Euro Crash. The European Time Bomb.
"Beggar-thy’s-neighbor"
The Spread beyond Greece, Ireland, Portugal, Spain, United Kingdom, France and finally Germany.
The euro is a ticking time bomb and the Countdown runs. A currency reform in the near future is more likely than never. Politicians desperately try to fake financial data and debt, lie to the people to calm down and cheat.
They fear riots like in Greece and France, or even revolutions like those in North Africa. Security authorities and intelligence agencies are already warning of civil war-like conditions in Europe.
© Heinz Duthel 2015
Euro Crash. The European Time Bomb.
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Troubled Asset Relief Program
The 2008-2009 Spanish financial crises are part of the world economic crisis of 2008. In Spain, the crisis was generated by long term loans (commonly issued for 40 years), the building market crash which included the bankruptcy of major companies, and a particularly severe increase in unemployment, which rose to 13.9% in February 2009.
Euro zone 2011 - Euro zone 2015
17 Member States of the European Union use the euro as their currency in 2011
The euro zone, officially the euro area, (7) is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender. The euro zone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Of the 10 EU member states outside the euro zone, seven states are obliged to join, once they fulfill the strict entrance requirements. Three EU member states have exceptions (that is, states not obligated to join the Zone), including Sweden, which has a de facto opt out; Denmark, which has an opt out that may be abolished in the future; and the United Kingdom, which also has an opt out provision.
Certain parts of the euro area are part of the European Union even though they are not on the European continent, such as the French overseas departments of Guadeloupe, French Guyana, and Martinique in the Caribbean, and Réunion in the Indian Ocean. The Portuguese islands of Madeira and the Azores, and the Spanish Canary Islands, all in the Atlantic Ocean, are other examples.
As part of the euro area, these regions use the euro normally. However, the euro can also be found in other countries and regions which are neither part of the European Union nor the euro area.
Who else uses the euro?
Three of these have adopted the euro as their national currency: the Principality of Monaco, the Republic of San Marino, and the Vatican City State.
Previously, Monaco used the French franc while San Marino and the Vatican used the Italian lira. They were allowed by France and Italy, respectively, to issue their own coins in those currencies. They now and use the euro and have monetary agreements with the EU under which they can also produce limited quantities of euro coins with their own design on the national sides, but cannot issue euro banknotes.
The agreements, signed before the introduction of euro banknotes and coins in 2002, have been or are being renegotiated in order to correct some shortcomings in their implementation, and possibly increase the maximum volume of coins these countries are entitled to issue. The new agreement with the Vatican entered into force on 1 January 2010, while negotiations with San Marino are still ongoing. Discussions with Monaco should be launched in 2010.
Certain French overseas territories, which are not part of the European Union, use the euro as their official currency through agreements with the EU. These are the Saint-Pierre-et-Miquelon islands close to the eastern coast of Canada, and the island of Mayotte in the Indian Ocean. These territories do not issue their own coins.
Finally, some countries and territories use the euro as a de facto currency, meaning it has no legal status but is commonly used.
Andorra, an independent principality on the French-Spanish border with no former official currency, now uses the euro in this way, as it has replaced the Spanish peseta and the French franc previously in circulation. Andorra may not issue its own euro coins and banknotes though, as the negotiations on the monetary agreement with the EU have not been finalized yet.
Kosovo and Montenegro in the Balkans also use the euro as a domestic currency without any agreements with the EU, following the tradition of the German mark which had previously been the de facto currency in these areas.
Monetary policy of the zone is the responsibility of the European Central Bank, though there is no common representation, governance or fiscal policy for the currency union. Some co-operation does however take place through the euro group, which makes political decisions regarding the euro zone and the euro.
The euro zone can also be taken informally to include third countries that have adopted the euro, for example Montenegro (see details on these countries below). Three European microstates-Monaco, San Marino and the Vatican City-have concluded agreements with the European Union permitting them to use the euro as their official currency and mint coins, (8) but they are neither formally part of the euro zone (9) (10) nor represented on the board of the European Central Bank.
17 Member States of the European Union use the euro as their currency in 2011
Belgium
Germany
Estonia
Ireland
Greece
Spain
France
Italy
Cyprus
Luxembourg
Malta
The Netherlands
Austria
Portugal
Slovenia
Slovakia
Finland
Non-participants
Bulgaria, Czech Republic, Denmark, Latvia, Lithuania, Hungary, Poland, Romania, Sweden and the United Kingdom are EU Member States but do not currently use the single European currency.
