THE CRISIS IN THE

EUROZONE









By: Boldojar Ioana
Bortun Roxana
Branga-Peicu Livia
Butusina Elena
Cazacu Manuela

Group: FABIZ 131

INTRODUCTION

AIter the Second World War, many politicians had the dream oI creating a single
monetary unit Ior the whole oI Europe, namely the euro, which was later established by the
Maastricht Treaty oI the European Union in 1992. The currency oIIicially came into
existence on 1 January 1999. To join the curreny, member states had to qualiIy by meeting all
the terms oI the treaty in regards to budget deIicit, interest rates, inIlation and other monetary
requirements. At that time, although qualiIying, the UK, Sweden and Denmark declined to
join the new currency. Since then it has been a bumpy road Ior the countries using the single
currency.
The eurozone member states have dealt (up to this point) with the crisis in diIIerent
ways. However, it is important to understand that each diIIiculty Ior a single member oI the
eurozone will ripple into diIIiculties Ior the other member states as well due to the Iact that
they share the same currency. To illustate this and discover the crisis in each oI the member
states in the eurozone we will discuss randomly each member state separately.

FRANCE

The French Republic is the largest country in Western Europe,
and it possesses the second largest economy in the EU, aIter Germany.
It is a Iounding member oI the EU and UN, a member oI the
Francophonie, the G8, G20, NATO, OECD, WTO, the Latin Union
and a permanent member oI the UN Security Council. Even though it
may seem that such a strong economy will not Iace any problems, France has also been
aIIected by the global crisis. However, it has been shielded by the worst eIIects oI the
recession.
Among the euro-zone countries, France was blessed to meet only a modest decrease
oI -2.5 oI GDP y-o-y 2009, while in 2010 there was an increase oI 1.5 oI GDP. For
2012, the predictions are oI merely 1 growth, as compared to the previous estimations oI
1.75. The French authorities are announcing the implementation oI Iurther austerity
measures, which however, are not on the liking oI the population.
The unemployment rate in 2009 boosted by 21 compared to the previous year, and
in 2010 it reached its peak oI 9.78. In the Iirst quarter oI 2011, the unemployment rate had
a modest decrease to 9.3 oI population, and the labor market shows limited signs oI
improvement. The strength that France has shown so Iar are mainly grace to the private
consumption and to the robust growth in world trade. But, since the unemployment rate has
reached such a high historical value, it will most probably give a direct hit to France`s
economy.
In 2007, the budget deIicit was oI 2.7 oI GDP and it increased to 7.8 in 2010.
During this period, the public debt also rose Irom 64 to 84 in 2010 and it is expected to
increase to a Iurther value oI over 90 by 2013, while the net asset position was -51 oI
GDP in 2009. These numbers are worrying, and still, investors consider France as being saIe,
which is why the interest rates on government bonds have remained at a low level.
The downturn in the French economy was less severe than in the euro-zone as a
whole, mainly because France is less reliant on exports and because its private consumption
remained at a high level so Iar. The government has put together an agenda oI reIorms and
policies to be implemented, in order to stimulate competition, job creation, to preserve Iiscal
sustainability and to raise welIare. Among those, the retirement age was increased Irom 60 to
62 and Ior Iull pension-entitlements Irom 65 to 67, action that has been seen in almost all
countries aIIected by recession.
While Germany chooses a more conservative approach, and is seriously thinking
about going back to the Deutsche Mark, France is still Iighting to support the common
currency. In the Iuture, France will probably Iace an outIlow oI valuable people leaving Ior
better jobs, which combined with its rigid emigration policies, will lead to a shortage oI
capable workIorce. This situation may mean the need Ior higher spending on health care and
related services, which will drain government aid Iunds. Perhaps this problem is the biggest
challenge France has to deal with in the 21st century.

FINLAND

Finland was at its origins part oI Sweden, until 1809, when it
became an autonomous Grand Duchy under the ruling oI the Russian
Empire. Finland became a Iree republic aIter its Declaration oI
Independence in 1917, joined the EU in 1995 and the euro zone since its
inception in 1999. Finland has a history oI cyclical economy, very easy
to be inIluenced by the shocks oI the global market. The most important characteristics oI
Finland`s welIare state are the high standard oI education, equality promotion, and national
social security system, while its challenges are represented by an aging population and by the
Iluctuations oI an export driven economy.
Finland Ielt the taste oI crisis twice in the recent period, Iirst in 1990, when it entered
a deep depression which caused a 14 decrease in GDP and an unemployment rate oI almost
20. It succeeded to overcome it by implementing strict Iinancial regulation, Iiscal and
employment policies. Short time aIterwards, though, Finland`s economy slipped right backed
into recession at the beginning oI 2009. Finland`s export-driven and traditionally robust
economy didn`t manage to keep the country outside recession, mainly due to the Iall in the
demand oI exports Irom abroad. The main cause behind its economic problems is the Iragile
economic situation oI its trade partners, which aIIected the country`s key industry areas oI
paper and Nokia mobile phones.

The Finnish economy received a grand hit when it`s activity Iell by 8.1 in 2009, as
compared to the previous year, being the largest contraction rate in Europe. Nevertheless, the
economy knew an increase oI 3.1 in 2010, and predictions are Ior a 2.6 increase by the
end oI 2011. The unemployment rate has been slowly increasing, Irom its lowest point oI
6.4 in 2008 to 8.4 oI population in 2010, being currently on the 102 rank on worldwide
level. Even though Finland`s government is Iamous as being one oI the healthiest Iinancially
in Europe, the policies it has been implementing led the economy Irom a budget surplus oI
4.5 oI GDP in 2008, to a budget deIicit oI -3.1 in 2010. In spite oI the sound position oI
the public sector, the private one has a higher debt position (-64 oI GDP in 2009).
The gross public debt increased at 41 in 2010 Irom 35 oI GDP in 2008, but it is
still the lowest one in Europe, and has been achieved by the steadily positive balance surplus
oI the country starting 1998. In spite oI these worrying Iigures, the public debt is
considerably smaller than the public assets (mainly social security Iunds) which peaked at
about 63 oI GDP in 2009.
The Iuture is uncertain Ior Finland, the greatest challenge it has to overcome being its
ageing population. Even though they have a relatively high unemployment rate, the
government is concerned that a workIorce deIiciency will strike this country soon, because
the population is not enough prepared Ior the type oI jobs that will appear on the market
(especially in the IT industry). This Iactor, along with the social support expenses that are
bound to increase soon, might put too much strain on government`s budget.

