Eurozone Crisis

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Eurozone Crisis

• Banking Crisis, Break Up, Depression..
• ....or United States of Europe?

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The Global Economy Context

• 1. Limits to Growth Constraints experienced as
  high energy, food and materials costs so that
  growth is flagging anyway and millions struggle
  to find enough purchasing power

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Limits to Growth Constraints Liquid Fuels
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The Global Economy Context

• 1. Limits to Growth Constraints experienced as
  high energy, food and materials costs so that
  growth is flagging anyway and millions struggle
  to find enough purchasing power
• 2. The growing power of the global finance
  sector/casino and its effects in politics and
  financial speculation huge sums of money slosh
  around the world into and out of countries and
  banks looking for safe havens and gambling on
  outcomes of crises making these crises worse..

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The Global Economy Context

• 1. Limits to Growth Constraints experienced as
  high energy, food and materials costs so that
  growth is flagging anyway and millions struggle
  to find enough purchasing power
• 2. The growing power of the global finance
  sector/casino and its effects in politics and
  financial speculation huge sums of money slosh
  around the world into and out of countries and
  banks looking for safe havens and gambling on
  outcomes of crises making these crises worse..
• 3. Uneven development between nations reaching
  their outer limits and unbalancing the global
  economy - e.g. The BRICS, particularly China, vs
  USA and Europe....and the eurozone crisis within
  Europe

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The Global Economy Context

• 1. Limits to Growth Constraints experienced as
  high energy, food and materials costs so that
  growth is flagging anyway and millions struggle
  to find enough purchasing power
• 2. The growing power of the global finance
  sector/casino and its effects in politics and
  financial speculation huge sums of money slosh
  around the world into and out of countries and
  banks looking for safe havens and gambling on
  outcomes of crises making these crises worse..
• 3. Uneven development between nations reaching
  their outer limits and unbalancing the global
  economy - e.g. The BRICS, particularly China, vs
  USA and Europe....and the eurozone crisis within
  Europe
• (4. Ageing society in developed countries
  more and more elderly people dependent on
  pensions from the finance sector....)

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What is the problem in the Eurozone really?

• Current austerity policies treat the problem as
  if it were due to inadequate financial discipline
  by states. i.e. States have spent too much and
  not taxed enough so they need to borrow too
  much.. In this narrative created to bamboozle
  ordinary people states need to adopt policies
  which cut expenditure, raise taxes and privatise
  assets instead of spending and borrowing so
  much...
• Only those countries that sign the
  sado-monetarist fiscal pact can expect to receive
  aid from the European Stability Mechanism (ESM),
  the permanent euro rescue fund which will be
  launched this summer with 700 billion
  available.....

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From 2001 to 2007 fiscal deficits were not high
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There were however considerable trade imbalances
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Germany undermined its competitors

• Germany outcompeted the peripheral countries in
  the eurozone they could no longer devalue
• Before the common currency countries that could
  not compete with German (and other)imports in
  their markets retained competitiveness because
  their separate currencies could be devalued.

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Inability to devalue inside eurozone...

• For example, if Italy was importing more goods
  from Germany than it was exporting back the lira
  depreciated against the deutschmark. So, for
  Italians to continue buying German goods meant
  more lira had be offered for DM and German goods
  became more expensive to Italian importers.
• By contrast Germans buying in Italy (eg on
  holiday) got more lira for a DM and so spent more
  in Italy. Imports of German goods would fall and
  exports to Germany would rise.
• In the common currency zone this adjustment can
  no longer happen. The peripheral countries are
  probably 30 overvalued compared to Germany but
  cannot devalue. Greece is probably 60
  overvalued.
• For a time the peripheral countries borrowed from
  eurozone banks to pay for their import
  surpluses. However that is a temporary solution.
• The German economy is undermining the economies
  of its competitors who are also its customers.
  This had knock on effects on the property markets
  and then on state finances in the eurozone

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Import Surpluses are Deflationary purchasing
power leaks out of the economy abroad

• An import surplus (trade deficit) is
  deflationary, tending to force down income and
  prices. More purchasing power is being spent
  abroad to buy imports than foreigners are
  bringing in to pay for exports and their
  holidays.
• A leakage of purchasing power out of an economy
  caused by imports can be offset for a time by
  people borrowing new bank credit money,
  particularly if bank credit is cheap, as it was
  in the first few years of the eurozone. It also
  helps if households or firms have savings to run
  down to pay for more than they are earning.
• After the 2007 crunch that was no longer
  possible. Companies and individuals saved to pay
  off debts instead so incomes fell as people spent
  less at home and abroad.

