EuroCrisis-Basics by Rock

От автора Moscowguy Studentki в группе Crock HSE Money Talk Group · Редактировать документ

You may notice that I have been stressing the European crisis this semester. It is the biggest challenge to the global economy today and can make all of us worse off if it develops in the worst way possible.  Hence, high likelihood (predict your professor's behavior! ;-)  to maybe ask a question or more on the final exam about this Number 1 issue in money, banking and financial institutions. 

So I made this document up to help you master a complex of issues under this heading.  Cheers., Doc Rock

 

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The Eurozone crisis update:

First, just below: Summary points (A,B,C & D) of financial/monetary problem etc. in Eurozone;   

Second, after, Graphics links on Eurozone crisis;

Third, at end:  Answers (policies to adobpt) 3-ideologies to cure market crisis of ‘real economy’ crisis

 

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What is this European “financial crisis”?  Here is a listing of the elements that make this situation so serious and so dangerous (threat of decline of the real economy, and the political instabilities and dangers that make many recall the evils that came to power in the 1930s in that era of economic failure).  These aspects are found both in the Eurozone (euro-economies) and in some other EU-member/non-euro countries, as well as in other non-EU European countriest:

 

A:  FINANCIAL AND MONETARY ASPECTS: 

--(1) ‘The Eurodebt Crisis’:   Sovereign (GOVERNMENT) DEBT of several countries REFINANCING PRICE (INTEREST RATE) IS HIGH, around 7% currently for Italy and some other countries, and even higher for Greece.  Succeeding in the repayment of debt become more difficult at higher prices and government debt can even grow larger with these high prices (refinancing interest rates). 

----Possible Negative Effects of Eurodebt crisis:  Many countries pay more to keep borrowing or refinancing existing debt as needed.  For individual countries who defaultàDifficulty borrowing at all or having to pay extraordinarily high rates with special conditions (e.g.Greece so far cut repayment to 50% of value ‘voluntarily’ agreed to by banks.) Cannot carry out desired stimulus policy at all, due inability to borrow.

--(2)  The ‘European Banking Crisis’:  Balance sheets of European banks are not in good shape.  They have a lot of BAD OR DOWNGRADED ASSETS (e.g. European Governments’ bonds).  Some banks also face a loss of investor and depositor confidence in them, so there may be DECLINING DEPOSITS on the liabilities side of the balance sheet.  Many banks CAPITAL IS TOO LOW to be able to provide a cushion in case of further balance sheet deterioration.   

----Possible Negative Effects of Euro Banking crisis:  Banks may reduce lending to business (slowing economic activity or making growth even negative).  Some banks require governmental bailouts (already several countries, e.g. Ireland, Belgium) that are quite costly to public budgets.  Bank panics as people and other depositors withdraw funds from banks,  http://www.guardian.co.uk/business/2011/dec/16/greeks-fearing-collapse-of-eurozone-bailout-pulled-record-sums-from-bank  accelerating the crisis for these banks and making some go into insolvency (legally bankrupt) and disappearing or being taken over by government (bailouts). 

--(3) A possible ‘Systemic Financial Crisis’:  The potential necessity for widespread  ‘Government Spending or Financing of Banks in Trouble.’  If banks become severely illiquid or bankrupt they will need help to survive and prevent ‘contagion’ where all banks lose the trust of consumers & investors that can produce further bank weakening of balance sheets.  Some banks will/may need EXTERNAL BAILOUTS of some kind to survive. 

----Possible Negative Effects of Financial System crisis:  Worst case: Credit freeze of no lending to anyone.  Major banks across Europe go into failure (illiquidity hits some, many, most…no one knows for sure to what extent banks are near such a point if they cannot borrow for liquidity purposes) and ‘general banking panic’ as everyone tries to take cash out of banking system.  Market system as a whole is threatened with full-scale collapse; if so, then expect novel, radical political changes in economic policies and intervention on a massive scale to try and stop such a crisis from leading to total collapse.   Not the worst scenario:  Credit becomes very very difficult to obtain for non-financial businesses and the market system slows down very rapidly as businesses have to operate without traditional credit access; some non-financial firms may go into insolvency (if highly leveraged balance sheets and not enough income flows to sustain operations) and/or massive lay-offs of employees.  European-wide effects and more slowly, major global impact of this, especially on trading partners and especially those exporting a lot to Europe (e.g. China, Asia, USA, etc.)