MALTA

Malta is an archipelago composed oI seven islands, oI which only three
are inhabited: Malta, Gozo and Comino, and is the smallest and most densely
populated country in the European Union. Malta has been under the British rule
since 1800, and gained its independence lately in 1964 as a liberal parliamentary democracy,
changing its statute in 1974 into a republic. Malta ascended to the European Union in 2004
and on the 1
st
oI January 2008 entered into the euro-zone. Although the global crisis started in
2007, all throughout 2008, Malta did not know its eIIects, mainly because its banks had
limited exposure to the sub-prime sector.

With a surIace oI only 316 km
2
, Malta has little natural resources and its economy is
mainly service-based (Iinancial services and tourism). Because oI its scarce natural resources,
Malta has to import most oI its energy and water needs. The demand Ior energy is increased
by the desalination plants, as Malta does not have suIIicient Iresh water resources. The state
also contributed to the rising prices oI utilities when it decided to privatize the water and
energy suppliers.

Because oI its small and open-economy with export and import values oI GDP
around 80, Malta is extremely vulnerable to external shocks. About 25 oI Malta`s GDP is
represented by the manuIacturing industry (although this industry largely consists out oI one
manuIacturer oI micro electronics). The global crisis started aIIecting Malta in this sector
indirectly, due to the recessions oI its economic partners. However, the slowdown in the
manuIacturing industry was visible beIore the start oI the economic crisis.

When it ascended to the EU, in 2004, the level oI public debt was slowly declining
Irom the 2001 level oI 64 oI GDP. However, quickly aIterwards, the trend reversed,
reaching its peak oI 70.9 oI GDP in 2010. Other Iigures show that Malta is slowly
recovering Irom the crisis: the account deIicit decreased in the Iirst quarter oI 2011 to EUR
79.8 million Irom EUR 150 million last year. The goods trade deIicit also narrowed to EUR
88.1 million Irom EUR 173.5 million in 2010. At the same time, Malta knew an increase oI
the surplus balance in the services account Irom EUR 156.6 million to EUR 176.6 million,
while the current transIers account recorded a deIicit oI EUR 12 million, down Irom EUR
16.4 million in 2010.

As a Iuture trend, Malta is expected to continue its economic growth, as shown by the
Iavorable situation in unemployment rate which has slowly decreased in 2010 with 1.79
Irom the 2009` s level oI 7 oI population (which was up 18.14 Irom the 5.92 level oI
2008). However, Malta remains vulnerable to the poor economic situation oI its economic
partners, as it is dependent on Ioreign trade.




PORTUGAL

The Portuguese Republic joined EEC in 1986, the EMU (European
Monetary Union)in 1998 and adopted euro on the 1
st
oI January 2002. At the
time, Portugal`s economy was above the EU average, but started declining at
a Iast rate, the GDP per capita standing now at a mere two-thirds oI EU`s 27
countries.

Portugal Ielt the eIIects oI the global crisis Irom the very beginning, and it is now
on the verge oI bankruptcy, being the 3
rd
most indebted country in the EU, aIter Greece and
Ireland.

The recession has been worsened by the political issues that Portugal has been
conIronting with recently. AIter the Iall oI the Government, the new one also Iailed to
achieve its goal oI reducing the budget deIicit to 5.9 oI GDP as required under the EUR 78
billion bailout program, achieving a decrease to only 8.7 ( which is still an improvement
Irom the 2010 level oI 9.2 oI gross domestic product). Under terms oI the bailout agreed
with the European Union, the International Monetary Fund and the European Central Bank
last month, Portugal must cut its budget deIicit to 3 oI GDP by 2013.
2
This is an over
ambitious goal, we could say, Ior a country that will be conIronted with crisis Ior at least 2
years ahead.
The austerity measures imposed by the government are not very popular, and yet it
will have to reduce spending due to the conditions attached to the Iinancial assistance
program oIIered by the European Commission. Austerity measures imply lower transIers,
higher taxes and rigorous changes to social security system. Another concerning Iactor oI the
crisis is the increasing inIlation rate , up to 4.2 in 2011 Irom a previous value oI 3.6. The
recession also determined an increase in the unemployment rate Irom 10.6 in 2010 to a
historical maximum oI 12.4 in the Iirst quarter oI 2011.
3
In order to stimulate GDP growth
and competitiveness, Portugal`s government is Iocusing on boosting exports and
implementing market labor reIorms. Improvements are hardly achieved, though, because oI
the interdependence oI the economic blocks at global level.
Along with the entry into the euro-zone, the interest rates came down, causing
massive borrowing among the non-Iinancial corporations. This led to a domestic Iund
shortage, coercing banks into becoming more and more dependent on ECB liquidities to
replace mature short-term Iunding, and the situation is Iorecasted to get even worse when the
recession will start pushing up the non-perIorming loans. All oI these aspects are contributing
to the budget deIicit presented earlier and makes it harder Ior the government to push the
Iinancial situation back on track.
In the Iuture, Portugal will move towards more private enterprises and will search to
increase competition. The Government will direct its attention towards attracting more
Ioreign direct investors, which are expected to appear Irom Portugal`s close links with Spain
and Latin America. A consolidation in the Iinancial sector would be beneIicial, with
appearance oI new banks, able to realize economies oI scale and powerIul enough to compete
at European level.