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After 2007 the global crash morphed into a
problem of state finances

• Falling incomes created government deficits as
  taxes fell and welfare and unemployment benefits
  rose.
• The import surplus made state funding even more
  of a problem. Healthy domestic businesses from
  which tax revenues could be raised are less while
  welfare and unemployment benefits tend to rise.
• This added to the fact that over the last decades
  most countries had reduced taxes on the rich, on
  property and real estate and put taxes on
  ordinary people and labour instead.
• At the same time broken banks passed their
  property market losses over to governments.

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Governments inherit the debts of banks broken
when a property bubble crashed

• In several countries (eg Ireland and Spain) a
  real estate bubble developed up to 2007 because
  there was still money to be made in building
  houses, infrastructure and to some extent holiday
  homes. Migration was high and credit in the new
  eurozone was cheap. EU funds were available for
  the infrastructure.
• Local government often encouraged land
  development because their revenues were then
  higher.
• If rising land values had been taxed away this
  would have discouraged speculation and helped
  resolve the fiscal crisis but property taxes were
  reduced and taxes put on labour income instead.
• Cheap euros borrowed from the banks pumped up
  real estate and land prices.

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Governments Bail Out the Banks

• When the property bubble burst many banks were
  left with bad debts.
• Governments bailed out the banking system.
• Taxpayers were then on the hook for the debts -
  even though they were struggling because of their
  own debts

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.
• 4. These austerity measures reduce income and
  spending as people and companies cut back more,
  reducing tax takes while elites take their money
  to Switzerland..

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.
• 4. These austerity measures reduce income and
  spending as people and companies cut back more,
  reducing tax takes while elites take their money
  to Switzerland..
• 5. Government deficits get worse.

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.
• 4. These austerity measures reduce income and
  spending as people and companies cut back more,
  reducing tax takes while elites take their money
  to Switzerland..
• 5. Government deficits get worse.
• 6. Rating agencies downgrade country debt ratings
  again.....

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.
• 4. These austerity measures reduce income and
  spending as people and companies cut back more,
  reducing tax takes while elites take their money
  to Switzerland..
• 5. Government deficits get worse.
• 6. Rating agencies downgrade country debt ratings
  again.....
• 7. Riots, strikes and protests eventually means
  that governments fall

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.
• 4. These austerity measures reduce income and
  spending as people and companies cut back more,
  reducing tax takes while elites take their money
  to Switzerland..
• 5. Government deficits get worse.
• 6. Rating agencies downgrade country debt ratings
  again.....
• 7. Riots, strikes and protests eventually means
  that governments fall
• 8. European Union imposes "technocratic" - i.e.
  Unelected rulers - usually former bankers and
  their associates..

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.
• 4. These austerity measures reduce income and
  spending as people and companies cut back more,
  reducing tax takes while elites take their money
  to Switzerland..
• 5. Government deficits get worse.
• 6. Rating agencies downgrade country debt ratings
  again.....
• 7. Riots, strikes and protests eventually means
  that governments fall
• 8. European Union imposes "technocratic" - i.e.
  Unelected rulers - usually former bankers and
  their associates..
• 9. Bankers who have insured debt against
  default lean on politicians behind the scenes
  lest they have to pay out and pressure for
  further austerity on the people

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.
• 4. These austerity measures reduce income and
  spending as people and companies cut back more,
  reducing tax takes while elites take their money
  to Switzerland..
• 5. Government deficits get worse.
• 6. Rating agencies downgrade country debt ratings
  again.....
• 7. Riots, strikes and protests eventually means
  that governments fall
• 8. European Union imposes "technocratic" - i.e.
  Unelected rulers - usually former bankers and
  their associates..
• 9. Bankers who have insured debt against
  default lean on politicians behind the scenes
  lest they have to pay out and pressure for
  further austerity on the people
• 10. People who cannot pay don't pay so the
  prospect of default looms anyway.