Members
In 1998 eleven European Union member states had met the convergence criteria, and the euro zone came into existence with the official launch of the euro on 1 January 1999. Greece qualified in 2000 and was admitted on 1 January 2001. Physical notes and coins were introduced on 1 January 2002. Slovenia qualified in 2006 and was admitted on 1 January 2007. Cyprus and Malta qualified in 2007 and were admitted on 1 January 2008. Slovakia qualified in 2008 and joined on 1 January 2009. Estonia qualified in 2010 and joined on 1 January 2011. That makes 17 member states with 329 million people in the euro zone.
EU Euro zone (17)
EU states obliged to join the Euro zone (8)
EU state with an opt-out on Euro zone participation (UK)
EU state with an opt-out which may be abolished by a future referendum (Denmark)
States outside the EU with issuing rights (3)
Other non-EU users (4)
Austria Austria 1 January 1999 8,356,707 384,908
Belgium Belgium 1 January 1999 10,741,048 468,522
Cyprus Cyprus 1 January 2008 801,622 24,910
Northern Cyprus (11)
Estonia Estonia 1 January 2011 1,340,274 19,120
Finland Finland 1 January 1999 5,325,115 237,512
France France 1 January 1999 64,105,125 2,649,390
New Caledonia (12)
French Polynesia (12)
Wallis and Futuna (12)
Germany Germany 1 January 1999 82,062,249 3,330,032
Greece Greece 1 January 2001 11,262,539 329,924
Republic of Ireland Ireland 1 January 1999 4,517,758 227,193
Italy Italy 1 January 1999 60,090,430 2,112,780
Luxembourg Luxembourg 1 January 1999 491,702 52,449
Malta Malta 1 January 2008 412,614 7,449
Netherlands Netherlands 1 January 1999 16,481,139 792,128
Aruba (14) Curacao (15)
Sint Maarten Sint Maarten (15)
Netherlands Caribbean Netherlands (16)
Portugal Portugal 1 January 1999 10,631,800 227,676
Slovakia Slovakia 1 January 2009 5,411,062 87,642
Slovenia Slovenia 1 January 2007 2,053,393 48,477
Spain Spain 1 January 1999 47,021,031 1,460,250
European Union Euro zone 329,937,622 12,475,099
Ten countries (Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, and the United Kingdom) are EU members but do not use the euro. Before joining the euro zone, a state must spend two years in the European Exchange Rate Mechanism (ERM II). Since 1 January 2009, the National Central Banks (NCBs) of Estonia, Latvia, Lithuania, and Denmark have participated in ERM II. The remaining currencies are expected to follow as soon as they meet the criteria. Few countries have declared a target date, and only Estonia gained approval (17) and succeeded in adopting the euro on 1 January 2011.
Denmark and the United Kingdom obtained special opt-outs in the original Maastricht Treaty. Both countries are legally exempt from joining the euro zone unless their governments decide otherwise, either by parliamentary vote or referendum. The current Danish government has announced plans to hold a referendum on the issue following the adoption of the Treaty of Lisbon. (18) (19) (20) Sweden gained a de facto opt-out by using a legal loophole. It is required to join the euro zone as soon as it fulfills the convergence criteria, which include being part of ERM II for two years; joining ERM II is voluntary. (21) (22) Sweden has so far decided not to join ERM II.
The 2008 financial crisis increased interest in Denmark and initially in Poland to join the euro zone, and in Iceland to join the European Union, a pre-condition for adopting the euro. (23) Since Latvia requested help from the International Monetary Fund (IMF), as a precondition, it may be forced to drop its currency peg. This would take Latvia out of ERM II and possibly move the euro adoption date even further from 2013 than currently planned. (24) However, by 2010, the debt crisis in the euro zone caused interest from Poland and the Czech Republic to cool. (25)
Non-member usage
The euro is also used in countries outside the EU. Three states (i.e., Monaco, San Marino, and Vatican City) (26) (27) have signed formal agreements with the EU to use the euro and mint their own coins. Nevertheless, they are not considered part of the euro zone by the ECB and do not have a seat in the ECB or Euro Group.
Some countries (i.e., Andorra, Kosovo, (a) and Montenegro) have officially adopted the euro as their sole currency without an agreement and, therefore, have no issuing rights. Andorra is currently negotiating an agreement with the EU. These states are not considered part of the euro zone by the ECB. However, in some usage, the term euro zone is applied to all territories that have adopted the euro as their sole currency. (28) (29) (30) Further unilateral adoption of the euro (erotization), by both non-euro EU and non-EU members, is opposed by the ECB and EU. (31)
Administration and representation
Further information: European Central Bank and Euro Group
Jean-Claude Juncker is the current Euro Group president
The monetary policy of all countries in the euro zone is managed by the European Central Bank (ECB) and the Euro system which comprises the ECB and the central banks of the EU states that have joined the euro zone. Countries outside the euro zone are not represented in these institutions. Whereas all EU member states are part of the European System of Central Banks (ESCB). Non EU member states have no say in all three institutions, even those with monetary agreements such as Monaco. The ECB is entitled to authorize the design and printing of euro banknotes and the volume of euro coins minted, and its president is currently Jean-Claude Trichet.