AUSTRIA
Over the past two years, Austria has been through its Iirst
major recession since the early 1980s. Austrian banks, with a large
exposure to Central and Eastern European countries that were hit
hard by the global Iinancial crisis, have been under considerable
strain. Still, the overall impact oI the economic slowdown has not been as severe as in other
advanced economies.
Austria`s international orientation and tradition oI strong property rights are the
backbone oI its economic growth. The government has streamlined time-consuming
regulations, and a comprehensive legal Iramework promotes competition. Foreign investment
requirements are not particularly stringent, and the Iinancial market Iacilitates entrepreneurial
activity. The corporate tax regime is competitive, although individuals still Iace high tax rates
and an onerous overall tax burden.
Austria`s trade policy is the same as that oI other members oI the European Union.
The common EU weighted average tariII rate was 1.2 in 2009. However, the EU has high
or escalating tariIIs Ior agricultural and manuIacturing products, and its MFN tariII code is
complex. EU-wide non-tariII barriers include agricultural and manuIacturing subsidies,
quotas, import restrictions and bans on some goods and services, market access restrictions in
some services sectors, non-transparent and restrictive regulations and standards, and
inconsistent regulatory and customs administration. Ten points were deducted Irom Austria`s
trade Ireedom score to account Ior non-tariII barriers.
Austria has a high income tax rate and a moderate corporate tax rate. The top income
tax rate is 50 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-
added tax (VAT), a tax on insurance contracts, and a tax on real estate transIers. In the most
recent year, overall tax revenue as a percentage oI GDP was 42.9 percent.
Spending is high even in comparison to other European countries. In the most recent
year, total government expenditures, including consumption and transIer payments, equaled
49 oI GDP. Stimulus spending drove public-sector debt to nearly 67 oI GDP.
Sustainability oI the pension program and other social schemes is in jeopardy.
For Ioreign investments, at least one manager must meet residency and other legal
qualiIications, and non-residents must appoint a representative in Austria. Foreign and
domestic private enterprises may establish, acquire, and dispose oI business interests, except
in some inIrastructure areas, utilities, and a Iew state monopolies. Legal, regulatory, and
accounting systems are transparent, but bureaucracy can be cumbersome and unpredictable.
Expropriation is rare and requires special legal authorization.
Austria has one oI the world`s most competitive banking systems. Banks provide a
wide range oI credit and Iinancial services, credit is allocated at market terms, and domestic
and Ioreign investors enjoy unrestricted access to capital markets. The Iive largest banking
groups account Ior around 60 oI total assets. Financial regulations are consistent with
international norms. Foreign exchange is Iully liberalized, and there are no limitations on
cross-border transactions.
CYPRUS

Cyprus has an open, Iree-market, services-based economy with
some light manuIacturing. Cyprus' accession as a Iull member to the
European Union as oI May 1, 2004, has been an important milestone in
its recent economic development. The Cypriots are among the most
prosperous people in the Mediterranean region, with a per capita
income rapidly approaching 100 oI the EU 27 average. Internationally, Cyprus promotes its
geographical location as a "bridge" between three continents, along with its educated
English-speaking population, good airline connections, and telecommunications.
In the past 20 years, the economy has shiIted Irom agriculture and light manuIacturing
to services. Currently, agriculture makes up only 2.3 oI the GDP and employs 7.4 oI the
labor Iorce. Industry, mining, and construction contribute 16.5 and employ 19.3 oI the
labor Iorce. The services sector, including tourism, contributes 81.2 to the GDP and
employs 73.3 oI the labor Iorce. In recent years, the services sector, and Iinancial services
in particular, have provided the main impetus Ior growth, while tourism has been declining in
importance. ManuIactured goods account Ior 58.3 oI domestic exports, while potatoes and
citrus constitute the principal export crops. More than 68.8 oI its imports come Irom the
European Union, particularly Greece, Italy, and Germany, while 1.4 come Irom the United
States.
In 2010, the Cypriot economy expanded by 1.0, buoyed by a rebound in tourism
and Iinancial services, Iollowing a 1.7 contraction in 2009 in the aItermath oI the global
Iinancial crisis. However, Cyprus' path to recovery is still Iraught with diIIiculties. Structural
rigidities in the labor market undermine Cyprus' competitiveness in most sectors, while a
bloated civil service poses special challenges. Tourism, once the engine oI growth Ior the
island, has been stagnating over the last decade, Iacing stiII competition Irom the region.
Growth Ior 2011 is Iorecast at 1.4-1.7. Most analysts agree that Cyprus will Iind it
diIIicult to reach growth rates in excess oI 2.0-2.5 in the coming years--considerably
lower than the 4.0 growth average recorded in the decade preceding the 2009 crisis.
The state payroll represents about 30 oI public spending annually. The government
pledged to engage civil service unions in a discussion to eIIect wide-ranging cutbacks,
including seeking union agreement on shaving t70 million (approx. $96 million) oII the civil
service payroll over 2 years (2011 and 2012) and discussing civil service pension reIorm.
Civil service employees do not contribute toward their own pensions, but this may have to
change in order to saIeguard the long-term viability oI the social security system.
In recent months, all three major credit rating agencies have downgraded Cyprus (both
its sovereign debt and its main banks) over concerns oI Iiscal slippage and exposure oI the
Cypriot Iinancial system to the Greek market and debt. InIlation remained stubbornly above
the average EU 27 level at 2.6 in 2010, a trend continuing in 2011. Unemployment remains
below the average EU level, but its current level oI over 7.0 is a 35-year high Ior Cyprus.

ESTONIA

Estonia, a 2004 European Union entrant, has a modern
market-based economy and one oI the higher per capita income
levels in Central Europe and the Baltic region. Estonia's
successive governments have pursued a Iree market, pro-business
economic agenda and have wavered little in their commitment to
pro-market reIorms. The current government has pursued relatively sound Iiscal policies that
have resulted in balanced budgets and very low public debt. The economy beneIits Irom
strong electronics and telecommunications sectors and strong trade ties with Finland,
Sweden, and Germany. Estonia's economy slowed down markedly and Iell sharply into
recession in mid-2008, primarily as a result oI an investment and consumption slump
Iollowing the bursting oI the real estate market bubble. GDP dropped nearly 15 in 2009,
among the world's highest rates oI contraction. A modest recovery began in 2010, but
unemployment stands above 13. Estonia adopted the euro in January 2011, being the last
country that entered in the euro-zone.

AIter a long period oI very high growth oI GDP, the GDP oI Estonia decreased by a
little over 3 on a yearly basis in the 3rd quarter oI 2008. In the 4th quarter oI 2008 the
negative growth was already 9,4. Still, in 2009 Estonia was one oI the Iive worst
perIorming economies in the world in terms oI annual GDP growth rate. As a measure oI
minimizing the Iinancial crisis impact, on July 2009 Estonian VAT was increased Irom 18
to 20. Estonia's unemployment rate raise up to 18.8 throughout the duration oI the crisis,
then stabilize to 13.8 by the summer 2011. Some oI the reduction in unemployment has
been attributed to some Estonians' travelling abroad (Finland, UK, Australia and elsewhere)
Ior work.