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The Debt Deflation Spiral

• 1. Credit rating agencies downgrade countries
  throwing doubt over whether they will repay their
  debts.
• 2. The financial markets demand higher interest
  rates for more risky lending.
• 3. Higher interest rates have to be financed out
  of state budgets so lead to more tax raises on
  ordinary people (though not on elites), cuts in
  services and privatisations.
• 4. These austerity measures reduce income and
  spending as people and companies cut back more,
  reducing tax takes while elites take their money
  to Switzerland..
• 5. Government deficits get worse.
• 6. Rating agencies downgrade country debt ratings
  again.....
• 7. Riots, strikes and protests eventually means
  that governments fall
• 8. European Union imposes "technocratic" - i.e.
  Unelected rulers - usually former bankers and
  their associates..
• 9. Bankers who have insured debt against
  default lean on politicians behind the scenes
  lest they have to pay out and pressure for
  further austerity on the people
• 10. People who cannot pay don't pay so the
  prospect of default looms anyway.
• 11.Banks fear bankruptcy and a domino chain of
  failures as state bonds are downgraded and their
  assets lose value

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Deflationary Spiral
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Sovereign Debt Crises

• A state that has debts but which issues its own
  money supply can always print enough money to
  repay its debts. (Or get its central bank to
  print money and then make the money available to
  the government)
• But that cannot happen in the Eurozone and indeed
  the Treaty of Maastricht outlaws central banks
  creating euros and making them available to
  states...
• So states that get in this deflationary spiral
  can run out of money and need to borrow and not
  have the money to bail out their banks....

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The Sovereign Debt Crisis then exacerbates the
banking crisis

• Another vicious circle
• States bailing out banks by taking on bank bad
  debts themselves become financially vulnerable so
  that their own debts become default risks
• Then banks still holding state debt (bonds) find
  their assets are no longer safe and means, in
  turn, that defaulting states would mean
  defaulting banks
• The sovereign debt problem may also be passed
  through credit default swap markets back to banks
  (though the biggest players find ways to wriggle
  out of their obligations)

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The supposed rescue policies
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European Financial Stability Mechanism

• In return for loans from the EFSF countries must
  adopt German dictated strict austerity measures
  which will reduce incomes thus making state and
  banking sector finances worse an exercise in
  futility...

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Techniques for rescuing the Eurozone
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ECB and the Long Term Refinancing Operation (LTRO)

• What is LTRO?
• The long term refinancing operation (LTRO) is a
  cheap loan scheme for European banks that was
  announced by the European Central Bank (ECB)
  towards the end of 2011 in a bid to help ease the
  eurozone crisis
• Why are banks signing up for LTRO?
• Eurozone banks are strapped for cash, and with
  the ongoing crisis in the region, investors have
  become slow to back them up. As the money starts
  to dry up banks face a potential funding, or
  'liquidity', problem.
• The biggest strain on eurozone banks is repaying
  their debts to bondholders  these redemptions
  are 'absolutely massive' in 2012.
• How does LTRO work?
• Banks in Europe ask the ECB for the loan. The
  loan is then backed up by collateral through the
  banks own national central bank, meaning each
  country vets the collateral for the loans given
  to banks.
• The loans differ from the ECBs previous monthly,
  longer-term lending programme, which allowed
  banks to take money for a three-month term at low
  rates.

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European Banking Crisis The Spanish Government
doesnt want to use the ESFS

• Spanish banks are sitting on roughly 1 trillion
  (1.3 trillion) in shaky loans related to the
  ailing real estate sector -- and urgently need
  fresh capital as a risk buffer. The estimates for
  the cash shortfall range from 50 billion to 200
  billion.
• Since such sums of money would overburden both
  the banks and the government budget, experts
  believe that the Spanish government should
  urgently seek help from the EFSF.
• But Spanish Prime Minister Mariano Rajoy is
  resisting this move, not just because the euro
  partners would basically have a say in governing
  the country, but also because his entire nation
  would then be branded as high risk -- and would
  probably find itself cut off from the
  international financial markets.