The euro zone is represented politically by its finance ministers, known collectively as the Euro Group, and is presided over by a president, currently Jean-Claude Juncker. The finance ministers of the EU member states that use the euro meet a day before a meeting of the Economic and Financial Affairs Council (Coffin) of the Council of the European Union. The Group is not an official Council formation but when the full Eco Fin council votes on matters only affecting the euro zone, only Euro Group members are permitted to vote on it. (32) (33) (34)
On 15 April 2008 in Brussels, Juncker suggested that the euro zone should be represented at the International Monetary Fund as a bloc, rather than each member state separately: "It is absurd for those 15 countries not to agree to have a single representation at the IMF. It makes us look absolutely ridiculous. We are regarded as buffoons on the international scene." (35) However Finance Commissioner Joaquin Almunia stated that before there is common representation, a common political agenda should be agreed. (35)
Economy
Comparison table
Euro zone 317 million €8.4 trillion 14.6% 21.7% GDP 20.9% GDP
EU (27) 494 million €11.9 trillion 21.0% 14.3% GDP 15.0% GDP
United States 300 million €11.2 trillion 19.7% 10.8% GDP 16.6% GDP
Japan 128 million €3.5 trillion 6.3% 16.8% GDP 15.3% GDP
GDP in PPP exports/imports as goods and services excluding intra-EU trade.
Inflation
HICP figures from the ECB: (36)
Mid 1999: 1.0%
Mid 2000: 2.0%
Mid 2001: 2.8%
Mid 2002: 1.9%
Mid 2003: 1.9%
May 2004: 2.5%
May 2005: 2.0%
May 2006: 2.5%
May 2007: 1.9%
May 2008: 3.7%
May 2009: 0.0%
May 2010: 1.6%
Interest rates
Interest rates for the euro zone set by the ECB since 1999. Levels are in percentages per annum. Prior to June 2000, the main refinancing operations were fixed rate tenders. This was replaced by variable rate tenders, the figures indicated in the table after that refer to the minimum interest rate at which counterparties may place their bids. (3)
Euro zone interest rates
Date Deposit facility Main refinancing operations Marginal lending facility
01 Jan 1999 2.00 3.00 4.50
04 Jan 1999 (37) 2.75 3.00 3.25
22 Jan 1999 2.00 3.00 4.50
09 Apr 1999 1.50 2.50 3.50
05 Nov 1999 2.00 3.00 4.00
04 Feb 2000 2.25 3.25 4.25
17 Mar 2000 2.50 3.50 4.50
28 Apr 2000 2.75 3.75 4.75
09 Jun 2000 3.25 4.25 5.25
28 Jun 2000 3.25 4.25 5.25
01 Sep 2000 3.50 4.50 5.50
06 Oct 2000 3.75 4.75 5.75
11 May 2001 3.50 4.50 5.50
31 Aug 2001 3.25 4.25 5.25
18 Sep 2001 2.75 3.75 4.75
09 Nov 2001 2.25 3.25 4.25
06 Dec 2002 1.75 2.75 3.75
07 Mar 2003 1.50 2.50 3.50
06 Jun 2003 1.00 2.00 3.00
06 Dec 2005 1.25 2.25 3.25
08 Mar 2006 1.50 2.50 3.50
15 Jun 2006 1.75 2.75 3.75
09 Aug 2006 2.00 3.00 4.00
11 Oct 2006 2.25 3.25 4.25
13 Dec 2006 2.50 3.50 4.50
14 Mar 2007 2.75 3.75 4.75
13 Jun 2007 3.00 4.00 5.00
09 Jul 2008 3.25 4.25 5.25
08 Oct 2008 2.75 4.75
09 Oct 2008 3.25 4.25
15 Oct 2008 3.25 3.75 4.25
12 Nov 2008 2.75 3.25 3.75
10 Dec 2008 2.00 2.50 3.00
21 Jan 2009 1.00 2.00 3.00
11 Mar 2009 0.50 1.50 2.50
08 Apr 2009 0.25 1.25 2.25
13 May 2009 0.25 1.00 1.75
13 April 2011 0.50 1.25 2.00
Public debt
The following table states the ratio of public debt to GDP in percent for EU and other selected European states. Euro zone and non-euro zone EU members are marked as Euro and EU respectively.