Estonia today is mainly inIluenced by developments in Finland, Russia, Sweden and
Germany the Iour main trade partners. The government recently greatly increased its
spending on innovation. The prime minister Irom the Estonian ReIorm Party has stated its
goal oI bringing Estonian GDP per capita into the top 5 oI the EU by 2022. However, the
GDP oI Estonia decreased by 1.4 in the 2nd quarter oI 2008, over 3 in the 3rd quarter oI
2008, and over 9 in the 4th quarter oI 2008. The Estonian economy Iurther contracted by
15.1 in the Iirst quarter oI 2009. Low domestic and Ioreign demand has depressed the
economy's overall output. The Estonian economy's 33.7 industrial production drop was the
sharpest decrease in industrial production in the entire European Union.

The experts Iorecast that the Estonian economy will stabilize by 2016 as the economy
recovers on the basis oI strong exports (as internal consumption and, thus imports,
plummeted) and cuts in public Iinances.

SLOVENIA

Slovenia became the Iirst 2004 European Union entrant to
adopt the euro (on 1 January 2007) and has become a model oI
economic success and stability Ior the region. With the highest per
capita GDP in Central Europe, Slovenia has excellent inIrastructure, a well-educated work
Iorce, and a strategic location between the Balkans and Western Europe. Privatization has
lagged since 2002, and the economy has one oI highest levels oI state control in the EU.
Structural reIorms to improve the business environment have allowed Ior somewhat greater
Ioreign participation in Slovenia's economy and have helped to lower unemployment. In
March 2004, Slovenia became the Iirst transition country to graduate Irom borrower status to
donor partner at the World Bank. Despite its economic success, Ioreign direct investment
(FDI) in Slovenia has lagged behind the region average, and taxes remain relatively high.
Furthermore, the labor market is oIten seen as inIlexible, and legacy industries are losing
sales to more competitive Iirms in China, India, and elsewhere. In 2009, the world recession
caused the economy to contract - through Ialling exports and industrial production - by more
than 8, and unemployment to rise above 9. Although growth resumed in 2010, the
unemployment rate continued to rise, topping 10.

In the middle oI economic crisis, Slovenian economy suIIered a severe setback. In
2009, the Slovenian GDP per capita shrunk by 7.33 , which was the biggest Iall in the
European Union aIter the Baltic countries and Finland. Unemployment rose Irom 5.1 in
2008 to 11.1 in November 2010, which was above the average in the European Union and
is as oI February 2011 still rising. In January 2011, the total national debt oI Slovenia was
unknown, but has been estimated by media to amount to 22,43 billion Euro or almost 63 oI
GDP, surpassing the European Union limit oI 60 oI GDP.

On 11 November 2011, interest rates on the 10-year government bonds oI Slovenia
surged past the 7 mark, in the context oI the European sovereign debt crisis. Experts
conclude that taking into account that Slovenia is a small country, the external debt remains
large. However, there is not big cause Ior much concern as Slovenia is saIely inside the Euro-
zone. It is unlikely though that external debt can grow once again quickly in the coming
years. As Slovenia will be impacted by the aging oI the population soon, a positive net
investment position would be better, especially as Slovenia already enjoys a high per capita
income (real GDP per capita USD 20,872 in 2008), which means that the long-term growth
rate cannot be expected to be Iar above the rather low rate oI growth oI the rest oI the euro-
zone.


SPAIN

Spain's mixed capitalist economy is the 12th largest in the world,
and its per capita income roughly matches that oI Germany and France.
However, aIter almost 15 years oI above average GDP growth, the
Spanish economy began to slow in late 2007 and entered into a recession
in the second quarter oI 2008. GDP contracted by 3.7 in 2009, ending
a 16-year growth trend, and by another 0.4 in 2010, making Spain the
last major economy to emerge Irom the global recession. The reversal in Spain's economic
growth reIlects a signiIicant decline in the construction sector, an oversupply oI housing,
Ialling consumer spending, and slumping exports. Government eIIorts to boost the economy
through stimulus spending, extended unemployment beneIits, and loan guarantees did not
prevent a sharp rise in the unemployment rate, which rose Irom a low oI about 8 in 2007 to
20 in 2010. The government budget deIicit worsened Irom 3.8 oI GDP in 2008 to about
9.7 oI GDP in 2010, more than three times the euro-zone limit. Spain's large budget deIicit
and poor economic growth prospects have made it vulnerable to Iinancial contagion Irom
other highly-indebted euro zone members despite the government's eIIorts to cut spending,
privatize industries, and boost competitiveness through labor market reIorms.

According to the Financial Times, was Spain's rapidly growing trade deIicit, which
had reached a staggering 10 oI the country's GDP by the summer oI 2008,

the "loss oI
competitiveness against its main trading partners" and, also, as a part oI the latter, an inIlation
rate which had been traditionally higher than the one oI its European partners, back then
especially aIIected by house price increases oI 150 Irom 1998 and a growing Iamily
indebtedness (115) chieIly related to the Spanish Real Estate boom and rocketing oil prices.

In July 2009, the IMF worsened the estimates Ior Spain's 2009 contraction, to minus
4 oI GDP Ior the year (close to the European average oI minus 4.6), besides, it estimated
a Iurther 0.8 contraction oI the Spanish economy Ior 2010, the worst prospect amid
advanced economies. The estimation oI the IMF was proven to be somewhat too pessimistic,
as Spain's GDP sank less than that oI most advanced economies in 2009 and by the Iirst
quarter oI 2010 had already emerged Irom the recession.

Spain's unemployment rate hit 17.4 at the end oI March, with the jobless total
having doubled over the previous 12 months, when two million people lost their jobs; with
the oversized building and housing related industries contributing greatly to the rising
unemployment numbers. In this same month, Spain Ior the Iirst time in its history had over
4,000,000 people unemployed, an especially shocking Iigure even Ior a country which had
become used to grim unemployment data.

At the beginning oI 2010, Spain's public debt as a percentage oI GDP was still less
than those oI Britain, France or Germany. However, commentators pointed out that Spain's
recovery is Iragile, that the public debt was growing quickly, that troubled regional banks
may need large bailouts, growth prospects were poor and thereIore limiting revenue and that
the central government has limited control over the spending oI the regional governments.
The central government Iound itselI in the diIIicult position oI trying to gain support Ior
unpopular spending cuts Irom the recalcitrant regional governments.The experts Iorecast that
the economy oI Spain will be stagnating in the next several years.

