EUROPEAN

FINANCIAL
CRISIS
:BY
ABDELRAHMAN
ELMAHDY
:SUPERVISED BY
MAHMOUD EMARA
PROF. SHERIFF ABDELFATTAH
MOHAMED MULSIM
KAMAL BADAWY
MAGED EWAIS
HISTORY BRIEF

After the world war II, Europe was devastated, the fastest
way to rebuild Europe was to begin to remove trade
barriers.
This gave the leaders in Europe an idea The Unified
Europe a union across the continent that would end all
future wars.
In 1992, there were 15 European countries signed the
Maastricht treaty and created the European union.
In 1st of January 1999, countries adopted one currency
called Euro and called themselves the Euro Area.
Now the Euro area has one monetary policy giving control
to the newly formed European central bank, but still each
country had its own fiscal policy, the key reason for the
current crisis.
WHAT IS THE EUROPEAN DEBT
?CRISIS
Its the failure of Europe, the currency which
ties together 19 European countries in an
intimate but flawed manner.
Over the past three years,, Portugal, Ireland,
Italy, Greece and Spain (PIIGS) have all teetered
on the brink of financial collapse threatening to
bring down the entire continent and rest of the
world
MONETARY VS. FISCAL

Monetary policy: Fiscal policy:

Money supply. Collecting taxes.
Interest rate. Government
Exchange rate. spending.
?HOW DID THIS CRISIS HAPPEN

Before the Euro, weaker economies of EU

(PIIGS) could only borrow at rates around 18%
at the same time country like Germany can
borrow at rate around 3%. After the euro,
weaker economies could now borrow at the
same rate as large countries at rate around 3%.
These small rates encouraged weaker
economies of EU (PIIGS) to increase spending to
impossible levels.
The American financial crisis which spread to
Europe and devastated small countries and
made them suddenly unable to pay their debts
?WHAT DID THE PIIGS DO

1. Ireland The Irish sovereign debt crisis

arose not from government over-
spending, but from the state
guaranteeing the main Irish banks
who had financed the real estate
bubble and sustained giant losses.
The Irish government wound up
rescuing its banks through borrowing
money, and now the country is
burdened under a huge debt load.
WHAT DID THE PIIGS DO?
(CONTINUE)
2. Spain also experienced a huge
housing bubble. The country didn't
indulge in excessive borrowing,
rather, it ended up with high deficits
because it couldn't collect enough tax
revenue to cover its expenses.
WHAT DID THE PIIGS DO?
(CONTINUE)
3. Greece not only borrowed beyond its
means, but exacerbated the problem
with lots of overspending, little
economic production to make up the
difference, and some creative
bookkeeping to prevent euro zone
authorities from realizing the true
extent of the situation.
WHAT DID THE PIIGS DO?
(CONTINUE)
4. Italy and Portugal have huge debt to
GDP ratios, high unemployment and
are struggling with a weak economy.
CAUSES SUMMARY

Rising
household
and
governme
nt debt
levels

Trade
Loss of
imbalance
confidence
s
CAUSE
S

Structural
Monetary
problem of
policy
Eurozone
inflexibility
system
CRISIS CONSEQUENCES:
1- DEBT AS A % OF GDP
CRISIS CONSEQUENCES:
2- UNEMPLOYMENT RATE
CRISIS CONSEQUENCES:
3- PROJECTED GDP
CRISIS CONSEQUENCES:
4- LONG-TERM INTEREST RATE
PROPOSED SOLUTIONS FOR
THE EUROZONE CRISIS
A. European fiscal union
Increased European integration giving
a central body increased control over
the budgets of member states.
Control, including requirements that
taxes be raised or budgets cut, would
be exercised only when fiscal
imbalances developed.
PROPOSED SOLUTIONS FOR
THE EUROZONE CRISIS
B. European bank recovery and resolution
authority
The European Commission approved some 4.5
trillion in state aid for banks, a sum which includes
the value of taxpayer-funded recapitalizations and
public guarantees on banking debts.
The proposal is that each institution would also be
obliged to set aside at least one per cent of the
deposits covered by their national guarantees for a
special fund to finance the resolution of banking.
PROPOSED SOLUTIONS FOR
THE EUROZONE CRISIS
C. Eurobonds
European bondsare suggestedgovernment
bondsissued inEurosjointly by the
18Eurozonenations. Eurobonds are debt
investments whereby an investor loans a certain
amount of money, for a certain amount of time,
with a certain interest rate, to the Eurozone bloc
altogether, which then forwards the money to
individual governments.
It is a way to tackle theEuropean sovereign debt
crisisas the indebted states borrow new funds
at better conditions as they are supported by
the rating of the non-crisis states.
PROPOSED SOLUTIONS FOR
THE EUROZONE CRISIS
D. European Monetary Fund
The aim is to reduce the combined private
and public debt by achieving government
debt is more than 80 to 100 percent of GDP;
non-financial corporate debt is more than 90
percent; privatehousehold debtis more than
85 percent of GDP.
The proposal is to finance by a one-time
wealth tax of between 11 and 30 percent for
most countries or 30-year debt-reduction plan
Thank You
Any
Question?