Austria 59.10 72.7 67.10 (44) 66.40 67.50
Belgium 84.60 100.4 93.70 (45) 101.00 96.20
Cyprus 59.60 56.20 (46) 56.20 58.00
Estonia 3.40 7.10 7.20
Finland 35.90 52.6 44.00 (47) 40.30 43.80
France 63.90 87.1 78.10 (48) 77.60 78.10
Germany 64.90 76.5 72.50 (49) 77.20 73.40
Greece 89.50 120.2 113.40 126.80
Ireland 24.90 72.7 64.00 (50) 64.80 65.50
Italy 104.00 127.7 115.8 (51) 115.80 116.00
Luxembourg 6.40 18.0 16.40 (52) 14.60 14.50
Malta 69.00 68.60
Netherlands 45.50 69.4 58.90 (53) 60.90 60.80
Portugal 63.60 86.3 75.80 (54) 76.80 76.10
Slovakia 35.90 39.8 35.70 (55) 35.70 35.40
Slovenia 23.60 44.1 31.30 35.40
Spain 36.20 62.4 53.20 (56) 53.20 53.20
Fiscal policies
The primary means for fiscal coordination within the EU lies in the Broad Economic Policy Guidelines which are written for every member state, but with particular reference to the 17 current members of the Eurozone. These guidelines are not binding, but are intended to represent policy coordination among the EU member states, so as to take into account the linked structures of their economies.
For their mutual assurance and stability of the currency, members of the Eurozone have to respect the Stability and Growth Pact, which sets agreed limits on deficits and national debt, with associated sanctions for deviation. The Pact originally set a limit of 3% of GDP for the yearly deficit of all Eurozone member states; with fines for any state which exceeded this amount. In 2005, Portugal, Germany, and France had all exceeded this amount, but the Council of Ministers had not voted to fine those states. Subsequently, reforms were adopted to provide more flexibility and ensure that the deficit criteria took into account the economic conditions of the member states, and additional factors.
The Organization for Economic Cooperation and Development downgraded its economic forecasts on 20 March 2008 for the Eurozone for the first half of 2008. Europe does not have room to ease fiscal or monetary policy, the 30-nation group warned. For the euro zone, the OECD now forecasts first-quarter GDP growth of just 0.5%, with no improvement in the second quarter, which is expected to show just a 0.4% gain.
Late 2000s recession and reform
As a result of the global financial crisis that began in 2007/2008, the Eurozone entered its first official recession in the third quarter of 2008, official figures confirmed in January 2009. (57) On 11 October 2008 the Euro Group heads of state and government (rather than finance ministers) held an extraordinary summit in Paris to define a joint action plan for the Eurozone and the European Central Bank to stabilize the European economy.
The leaders hammered out a plan to confront the financial crisis which will involve hundreds of billions of euros of new initiatives to head off a feared "meltdown".
They agreed a bank rescue plan: governments would buy into banks to boost their finances and guarantee interbank lending. Coordination against the crisis is considered vital to prevent the actions of one country harming another and exacerbating the bank solvency and credit shortage problems. In the Great Depression, so-called "beggar-thy-neighbor" measures taken unilaterally by countries are considered to have deepened the economic loss. (58)
Despite initial fears by speculators in early 2009 that the stress of such a large recession could lead to the breakup of the Eurozone, the euro's position actually strengthened as the year progressed. Far from the poorer performing economies moving further away and becoming a default risk, bond yield spreads between Germany and the weakest economies decreased easing the strain on these economies. The ECB has been attributed much of the credit for the turnaround in fortunes, injecting €500bn into the banks in June. (59)
In early 2010, fears of a sovereign debt crisis developed concerning Eurozone countries such as Greece, Spain, Ireland, Portugal and Italy. (60) See also Eurozone debt crisis.
With Greece facing severe economic difficulties, the EU adopted a plan to help its recovery, including surveillance from the ECB and loans. The European Council also stated for the first time that if it came to it, the EU would bail out the country if needed. (61) The crisis has sparked renewed discussion of fiscal integration as the lack of a federal treasury and budget being seen as a major weakness of the Eurozone (62) and there is the possibility the upcoming 10-year economic plan may lay the foundations for fiscal co-ordination. (63) The attack by speculators on Greece was seen by some, including the Greek government, as an attack on the Eurozone, using Greece as the weak-link. (64) (65) a 30 billion euro bailout for Greece was triggered in April 2010. (66)
Agreements and proposals
The economic crisis prompted calls for a more integrated Eurozone, (67) from bailing out member states to fiscal union.