GERMANY

The German economy - the IiIth largest economy in the world
in PPP terms and Europe's largest - is a leading exporter oI
machinery, vehicles, chemicals, and household equipment and
beneIits Irom a highly skilled labor Iorce. Like its western European
neighbors, Germany Iaces signiIicant demographic challenges to
sustained long-term growth. Low Iertility rates and declining net immigration are increasing
pressure on the country's social welIare system and necessitate structural reIorms. The
modernization and integration oI the eastern German economy - where unemployment can
exceed 20 in some municipalities - continues to be a costly long-term process, with annual
transIers Irom west to east amounting in 2008 alone to roughly $12 billion. ReIorms launched
by the government oI Chancellor Gerhard SCHROEDER (1998-2005), deemed necessary to
address chronically high unemployment and low average growth, contributed to strong
growth in 2006 and 2007 and Ialling unemployment, which in 2008 reached a new post-
reuniIication low oI 7.8. These advances, as well as a government subsidized, reduced
working hour scheme, help explain the relatively modest increase in unemployment during
the 2008-09 recession - the deepest since World War II - and its healthy decrease in 2010.
GDP contracted nearly 5 in 2009 but grew by 3.3 in 2010.

Germany crept out oI recession thanks largely to rebounding manuIacturing orders
and exports - primarily outside the Euro Zone - and relatively steady consumer demand.
Stimulus and stabilization eIIorts initiated in 2008 and 2009 and tax cuts introduced in
Chancellor Angela MERKEL's second term increased Germany's budget deIicit to 3.3 in
2009 and to 3.6 in 2010. The EU has given Germany until 2013 to get its consolidated
budget deIicit below 3 oI GDP. A new constitutional amendment likewise limits the Iederal
government to structural deIicits oI no more than 0.35 oI GDP per annum as oI 2016.

Germany staged a robust economic recovery in 2010 (GDP was up by 3.5). The
main growth driver is the external sector, thanks to a competitive economy well positioned to
beneIit Irom a global recovery. In particular, German industrial expertise in capital goods
production has helped it to beneIit Irom strong growth in the emerging markets, especially
Asia (exports to Asia accounted Ior 15 oI total exports in 2010). The good news is that
capacity utilization rates are returning to long-term averages, which bodes well Ior Iixed
investment. However, private consumption is not supporting the recovery to the extent that
we deem desirable given the Iavorable labor market dynamics. And the recent slippage oI
consumer conIidence in April does not bode well Ior private consumption going Iorward. In
any case, the absence oI high debt levels amongst German households and Iirms means there
is no need Ior deleveraging through private debt reduction, which is acting as a drag on
growth in many advanced economies.

Germany`s Iiscal outlook has improved markedly due to the stronger-than-expected
recovery. The robust macroeconomic backdrop will help reduce the budget deIicit to below
3 in 2012. What`s more, the German government has substantial room Ior Iiscal maneuver
without compromising its very high debt aIIordability should economic growth Ialter.

Private consumption growth is envisaged to be stronger than usual at this stage oI the
upswing, owing to continued employment gains (the unemployment rate has now Iallen to its
lowest level since reuniIication and wage growth is solid). Increased capacity utilization will
underpin investment growth going Iorward. That said, growth will slow slightly since the
government is sticking to its consolidation plan in order to cope with the constitutional rules
oI the 'debt brake rule (this means the structural budget deIicit cannot exceed 0.35 oI
GDP Irom 2016 onwards) even though the country`s Iiscal metrics are improving Iaster than
previously thought. ThankIully, the consolidation measures announced by the government
around EUR80 billion Ior the period 2011-2014 are envisaged to have only moderate
adverse growth eIIects. A non-negligible downside risk is the slowdown in global demand as
major trading partners go through painIul and lengthy deleveraging processes.

In conclusion, experts consider that Germany will quickly recover Irom the crisis. The
biggest worry in this moment is the crisis oI debts in the Euro-zone which aIIects Germany
by aIIecting primarily its trade partners.

IRELAND

The Irish economy has undergone sharp economic
adjustments since late 2008 when its banking sector was hit by the
global Iinancial turmoil. The government`s reaction to the severe
economic recession has consisted mainly oI Iiscal stimulus and
bailouts oI troubled banks. The budget deIicit has been on the rise, and the ballooning cost oI
bank bailouts has prolonged uncertainty in the Iinancial sector and undermined the credibility
oI the government`s Iiscal policies. As a result, a low growth trajectory has become more
likely Ior the Iuture.
On the positive side and despite the ongoing crisis, Ireland`s overall levels oI
economic Ireedom remain high, sustained by such institutional strengths as strong protection
oI property rights, a low level oI corruption, eIIicient business regulations, and competitive
tax rates.
Ireland`s modern, highly industrialized economy perIormed extraordinarily well
throughout the 1990s, but the burst oI a speculative housing bubble in 2008 sent the economy
into a tailspin. In October 2009, Ireland voted in popular reIerendum on the EU`s Lisbon
Treaty Ior a second time and became the Iinal country to ratiIy the treaty.
Ireland`s trade policy is the same as that oI other members oI the European Union.
The common EU weighted average tariII rate was 1.2 percent in 2009. However, the EU has
high or escalating tariIIs Ior agricultural and manuIacturing products, and its MFN tariII code
is complex. Non-tariII barriers reIlected in EU and Irish policy include agricultural and
manuIacturing subsidies, quotas, import restrictions and bans Ior some goods and services,
market access restrictions in some services sectors, non-transparent and restrictive regulations
and standards, and inconsistent regulatory and customs administration among EU members.
Government procurement rules are restrictive. Ten points were deducted Irom Ireland`s trade
Ireedom score to account Ior non-tariII barriers.
Ireland has a relatively high marginal income tax rate but a low corporate tax rate.
The top income tax rate is 41 percent, and the top corporate tax rate is 12.5 percent. Other
taxes include a value-added tax (VAT) and a tax on interest. In the most recent year, overall
tax revenue as a percentage oI GDP was 30.8 percent.
The banking and Iiscal crises signiIicantly altered Ireland`s Iiscal position. In the
most recent year, total government expenditures, including consumption and transIer
payments, jumped to 42 percent oI GDP. At 14.3 percent oI GDP, Ireland`s deIicit is the
largest in the EU. Government debt equals nearly 60 percent oI GDP. Authorities are
committed to budgetary tightening and reductions in the wage bill, welIare beneIits, and
public services to achieve the desired Iiscal adjustment.

