728,099 sq. mi), and an estimated population of over 510 million.

3. The EU has developed an internal single market through a standardized system of laws that apply in all member states.

Cont…4. EU policies aim to ensure the free movement of people, goods, services, and capital within the internal market, enact legislation in justice and home affairs, and maintain common policies on trade, agriculture, fisheries, and regional development.

5. Within the Schengen Area, passport controls have been abolished.

6. A monetary union was established in 1999 and came into full force in 2002, and is composed of 19 EU member states which use the euro currency.

GDP (PPP) 2016 EstimateTotal $ 19973 TrillionPer Capita $39212

GDP (Nominal) 2016 EstimateTotal $16,518 TrillionPer Capita $32,384

Current EU Economy: The European Union has established a single market across the territory of all its members representing 510 million citizens. In 2014, the EU had a combined GDP of 18.640 trillion international dollars, a 20% share of global gross domestic product by purchasing power parity (PPP). As a political entity the European Union is represented in the World Trade Organization (WTO). EU member states own the estimated largest net wealth in the world, equal to 30% of the $223 trillion global wealth.

19 member states have joined a monetary union known as the eurozone, which uses the Euro as a single currency

Of the top 500 largest corporations in the world measured by revenue in 2010, 161 have their headquarters in the EU.. n 2016, unemployment in the EU stood at 8.9%.while inflation was at 2.2%, and the current account balance at −0.9% of GDP. The average annual net wage in the European Union was around $20,000 in 2015, which was about half of that in the United States.

There is a significant variance for GDP (PPP) per capita within individual EU states. The difference between the richest and poorest regions (276 NUTS-2 regions of the Nomenclature of Territorial Units for Statistics) ranged, in 2014, from 30% of the EU28 average to 539%, or from €8,200 to €148,000 (about US$9,000 to US$162,000)

The five largest economies in the world according to the IMF by Nominal GDP in 2015:

The History of European Union:

1945 - 1959A peaceful Europe – the beginnings of cooperation.

1960 - 1969A period of economic growth.

1970 - 1979A growing Community – the first enlargement.

1980 - 1989The changing face of Europe - the fall of the Berlin Wall.

2000-2009 Further expansion.

1990 - 1999A Europe without frontiers.

2010 – Today A challenging decade.

European Economy Crisis:

Many countries joined the Euro without respecting all the rules and flawing their numbers. For example, Greece entered the Eurozone with a budget deficit of

3.38% of GDP, exceeding the 3% limit. Moreover, the Euro was launched without fiscal policy, which makes the Euro adopt a policy of Laissez Faire.

The lack of fiscal policy gives less control over the currency and the overall economy, especially during recessions. This lack of control helps countries to hide their true numbers using intricate derivatives.

EU Crisis:

This is the case of Greece that used Goldman Sachs’ derivatives swaps; buying other currencies and selling euro to disguise their numbers.

Further, one may think that the low cost of borrowing that countries of the Eurozone benefited from was a great advantage of the currency.

But as Spain entered the Eurozone, it became eligible to borrow at very low interest rates, which considerably raised its debt, and it is also the case for other European countries that sunk in debt and are now in crisis.

Cont….

Greece applied to join the European Community in 1975. It was not greeted with open arms.

Greece’s entry was a way to ensure democracy and stability in southern Europe at the height of the cold war.

Greece was the model, Spain and Portugal followed, joining in 1986. But Greece was also a warning: levels of corruption were worse than the European average, the state was poor at collecting taxes.

Entry of Greece:

Economy of Greece :

The economy of Greece is the 46th largest in the world with a nominal gross domestic product (GDP) of $194.851 billion per annum.[4] It is also the 54th largest in the world by purchasing power parity, at $288.245 billion per annum.

Greece was accepted into the Economic and Monetary Union of the European Union by the European Council on 19 June 2000, based on a number of criteria (inflation rate, budget deficit, public debt, long-term interest rates, exchange rate) using 1999 as the reference year. After an audit commissioned by the incoming New Democracy government in 2004, Eurostat revealed that the statistics for the budget deficit had been under-reported.

Greek government debt levels from 1999 to present.

  IMF projection (%)  Actual unemployment rate (%)

Poverty:

2010–2015 government debt crisis:

According to Der Spiegel, credits given to European governments were disguised as "swaps" and consequently did not get registered as debt because Eurostat at the time ignored statistics involving financial derivatives.

These conditions had enabled Greek as well as many other European governments to spend beyond their means, while meeting the deficit targets of the European Union and the monetary union guidelines. In May 2010, the Greek government deficit was again revised and estimated to be 13.6% which was the second highest in the world relative to GDP with Iceland in first place at 15.7% and Great Britain third with 12.6%. Public debt was forecast, according to some estimates, to hit 120% of GDP during 2010.[

As a consequence, there was a crisis in international confidence in Greece's ability to repay its sovereign debt, as reflected by the rise of the country's borrowing rates (although their slow rise – the 10-year government bond yield only exceeded 7% in April 2010 – coinciding with a large number of negative articles, has led to arguments about the role of international news media in the evolution of the crisis).

In order to avert a default (as high borrowing rates effectively prohibited access to the markets), in May 2010 the other Eurozone countries, and the IMF, agreed to a "rescue package" which involved giving Greece an immediate €45 billion in bail-out loans, with more funds to follow, totaling €110 billion.In order to secure the funding, Greece was required to adopt harsh austerity measures to bring its deficit under control

According to Fortune, once the Greek break out of the euro, the central bank would pursue and expansionary monetary policy by lowering interest rates and printing money which would cause inflation to soar.

 Nomura’s Jens Nordvig, one of Wall Street’s top currency strategists, predicts the implied annual inflation to be around 8.6% and based on this inflation figure, the drachma is expected to plunge by around 43%. So if drachmas begin at one drachma per Euro then it is predicted that the conversion rate would depreciate to two to one.  

How Greece economic instability is threatening the entire stability of EU.

A currency’s valuation will be painful but it will eventually give a boost to the Greek economy making its exports cheaper. It is predicted the one off 30% devaluation of the drachma would push the economy by 20%. So as long as Greek banks do not fail, the drachma could be a better than expected means to an end.

On the other hand, if the drachma is to become Greek’s currency again, the European creditors would lose hundreds of billions. An amount of 240 billion euros to the government along with 89 billion euros as loans from the ECB to Greek banks might be defaulted in case of a Grexit. Borrowing costs should rise for Italy, Portugal, and Spain as a contagion effect but the fact is the ECB is buying their bonds as part of the quantitative easing which might put a ceiling on their rising yields.

Moreover, the euro would depreciate as a result of uncertainty over the Grexit boosting their exports.

Cont…

Recommendation:

“Grexit”….???

GREECE

1 2 3

Grexit after attempted Eurozone negotiations will integrate.

Greek banks collapse leading either to Eurozone rescue deal or to Grexit.

Greek mandate persuades Eurozone leaders to agree to revise deal.

DEAL EXIT

“The Euro can only be saved via a real political union. I don’t believe that a common economic and currency area can function in the long term if it is made up of 17 countries with 17 different social systems. The Eurozone needs a complete political union, comprising either all member states or a core Europe. That is the only way the Eurozone isn’t going to break up”.

---Allan Greenspan, ex-Chairman of the Federal Reserve

Conclusion