Peer review and sanctions agreed
Strong European Union oversight in the fields of taxation and budgetary policy and the enforcement mechanisms that go with it have sometimes been described as potential infringements on the sovereignty of Eurozone member states (68)
However, in June 2010, broad agreement was finally reached on a controversial proposal for member states to peer review each others' budgets prior to their presentation to national parliaments. Although showing the entire budget to each other was opposed by Germany, Sweden and the UK, each government would present to their peers and the Commission their estimates for growth, inflation, revenue and expenditure levels six months before they go to national parliaments. If a country was to run a deficit, they would have to justify it to the rest of the EU while countries with a debt more than 60% of GDP would face greater scrutiny. (69)
The plans would apply to all EU members, not just the Eurozone, and have to be approved by EU leaders along with proposals for states to face sanctions before they reach the 3% limit in the Stability and Growth Pact. Poland has criticized the idea of withholding regional funding for those who break the deficit limits, as that would only impact the poorer states. (69) In June 2010 France agreed to back Germany's plan for suspending the voting rights of members who breach the rules. (70)
In March 2011 was initiated a new reform of the Stability and Growth Pact aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the deficit or the debt rules. (71) (72)
However,
Bailout mechanism agreed
On 25 March 2010, the European Council agreed on a bailout mechanism for Greece and, with the approval of the European Council, for any other country in need of it. The majority of the €22 billion loan funds came from bilateral contributions from Eurozone members, with substantial extra contributions from the IMF. Germany backed IMF involvement and a compromise with France saw the IMF's input limited. There was concern that a Eurozone bailout would violate the EU treaties and German law, although the plan stresses that all actions will be carried out in accordance with those rules. The plan also provides for a greater role for the European Council and that "the European Council should become the economic government of the European Union and we (the European Council) propose to increase its role in economic surveillance." German finance minister Wolfgang Schäuble recently called for Eurozone rules to be significantly tightened, including the possibility of expelling members that repeatedly flaunt restrictions. (73)
In April 2010, the bailout mechanism was triggered, with €30 billion being loaned to Greece. (66) In May, the EU established a full fund of €750 billion to stabilize the Eurozone as a whole: 440 billion from Eurozone states, 60 billion from emergency European Commission funds, and 250 billion from the IMF. (74) A special purpose vehicle (SPV) called "European Financial Stability Facility” (EFSF) with base in Luxembourg was created. The EFSF will issue debt on capital markets, backed by guarantees from the Eurozone states. Money raised will be lent to indebted Eurozone governments after a restructuring programmer is agreed. (69)
In June 2010 there were reports that the EU was preparing to release funds to Spain. This was denied but German Chancellor Angela Merkel confirmed Spain could access the funds if necessary. (70)
European Monetary Fund proposed
There have been a number of proposals for greater fiscal union. This has come in the forms of a finance ministry or International Monetary Fund style body. Belgian Prime Minister Yves Leterme proposed a European Debt Agency which would manage Eurozone government debt. (75) A similar plan came from Wolfgang Schäuble, Germany's Minister of Finance, who proposed creating a European version of the International Monetary Fund (IMF) so IMF style resources and expertise could be used, while solving the problem within Europe. The plan is also backed by France, the Socialists and the Italian President who stated that "The European Central Bank (and) the European institutions are aware that there's something missing from our common tool box to tackle unforeseen and serious crises in one of the Eurozone nations." The Commission is preparing a formal proposal on an EMF (76) however some see the plan as too far fetched as there is no appetite for treaty reform after Lisbon. (75)
Regardless, an EMF or EDA would not be operational in time to help Greece. French President Sarkozy declared that "France is by the side of Greece in the most resolute fashion ... The euro is our currency. It implies solidarity. There can be no doubt on the expression of this solidarity" and that if the Eurozone let a member fail, there would have been no point in creating the currency. (76) In the long term, Germany wants an EMF to be accompanied by stronger enforcement mechanisms: for example a country that does not reign in its debt can have its EU funds withdrawn or its voting rights suspended. However, such plans are opposed by key EU member states such as France and Italy. (77)
The proposals may result in the biggest overhaul of the Eurozone since the euro's launch. With the guarantee that a member state would be bailed out, the market based system where a state must keep its own finances in check is being replaced by a state-run system with the EU bailing out countries in return for oversight over their finances. This is seen as vital as a Greek collapse would bring the rest of the EU with it; although Germany would be a big financial contributor, its industry relies on exports and its banks have investments in Greece. It requires giving up another chunk of sovereignty, funds or financial independence and would give the Eurozone a stronger base of a fiscal-political union that has been another weak point in its design. (78)
The European Stability Mechanism is the expected implementation of some of the proposed measures.