SLOVAKIA

Slovak economy one year aIter entering the eurozone - 2009 was
a very tough year Ior the Slovak economy due to the global economic
crisis. This was also Slovakia`s Iirst year in the eurozone. Over that
period all the major economic indices, such as GDP, trade and Ioreign
direct investment, signiIicantly Iell and, additionally, some oI the
indices were worse than in the rest oI the countries in the region.
Bearing in mind the Iact that the country has been present in the eurozone Ior a
relatively short period, it is diIIicult to unambiguously evaluate the proIits and losses
involved in adopting the euro. On the one hand, the competitiveness oI the Slovak economy
has worsened, while on the other, Bratislava has gained stronger conIidence among Ioreign
investors, which gives it access to cheaper capital and improves its prospects Ior economic
development in the Iuture.
Slovakia was aIIected very severely by the global economic crisis. Its GDP Iell
signiIicantly (according to initial estimates, by 5 per cent) similarly as its trade and Ioreign
direct investments. Over the past year, the unemployment rate rose by more than three per
cent, reaching 12.9 in December 2009. Recession worsened the Iinancial condition oI the
country. According to most recent data, the gap in public Iinances reached 6.3 oI GDP,
while in 2008 it was as small as 2.3 oI GDP. The increase in the public deIicit was mainly
the eIIect oI a reduction oI tax revenue.The anti-crisis package adopted by the centre-leIt
government led by Robert Fico, which amount to roughly 0.5 oI GDP Ior both 2009 and
2010, is not a serious burden Ior the state budget.
The main cause oI the recession on the Slovak economy was the global economic
crisis which resulted in lower demand Ior Slovak goods. The situation was additionally
aggravated by the insuIIiciently diversiIied exports structure, which relies predominantly on
the motor and electronic sectors. Another signiIicant Iactor was the rate at which the Slovak
koruna was exchanged (1 euro 30.126 SKK), which seems to have been too high. This
made Slovak exports less competitive than those oI the other countries in the region which
beneIited Irom the decrease in the values oI their national currencies.
The main beneIit oI entering the eurozone is the Iacilitated and cheaper access to
capital (lower interest rates than in the neighbouring countries which are outside the
eurozone). This has enabled Bratislava to signiIicantly reduce its debt service costs.
Additionally, Slovak banks may use the special currency swap line which the European
Central Bank made available at the time oI the crisis (the ECB reIused it to non euro-area
member states despite very strong pressure Irom them).
For the time being, the prospects Ior a Iast expansion oI the eurozone are quite
distant. The countries within the zone have to Iace their own Iinancial diIIiculties and
thereIore do not want to agree to soIten the criteria Ior admission to the eurozone (low budget
deIicit, public debt, inIlation rate and interest rates) or to shorten the transition period.

l1AL?

Italy's public debt to GDP ratio is presently at an
uncomIortably high 120 percent, while it suIIers Irom both very
sclerotic economic growth and a dysIunctional political system.
Monetary policy cannot and must not solve solvency problems oI
states and banks, calling Ior a halt to incessant pressure Irom the rest
oI the world Ior the ECB to violate its own legal mandate with debt monetisation. Many
investors had assumed the ECB would step in to cap Italian yields once Silvio Berlusconi had
the leIt oIIice, giving Mr Monti a "dowry" oI lower borrowing costs to help him shake up the
labour markets as demanded the EU authorities.

Mr Weidmann said that the ECB is prohibited by treaty law Irom acting as a lender-
oI-last resort Ior states, whether directly or covertly through the International Monetary Fund.
What chilled markets most was his comment that Italy's bond yields are "no big deal" and
that the country must sort out its own problems. "Monetary Iinancing will set the wrong
incentives. Fixing an interest rate Ior a country is certainly not compatible with our mandate,"
he said. Political co-operation in Rome Iailed to prevent Italian borrowing costs being
pushed into the "bail-out zone" Ior the second time in a week, prompting warnings Europe is
"heading Ior an almighty crash". Economists warned this month (november 2011) that
Rome's borrowing costs were "unsustainable" even with the help oI the European Central
Bank (ECB). "With no solution to Italy's problems in sight... we are heading Ior an almighty
crash," they said in a note. What investors want to know is whether the ECB is ready to stand
behind the bond markets because it is not clear who else is going to buy EUR 350bn oI Italian
debt over the next year. II we had seen a credible government in Italy six months ago it might
have turned market sentiment, but it may be too late now.

It is diIIicult to see any major change this period Irom the dozen or so preceding it
which bore these characteristics - high volatility, low volume and a Iocus on all things
European. Such was the case last week when the spotlight swung away Irom Greece to Italy.
Thanks to a successIul Italian government bond sale a total collapse was avoided and so
Western markets managed to stabilise.

European banks were in Iocus as US stocks tumbled aIter Credit Suisse was warned
on a possible credit downgrade, while Italian debt investors Iailed to be soothed by the
appointment oI a reIorm premier. That compounded an earlier drop in Iinancials aIter
UniCredit, Italy's largest bank, was one oI the main victims in the broad market risk sell-oII
as it unveiled a record 10.6bn loss in the third quarter and said it would begin laying oII
thousands oI staII. UniCredit's shares plunged as much as 9.6 per cent, though they closed
down by 6.2 per cent.

It will be a race against time as recession risk looms in Italy and the eurozone next
year, while over a IiIth oI Italian public debt comes due over the same period.

GREECE

Evangelos Venizelos, Greece's Iinance minister, said Athens' new
government "must do everything that's required" to avoid bankruptcy and
enact the austerity measures agreed in Brussels last month (september
2011). He said reIorms were necessary to secure an EUR 8bn injection oI
international aid.

Addressing lawmakers beIore she leIt Berlin, Merkel said that the summit's main goal
would be to cut Greece's debt to 120 percent oI gross domestic product by 2020, a level that
international creditors said last week could be achieved iI bondholders accepted voluntary 50
percent losses. Banks bowed to pressure to accept a 50 percent haircut on Greek debt aIter
Merkel made clear it was European leaders' "last word."