--(4) ECB as the LENDER-OF-LAST-RESORT?  This is another monetary/financial question for the Eurozone (countries using the Euro currency) is what role can be expected from the Euro-Central Bank (ECB).  The charter of the ECB specifically states that the ECB CANNOT PURCHASE GOVERNMENT DEBT from its member countries so this alternative seems off the table of possibilities at present.  It may also be legally impossible (without a change in rules) for the ECB to ISSUE EUROBONDS BACKED BY THE ENTIRE EUROZONE system; this would effectively make the bonds for any country guaranteed by all the members of the Eurozone (the 17 of the 27 in the EU; 10 are not members of the Euro currency).  The ECB can help lend to banks, but is reluctant to do so on a large scale (and question of bank holdings of public debt is unclear it appears).  An alternative being followed is for the ECB to use the IMF (International monetary Fund, a global institution) as intermediary for providing help to Eurozone governments in difficulty.  Political pressures in each of the 17 member countries of the Eurozone make agreement on what to do very difficult to achieve.  This is as much a political as an economic crisis situation;  this is usually true in economic crises. 

--(5) Should there be ONE KIND OF EUROBOND for all countries?  Essentially this would mean collective responsibility for all government debts by ALL countries part of the Eurozone (i.e. using the currency and ECB as their own money and Central bank in effect).  This would mean a FISCAL UNION of some kind for the Eurozone countries.  They’d have to have some sort of COMMON PUBLIC BUDGET since their currency would become the guarantor of all Euro-denominated bonds issued by any one of the 17 country-members of the Euro.  There is a sort of agreement on this but the Germans do not want to give the guarantee of All to any Eurobond….so it is not clear what the ‘fiscal union’ will actually be.  It is to be decided in the future so we will only see then what it means.  The problem for the current crisis, is that it does not really do anything specific for the short term crisis (or, perhaps, even for the medium---1-6 or more months challenges).  Curently, no guarantee for any government debt except from the government concerned alone (and, as with Greece, that may not mean much to investors). 

 

B:  “REAL ECONOMY” ASPECTS OF THE CURRENT SITUATION:

--(1) GROWTH OF THE REAL ECONOMY problem:  The future looks like one of LOW RATES OF ECONOMIC GROWTH so that everything becomes more difficult when the size of the ‘economic pie’ is not growing, or in some cases even shrinking.  GDP growth rates are projected for only about +/- 1% or somewhat more in the EU. Some forecasts are for zero or even negative growth of the EU as a whole, depending on what occurs in the rest of the world’s economy. 

--(2) UNEMPLOYMENT, ALREADY HIGH (in some countries) MAY RISE if growth stays low.   Further negative impacts from rising unemployment are often felt especially by the young (less strongly connected to job; first to be let go), the less-well educated (few alternatives for work), and poorest (no savings to fall back on) and those living in countries with the least developed welfare systems (especially former communist countries like Poland, Hungary, Baltics, Bulgaria, Romania, and others with less public assistance programs in southern Europe). 

Also as jobs decline, incomes decline and this can cause spread of business difficulties of finding consumers to buy from them. 

--(3) BUSINESSES AND INVESTMENT are in an uncertain situation.  Uncertainty makes businesses more cautious about new projects or expanding employment.  In fact, businesses may become so cautious that employment is even reduced and spending cut back until the future is more clearly perceived.   Negative effects are less new job creation, less investment means less income for other businesses and a downward ‘vicious cycle’ can continue to make the whole economic situation get worse and worse.