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Unemployment

• Euro zone unemployment has hit a record high, and
  job losses are likely to keep climbing as the
  blocs devastating debt crisis eats away at
  businesses ability to hire workers while
  indebted governments continue to cut staff.
• Around 17.4 million people were out of work in
  the 17-nation euro zone in April, or 11 percent
  of the working population, the highest level
  since records began in 1995.

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The Break Up Scenario...
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Leaving the euro and devaluing might solve the
trade imbalances for counries like Greece and
Spain but...

• The value of Euro denominated debt owed to
  external creditors would soar relative to GDP
  denominated in a weakening currency....
• Countries would be forced to default on their
  debts....which are largely to Germany....
• Currently creditors are shifting the entire
  burden of adjustment onto debtors, while the
  "centre" avoids its own responsibility for the
  imbalances but this would rebound on Germany if
  it leads to a break up....

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Too much success is not an advantage Lao Tzu
Tao te Ching
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Germanys export success becomes its Achilles
Heel

• The exports to southern europe exceeded imports
  so Germany earned more from exports than it paid
  for imports. This money balance was used for
  loans to southern europe through the banking
  system so that they could buy the imports from
  Germany
• A wave of defaults in southern europe would mean
  Germanys own banks would need to be bailed out
• At the same time export demand generates a huge
  proportion of German GDP if/when this crashes
  so too will German export markets and thus the
  German economy.....
• Germanys economy is thus very vulnerable if and
  when the euro crashes...

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What would a collapse feel like? No money/credit
no goods...E.g. Energy and pharmaceuticals in
Greece

• 1. Greece's power regulator RAE told Reuters on
  Friday it was calling an emergency meeting next
  week to avert a collapse of the debt-stricken
  country's electricity and natural gas system. RAE
  took the decision after receiving a letter from
  Greece's natural gas company DEPA, which
  threatened to cut supplies to electricity
  producers if they failed to settle their arrears
  with the company.
• 2. The country's pharmacies are owed 500m euros
  by the state-backed healthcare insurer, according
  to reports. From next week patients will have to
  stump up the cash for their medicines upfront,
  and then claim a reimbursement from the National
  Organization for Healthcare Provision (EOPYY). It
  doesn't take a genius to figure out that a)
  medicines tend to be very expensive, b) so paying
  for them may be very difficult for a lot of
  people, especially pensioners. And c) if the
  EOPYY is having trouble paying the pharmacists,
  it's unlikely to find it any easier to reimburse
  individuals.

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Trade Insurance dries up and thus imported
components cease to be available

• Trade insurers have been reviewing their Greek
  exposure ahead of the country's June 17 general
  election, seen as a potential trigger for a euro
  exit if victory goes to parties that oppose
  spending cuts agreed under a European bailout
  deal......
• Reduced availability of insurance cover for
  exports to Greece will likely make it harder for
  manufacturers there to source imported components
  and materials, said Vincent McCue, trade credit
  client team leader at insurance broker Marsh.

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In Summary

• In the context of an unstable and fragile global
  economy loaded down with debt and rising energy
  and materials costs..
• Intra European trade imbalances were deflationary
  in peripheral countries and after 2007 created a
  state and banking finance crisis made worse by
  property market collapses which undermined the
  banks
• Austerity policies are combined with loans to
  states and banks but make the situation worse
  creating a vicious spiral
• The aim of the banks and finance houses in all of
  this are to be left standing after everyone else
  is ruined and state and other assets have been
  transferred to them

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United States of Europe?(or a German takeover of
Europe)
The plan could see vast national debt and
banking liabilities pooled and then backed by
the financial strength of Germany in return for
eurozone governments surrendering sovereignty
over their budgets and fiscal policies to a
central eurozone authority. A "gang of four"
the European council president, the commission
chief, the president of the European Central Bank
and the head of the eurogroup of 17 finance
ministers has been charged with drafting the
proposals for a deeper eurozone fiscal union, to
be presented to an EU summit at the end of the
month.