The three-pronged approach was right since it deals with the three aspects oI this
crisis: reducing Greece's debt burden, avoiding a credit crunch (by recapitalising the banks)
and preventing contagion to other countries (by boosting the EFSFs lending power). But the
details oI the deal are so Iar rather vague, especially on the EFSF. Details oI the bank
recapitalisation plan have yet to be spelt out as well. The Iirst part oI the plan, the Greek debt
restructuring, aims to reduce Greek government debt Irom 160 oI GDP to 120 oI GDP by
2020. The Eurozone leaders' communique indicates that to achieve this goal, private bond
holders oI Greek debt will assume a voluntary 50 haircut. In addition, Eurozone members
will lend up to euro30 billion to the Greek government immediately and an extra euro100
billion will be made available by 2014. These resources could be use to capitalise the Greek
banking system. The new programme should be agreed beIore the end oI the year and the
exchange oI bonds will take place in January 2012.

The second part oI the package aims at avoiding an outright contraction oI credit in
the region by capitalising European banks. This will be achieved through a two-step process:
Iirst, banks will need to raise euro106 billion oI extra capital by June 2012. Most oI the eIIort
will be done by Greek, Spanish and Italian banks, which will have to raise euro30, euro26
and euro14.7 billion respectively.

Here, a series oI questions and concerns remain unaddressed. For a start, will debt oI
120 oI GDP be sustainable Ior Greece? It remains a very high debt level with, as a result, a
heavy burden oI interest payments. At some point, Greece will presumably return to Iinancial
markets to reIinance its debt but it is doubtIul that it could do so iI debt levels remained that
high. Achieving a lower debt level would require an even larger haircut Ior private investors
which would compound the risk that this process becomes disorderly or debt Iorgiveness by
governments and/or losses Ior the European Central Bank which are currently politically
unacceptable. A second question raised by this latest deal is how is Greece expected to raise
an additional euro15 billion through privatisations? The euro50 billion target set out in the
previous negotiations appeared to be already very ambitious considering that Greece's GDP is
expected to contract over 6 this year and that the current price oI state-owned assets is
likely to be depressed.

Former British Prime Minister Sir John Major sees trouble ahead. He wrote in
Financial Times: "In a sensible world, the southern states would devalue to become
competitive - but they cannot. They are locked in a single currency. And, because they cannot
devalue their currency, they must devalue their living standards and promote reIorms to
enhance eIIiciency. This will take years. Meanwhile, ages must Iall, unemployment will rise
and social unrest may increase. The severity oI this medicine may not be bearable in a liberal
democracy."

The Greek economy now appears to be in virtual IreeIall as indicated by a 12 percent
contraction in real GDP over the past two years and an increase in the unemployment rate to
over 15 percent. This makes a substantial write-down oI Greece's US $450 billion sovereign
debt highly probable within the next Iew months. Such a deIault would constitute the largest
sovereign debt deIault on record.

The IMF now acknowledges that Greece's economic and budget perIormance has
been very much worse than anticipated and that the Greek economy is basically insolvent.
The IMF estimates that Greece's public debt to GDP ratio will rise to at least 180 percent or
to a level that is clearly unsustainable. The IMF is proposing that the European banks accept
a 50-60 cent on the dollar write-down on their Greek sovereign debt holding. This would
have a material impact on the European banks' capital reserve positions.

The European Central Bank (ECB) is correctly warning that a Greek deIault would
have a devastating eIIect on the Greek banking system, which has very large holdings oI
Greek sovereign debt. The ECB is also rightly IearIul that a Greek deIault will soon trigger
similar debt deIaults in Portugal and Ireland since depositors in those countries might take
Iright Iollowing a Greek deIault.

European policymakers are presently engaged in an eIIort to put Iorward a
comprehensive plan to address the crisis ahead oI the Iorthcoming G-20 Summit on
November 3-4, 2011. AIter many months oI denial, they now recognize the severity oI
Greece's solvency problem and the serious risks that a disorderly Greek deIault would pose to
the European economy. The recapitalization oI the European banking system with a view to
creating an adequate cushion Ior the European banks to absorb the losses Irom a Greek
deIault. The essence oI the problem conIronting Greece is one oI solvency rather than one oI
liquidity. Providing additional Iunding to these countries to essentially help it kick the can
down the road does little to resolve this country's solvency problems.


BELGIUM

When Belgium's government collapsed in April 2010 over an
arcane constitutional dispute that Iew Iully understood, it was expected
that new elections would provide impetus Ior much-needed economic
reIorms. The Iederal government in Brussels had been readying itselI to
implement the kind oI austerity measures adopted across Europe. These
were long overdue in Belgium, whose sovereign debt then stood at almost 100 percent oI its
gross domestic product - among the highest ratios in the European Union. Quick action was
required, economists warned. The last thing the country needed, thereIore, was a period oI
political deadlock. Yet aIter elections were held in June 2010, political deadlock is exactly
what Belgium got. The Nieuw-Vlaamse Alliantie, a Flemish separatist party led by Bart De
Wever, became the largest in the Iederal parliament aIter dominating the vote in Flanders, the
richer, Dutch-speaking halI oI the country.

Whereas European GDP growth Iell to 0.2 per cent in the second quarter, the latest Ior
which data are available, Belgium grew 0.7 per cent a quarter, or an annualised 2.8 per cent.
AIter regularly lagging German and French growth in recent years, the past Iew quarters have
shown Belgium outstripping its larger neighbours since the end oI 2010. It even became one
oI Europe's Iastest-growing economies in the second quarter. "Part oI the explanation oI why
the Belgian economy is still strong is that we have been late in introducing measures oI Iiscal
consolidation," Rudi Thomaes, head oI the Iederation oI Belgian enterprises, has said. The
good news may be shortlived, however. Belgium's economic Iate is inextricably tied to that oI
its big trading partners, particularly Germany. A prolonged slowdown there will have a
marked impact on the Belgian economy. And austerity can be kept at bay Ior only so long:
Belgian debt remains near 100 per cent oI GDP, against EU borrowing limits set at 60 per
cent.

Looking at perceived riskiness, Belgium in eIIect now stands halIway between the saIe
"core" countries such as France and Germany, and the eurozone's troubled southern Iringe,
where bail-outs have been required. The authorities say comparing Belgium with Greece or
Portugal is unIair. Even though Belgium's debt is high, its budget deIicit is under the 3 per
cent limit imposed by the EU, and it has high levels oI private savings that can counteract its
public debt. Its economy has Iew oI the structural Ilaws that are plaguing so-called
"peripheral" eurozone countries.