Other proposals
Spain has proposed that the EU enact the article in the Lisbon Treaty which will create the European Public Prosecutor. Spain for its part wants this new EU organ to co-ordinate legal action against those speculators who were attacking the euro. (79)
Finally, French President Nicolas Sarkozy called for the Eurogroup to be replaced by a "clearly identified economic government" for the Eurozone, stating it was not possible for the Eurozone to continue without it. The Eurozone economic government would discuss issues with the European Central Bank, which would remain independent. (80) This government would come in the form of a regular meeting of the Eurozone heads of state and government (similar to the European Council) rather than simply the finance ministers which happens with the current Eurogroup. Sarkozy stated that "only heads of state and government have the necessary democratic legitimacy" for the role. This idea was based on the meeting of Eurozone leaders in 2008 who met to agree a co-ordinated Eurozone response to the banking crisis. (81)
This is in contrast to an early proposal from former Belgian Prime Minister Guy Verhofstadt who saw the European Commission taking a leading role in a new economic government, something that would be opposed by the less integrationist states. (33) Sarkozy's proposal was opposed by Eurogroup chair Jean-Claude Juncker who does not think Europe is ripe for such a large step (33) and opposition from Germany killed off the proposal. (70) (81) Merkel approved of the idea of an economic government, but for the whole of the EU, not just the Eurozone as doing so could split the EU and relegate non-euro states to second class members. (70) The Euro Plus Pact implements some of these ideas.
European sovereign debt crisis (2010-present)
In early 2010, fears of a sovereign debt crisis, the 2010 Euro Crisis (1) developed concerning some European states, (2) including European Union members Greece, (3) Ireland, Portugal, Spain, (4) and Belgium. This led to a crisis of confidence as well as the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany. (5) (6)
Concern about rising government deficits and debt levels (7) (8) across the globe together with a wave of downgrading of European government debt (9) created alarm in financial markets. On 9 May 2010, Europe's Finance Ministers approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility. (10)
In 2010 the debt crisis was mostly centred on events in Greece, where there was concern about the rising cost of financing government debt. On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh Greek austerity measures. (11) The Greek bail-out was followed by a €85 billion rescue package for Ireland in November, and then in April 2011 Portugal began negotiations with the European Commission, the European Central Bank and the International Monetary Fund on the Eurozone's potential third bailout. (12)
Niall Ferguson wrote in 2010 that "the sovereign debt crisis that is unfolding...is a fiscal crisis of the western world". (13)
Greek government funding crisis
Causes
The Greek economy was one of the fastest growing in the Eurozone during the 2000s; from 2000 to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. (14) A strong economy and falling bond yields allowed the government of Greece to run large structural deficits. According to an editorial published by the Greek newspaper Kathimerini, large public deficits are one of the features that have marked the Greek social model since the restoration of democracy in 1974. After the removal of the right leaning military junta, the government wanted to bring disenfranchised left leaning portions of the population into the economic mainstream. (15) In order to do so, successive Greek governments have, among other things, run large deficits to finance public sector jobs, pensions, and other social benefits. (16) Since 1993 debt to GDP has remained above 100%. (17)
Public debt as a percent of GDP (2007).
Public debt as a percent of GDP (2009/2010).
Initially currency devaluation helped finance the borrowing. After the introduction of the euro in Jan 2001, Greece was initially able to borrow due to the lower interest rates government bonds could command. The global financial crisis that began in 2008 had a particularly large effect on Greece. Two of the country's largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009. (17)
To keep within the monetary union guidelines, the government of Greece has been found to have consistently and deliberately misreported the country's official economic statistics. (18) (19) In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. (20) The purpose of these deals made by several subsequent Greek governments was to enable them to spend beyond their means, while hiding the actual deficit from the EU overseers. (21) The emphasis on the Greek case has tended to overshadow similar irregularities, usage of derivatives and "massaging" of statistics (to cope with monetary union guidelines) that have also been observed in cases of other EU countries, especially Italy; (22) (23) (24) however Greece was seen as the worst case.
In 2009, the government of George Papandreou revised its deficit from an estimated 6% (8% if a special tax for building irregularities were not to be applied) to 12.7%. (25) In May 2010, the Greek government deficit was estimated to be 13.6% (26) which is one of the highest in the world relative to GDP. (27) Greek government debt was estimated at €216 billion in January 2010. (28) Accumulated government debt is forecast, according to some estimates, to hit 120% of GDP in 2010. (29) The Greek government bond market is reliant on foreign investors, with some estimates suggesting that up to 70% of Greek government bonds are held externally. (30)
Estimated tax evasion costs the Greek government over $20 billion per year. (31) Despite the crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January). (32) According to the Financial Times on 25 January 2010, "Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government had reckoned on." In March, again according to the Financial Times, "Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that amount." (33)
Downgrading of debt
On 27 April 2010, the Greek debt rating was decreased to the first levels of 'junk' status by Standard & Poor's amidst fears of default by the Greek government. (34) Yields on Greek government two-year bonds rose to 15.3% following the downgrading. (35) Some analysts question Greece's ability to refinance its debt. Standard & Poor's estimates that in the event of default investors would lose 30-50% of their money. (34) Stock markets worldwide declined in response to this announcement. (36)
Following downgradings by Fitch, Moody's and S&P, (37) Greek bond yields rose in 2010, both in absolute terms and relative to German government bonds. (38) Yields have risen, particularly in the wake of successive ratings downgrading. According to The Wall Street Journal, "with only a handful of bonds changing hands, the meaning of the bond move isn't so clear." (39)
On 3 May 2010, the European Central Bank suspended its minimum threshold for Greek debt "until further notice", (40) meaning the bonds will remain eligible as collateral even with junk status. The decision will guarantee Greek banks' access to cheap central bank funding, and analysts said it should also help increase Greek bonds' attractiveness to investors. (41) Following the introduction of these measures the yield on Greek 10-year bonds fell to 8.5%, 550 basis points above German yields, down from 800 basis points earlier. (42) As of 26 November 2010, Greek 10-year bonds were trading at an effective yield of 11.77%. (43)
Austerity and loan agreement
On 5 March 2010, the Greek parliament passed the Economy Protection Bill, expected to save €4.8 billion (44) through a number of measures including public sector wage reductions. On 23 April 2010, the Greek government requested that the EU/IMF bailout package be activated. (45) The IMF had said it was "prepared to move expeditiously on this request". (46) Greece needed money before 19 May, or it would face a debt roll over of $11.3bn. (47) (48) (49)
On 2 May 2010, a loan agreement was reached between Greece, the other Eurozone countries, and the International Monetary Fund. The deal consisted of an immediate €45 billion in loans to be provided in 2010, with more funds available later. A total of €110 billion has been agreed. (50) (51) The interest for the Eurozone loans is 5%, considered to be a rather high level for any bailout loan. The government of Greece agreed to impose a fourth and final round of austerity measures. These include: (52)
Public sector limit of €1,000 introduced to bi-annual bonus, abolished entirely for those earning over €3,000 a month.
An 8% cut on public sector allowances and a 3% pay cut for DEKO (public sector utilities) employees.
Limit of €800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over €2,500 a month.
Return of a special tax on high pensions.
Changes were planned to the laws governing lay-offs and overtime pay.
Extraordinary taxes imposed on company profits.
Increases in VAT to 23%, 11% and 5.5%.
10% rise in luxury taxes and taxes on alcohol, cigarettes, and fuel.
Equalization of men's and women's pension age limits.
General pension age has not changed, but a mechanism has been introduced to scale them to life expectancy changes.
A financial stability fund has been created.
Average retirement age for public sector workers has increased from 61 to 65. (53)
Public-owned companies to be reduced from 6,000 to 2,000. (53)
On 5 May 2010, a nationwide general strike was held in Athens to protest to the planned spending cuts and tax increases. Three people were killed, dozens injured, and 107 arrested. (54)
According to research published on 5 May 2010, by Citibank, the EMU loans will be pari passu and not senior like those of the IMF. In fact the seniority of the IMF loans themselves has no legal basis but is respected nonetheless. The loans should cover Greece's funding needs for the next three years (estimated at €30 billion for the rest of 2010 and €40 billion each for 2011 and 2012). Citibank finds the fiscal tightening "unexpectedly tough". It will amount to a total of €30 billion (i.e. 12.5% of 2009 Greek GDP) and consist of 5% of GDP tightening in 2010 and a further 4% tightening in 2011. (55)
Danger of default
Without a bailout agreement, there was a possibility that Greece would have been forced to default on some of its debt. The premiums on Greek debt had risen to a level that reflected a high chance of a default or restructuring. Analysts gave a 25% to 90% chance of a default or restructuring. (56) (57) A default would most likely have taken the form of a restructuring where Greece would pay creditors only a portion of what they were owed, perhaps 50 or 25 percent. (58) This would effectively remove Greece from the euro, as it would no longer have collateral with the European Central Bank. (citation needed) It would also destabilise the Euro Interbank Offered Rate, which is backed by government securities. (59)