The negotiators Iorming the coming government are debating how to cut spending,
partly mindIul oI the debt market's unwanted attentions. Detailed cuts totalling EUR10bn
($13.6bn) in 2012 are mooted, with the aim oI getting the debt-to-GDP ratio down to 90 per
cent by 2014. AIter years oI inaction caused by political paralysis, austerity has Iinally caught
up with Belgium. Opening up a potential new Iront in the battle to contain the eurozone
crisis, yields on Belgian's 10-year government bonds also jumped to about the 5-per-cent
mark, a warning about the grim state oI the nation's state Iinances and its stagnating economy.



NETHERLANDS

As the euro zone shudders, Europe`s populist politicians are
exploiting its woes to build up support and even threaten some
governments. Strong smaller economies at the heart oI the euro
zone, which have beneIited signiIicantly Irom membership, are
unlikely to leave the euro unilaterally, as some Iar-right parties want.

The government relies on the support oI Wilders`s Freedom Party (PVV), even
though it is not in the ruling coalition. Wilders denies he wants to bring down the government
over the euro but he is playing up a split on a major issue between the coalition and the party
on which it relies Ior survival. By proposing a reIerendum, Wilders has heightened tensions
between his party and the government.
The euro zone debt crisis has already toppled several governments and now threatens
to engulI Dutch Prime Minister Mark Rutte. Rutte has shot down the idea oI quitting the euro,
saying it would be disastrous Ior the export-oriented Dutch economy. But his government has
been criticized Ior supporting bailouts oI countries such as Ireland and Portugal, and a
stability Iund intended Ior Iuture rescues as the euro zone debt crisis spreads like wildIire to
bigger economies like Italy. EijIIinger said the cost to the Netherlands oI returning to the
guilder would be 'a multiple oI what we give to the stability Iund, without any doubt.

For the Netherlands, the EU`s internal market has a beneIit oI around 1,500 to 2,200
euros per citizen per year, and the euro itselI bestows a beneIit oI around 500 euros,
economic policy analysis bureau CPB said in a report this week.'The consequences (oI
leaving the euro) Ior Dutch citizens, Dutch companies, Dutch banks, the entire system,
including the state treasury would be enormous, said Finance Minister Jan Kees de Jager.
Yet opinion polls suggest many Dutch still hanker Ior the guilder, and resent having to pay Ior
Europe`s more proIligate members, particularly while the Dutch government is cutting
spending on healthcare, education, and social security beneIits.

The Netherlands is an exportoriented economy and is noted Ior its stable industrial
relations, low unemployment rate, and a sizable current account surplus. In 2007, Dutch GDP
grew by 3.5. Exports beneIited greatly Irom increased demand in the euro area and
improved price competitiveness. Private consumption increased as a result oI higher real
wages and employment gains. As one oI the most open economies in Europe, the Netherlands
is particularly vulnerable to developments in the global economy. As such, it could not escape
unscathed the global crisis that began in 2008. Economic activity experienced a severe
contraction oI 4 in 2009. The Dutch government`s public Iinances deteriorated sharply,
Irom a surplus in 2008 to a deIicit oI 5.4 in 2010. However, the deIicit is expected to
decrease to 3.7 in 2011 and 2.3 in 2012. Despite the severe economic crisis, the
unemployment rate increased to only 4.5 in 2010 and remains one oI the lowest in the EU.

The subsequent breakdown oI the euro area and global economic growth has caused
a slowdown in the Netherlands as well. According to the International Monetary Fund, long-
term Iiscal sustainability is one oI the key policy priorities. The Netherlands Iaces
considerable challenges with regard to demographics, as the population share oI 20-64 year
olds is decreasing at an accelerating pace. Progress is particularly urgent in labor taxation,
social beneIits, and employment protection to curtail work disincentives Ior Iemales
disadvantaged youth and elderly.


LUXENBOURG

Luxembourg is a member oI the euro zone. InIlation has been
low, averaging 1.6 percent between 2007 and 2009. As a participant in
the EU`s Common Agricultural Policy, the government subsidizes
agricultural production, distorting the prices oI agricultural products.
The government also regulates electricity rates and some Iuel prices and inIluences prices
through state-owned enterprises.
Luxembourg does not discriminate between Ioreign and domestic investment. Most
industries are open to Ioreign investment without any government restrictions. Bureaucratic
procedures, including those Ior licenses and permits, are streamlined and transparent, and
there is Iar less red tape than in larger European countries. Both residents and non-residents
may hold Ioreign exchange accounts. There are no restrictions or barriers with respect to
capital transactions, current transIers, repatriation oI proIits, purchase oI real estate, or access
to Ioreign exchange.
As a global Iinancial hub, Luxembourg`s sophisticated banking sector is well
capitalized and competitive. Regulations are transparent and eIIective. Many oI the world`s
leading banks have subsidiaries in Luxembourg. The Iinancial sector accounts Ior almost 30
percent oI the country`s GDP. The investment Iund industry has been expanding rapidly.
Capital markets are well developed, and trading on the Luxembourg Stock Exchange is very
active. The Iinancial system has been under stress in light oI the recent global Iinancial crisis,
and the government oI Luxembourg joined several other European governments in bailing
out prominent banks.
CONCLUSION
As we can see, each country has Iaced diIIerent problems during the crisis period but
also has had diIIerent solutions and methods oI dealing with the crisis. We can see that
member states do indeed inIluence one another and the crisis that started in Greece is now
aIIecting the whole eurozone. Member states should exchange ideas on how to deal with the
crisis and learn Irom one another, as well as help one another through diIIerent means (such
as putting the European Stability Mechanism in place).


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16. The Daily Telegraph ","Italian unity fails to stem market fears on euro:one [Edition 2] ", the author
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17. ubllcaLlon 1he ually 1elegraph MlxeJ slqools os stotm bollJs 8ot Metkel offets oo blot Cetmooy
ls ptepoteJ to toke oo mote Jebt tlsk Lhe auLhor LvansrlLchard Ambrose nov 13 2011
18. ubllcaLlon llnanclal 1lmes ostetlty to klck lo oftet polltlcol potolysls auLhors lgnal and
SLanley nov 13 2011
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22. PousLon Chronlcle Metkels powet cleot lo ctoftloq Jebt ploo cboocellot sttooqotms ltooce toly
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otoslo eotloq1be otozooe ctlsls uestoblllzloq tbe Clobol cooomy2 CcL 27 2011
25. ubllcaLlon LlLle 8euLers uotcb popollsts explolt eoto zooe ctlsls auLhor Sara Webb 23
november 2011