Because Greece is a member of the Eurozone, it cannot unilaterally stimulate its economy with monetary policy. For example, the U.S. Federal Reserve expanded its balance sheet by over $1.3 trillion USD since the global financial crisis began, essentially printing new money and injecting it into the system by purchasing outstanding debt. (60)
The overall effect of a probable Greek default would itself be small for the other European economies. Greece represents only 2.5% of the Eurozone economy. (61) The more severe danger is that a default by Greece will cause investors to lose faith in other Eurozone countries. This concern is focused on Portugal and Ireland, both of whom have high debt and deficit issues. (62) Italy also has a high debt, but its budget position is better than the European average, and it is not considered among the countries most at risk. (63) Recent rumours raised by speculators about a Spanish bail-out were dismissed by Spanish Prime Minister Mr. Zapatero as "complete insanity" and "intolerable". (64) Spain has a comparatively low debt among advanced economies, at only 53% of GDP in 2010, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy, Ireland or Greece, (65) and it doesn't face a risk of default. (66) Spain and Italy are far larger and more central economies than Greece; both countries have most of their debt controlled internally, and are in a better fiscal situation than Greece and Portugal, making a default unlikely unless the situation gets far more severe. (67)
Objections to proposed policies
PIGS: Portugal, Italy, Greece and Spain
PIIGS: with Ireland
PIIGGS: with United Kingdom (Great-Britain)
The crisis is seen as a justification for imposing fiscal austerity (68) on Greece in exchange for European funding which would lower borrowing costs for the Greek government. (69) The negative impact of tighter fiscal policy could offset the positive impact of lower borrowing costs and social disruption could have a significantly negative impact on investment and growth in the longer term. Joseph Stiglitz has also criticized the EU for being too slow to help Greece, insufficiently supportive of the new government, lacking the will power to set up sufficient "solidarity and stabilization framework" to support countries experiencing economic difficulty, and too deferential to bond rating agencies. (70)
As an alternative to the bailout agreement, Greece could have left the Eurozone. Wilhelm Hankel, professor emeritus of economics at the University of Frankfurt am Main suggested (71) in an article published in the Financial Times that the preferred solution to the Greek bond 'crisis' is a Greek exit from the euro followed by a devaluation of the currency. Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.
Spread beyond Greece
The government surplus or deficit of United Kingdom, Portugal, Italy, Ireland, Greece, United Kingdom, and Spain against the European Union and the Eurozone 2002-2009
A graph showing the economic data from Portugal, Italy, Ireland, Greece, United Kingdom, Spain (PIIGGS), Germany, the EU and the Eurozone for 2009. The data is taken from Eurostat.
One of the central concerns prior to the bailout was that the crisis could spread beyond Greece. The crisis has reduced confidence in other European economies. Ireland, with a government deficit of 14.3% of GDP, the U.K. with 12.6%, Spain with 11.2%, and Portugal at 9.4% are most at risk. (72) (73) (74)
On the positive side, The Economist acknowledged on 27 May 2010 that while Europe's "profligate economies will struggle ... as austerity kicks in," it also pointed out that "waning confidence will be mitigated by the boost that exports receive from the euro’s plunge." (75)
Financing needs for the Eurozone in 2010 come to a total of €1.6 trillion, while the US is expected to issue US$1.7 trillion more Treasury securities in this period, (76) and Japan has ¥213 trillion of government bonds to roll over. (77) The country’s most at risk are those that rely on foreign investors to fund their government sector. According to Ferguson similarities between the U.S. and Greece should not be dismissed. (78)
For 2010, the OECD forecasts $16,000bn will be raised in government bonds among its 30 member countries. Greece has been the notable example of an industrialized country that has faced difficulties in the markets because of rising debt levels. Even countries such as the US, Germany and the UK, have had fraught moments as investors shunned bond auctions due to concerns about public finances and the economy. (79) According to Niall Ferguson in the Financial Times: "Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries by the Federal Reserve and reserve accumulation by the Chinese monetary authorities. But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year." (80)
Ireland
In April 2010, following a marked increase in Irish 2-year bond yields, Ireland's NTMA state debt agency said that it had "no major refinancing obligations" in 2010. Its requirement for €20 billion in 2010 was matched by a €23 billion cash balance, and it remarked: "We're very comfortably circumstanced". (81) On 18 May the NTMA tested the market and sold a €1.5 billion issue that was three times oversubscribed. (82)
The December 2008 hidden loans controversy within Anglo Irish Bank led to the resignations of three executives, including chief executive Sean Fitzpatrick. A mysterious "Golden Circle" of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank in 2008.
An article of emergency legislation, known as the Anglo Irish Bank Corporation Bill 2009 was passed to nationalize Anglo Irish Bank was voted through Dáil Éireann and passed through Seanad Éireann without a vote on 20 January 2009. (83) President Mary McAleese then signed the bill at Áras an Uachtaráin the following day, confirming the bank's nationalisation. (84)
Spain