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THE EUROPENA UNION AND THE EUROZONE Prepared by LINO BRIGUGLIO Professor of Economics University of Malta Delivered at the University of Mauritius Septembe 2017. Layout of the Presentation. The EU – Brief Information Economic and Monetary Union and the Euro Area The Euro Crisis

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  1. THE EUROPENA UNION AND THE EUROZONE Prepared by LINO BRIGUGLIO Professor of EconomicsUniversity of MaltaDelivered at the University of Mauritius Septembe 2017

  2. Layout of the Presentation • The EU – Brief Information • Economic and Monetary Union and the Euro Area • The Euro Crisis • Slow Growth and recent Upswing • Conclusion • Appendix 1: The Greek Conandrum • Appendix 2: The European Central bank • Appendix 3: The Security and Growth Pact • Appendix 4: Quantitiative Easing and fall in Interest Rates

  3. The EU – Brief Information 1

  4. The European Union dwarfed by Asia and Africa

  5. 1. The EU – Brief Information Map of the European Union

  6. 1. The EU – Brief Information EU Population in 2016 totaling 510.3 Million

  7. 1. The EU – Brief Information GDP per capita in the EU member states (2016)

  8. Real GDP Growth Rate (%) Average 2010-2016 1. The EU – Brief Information 8

  9. Real GDP Growth Rate (%) Average 2005-2016 1. The EU – Brief Information 9

  10. Unemployment Rates (%) June 2017 1. The EU – Brief Information 10

  11. Unemployment Rates (%) 2000-2017 1. The EU – Brief Information 11

  12. 1957 to 2013 – From the EC 6 to the EU 28 1. The EU – Brief Information 1957: Germany, France, Italy, Belgium, Netherlands and Luxembourg signed the Treaty of Rome. 1973: Denmark, Ireland and the UK joined the EC 1980s: Greece joins in 1981; Spain and Portugal in 1986 1995: Austria, Finland and Sweden join 2004: Ten Countries join of which eight were central and eastern European countries — the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovenia and Slovakia and two were Mediterranean island states, Cyprus and Malta. 2007: Bulgaria and Romania join 2013: Croatia joins Candidate countries: Macedonia FYR, Montenegro, Serbia and Turkey. Iceland withdrew its candidacy. Potential candidate countries: Albania, Bosnia and Herzegovina and Kosovo.

  13. The Main EU Institutions 1. The EU – Brief Information The European Council are meetings of the Heads of State (quarterly summits). The Council of the European Union is the EU’s main decision-taking body, together with the European Parliament, and attended by Ministers from all member states. The ministers have the authority to commit their governments to the actions agreed in the meetings. The European Parliament members are elected directly by the people in each member state. The EP shares legislative and budgetary power with the Council. There are 751 MEPs. The European Commission is the executive body of the EU. Amongst other things, it takes steps to ensure that EU policies are properly implemented in the member states. The Court of Justice, located in Luxembourg, ensures that EU law is upheld The European Central Bank, located in Frankfurt, with the remit to manages the EU monetary policy and the euro.

  14. Directives and Regulations 1. The EU – Brief Information A regulation has general application and is binding in all Member States. As such, regulations are powerful forms of European Union law. When a regulation comes into force it overrides all national laws dealing with the same subject. A directive is also binding on all Member States regarding the results to be achieved, but leaves it to the national authorities as to the choice of form and methods. Directives are only binding on the member states to whom they are addressed, which can be just one member state or a group of them. In practice however directives are addressed to all member states. These regulations and directive imply that member states forego some aspects of national sovereignty

  15. Economic and Monetary Unionand the Euro Area 2 15

  16. What is EMU? 2. Economic and Monetary Union Economic and Monetary Union (EMU) is part of EU law and is aimed at coordinating economic policy among EU member states, achievement of economic convergence among same states and ultimately adoption of a single currency (the euro). All member states of the European Union are expected to participate in the EMU, although eligibility to adopt the Euro (the third stage of the EMU) is conditional on satisfying the so called Maastricht criteria. Two countries namely Britain and Denmark, have legal opt-outs and are not legally obliged to adopt the euro. Another other seven members are obliged to adopt the euro when they are in line with the Maastricht criteria.

  17. Origins: European Monetary System (EMS) The system of fixed exchange rates, under the Bretton Woods arrangement, ended in 1971. The member states of the European Community decided to take steps to reduce exchange fluctuations between their currencies by means of an intervention in currency markets. This led to the creation of the European Monetary System (EMS) in March 1979. The EMS involved, amongst other things, the creation of a reference currency called the European Currency Unit (ECU) composed of a basket of the currencies of the member states. Each currency had an exchange rate linked to the ECU; bilateral exchange rates were allowed to fluctuate with the ECU within a band of 2.25 %. 2. Economic and Monetary Union

  18. EMU: Three Stages during the 1990s The EMU’s first stage (which began 1 July 1990) involved the abolition of exchange controls. The second stage (which began on 1 January 1994) provided for establishing the European Monetary Institute (EMI) in Frankfurt, with representatives of the governors of the central banks of the EU countries The third stage was the introduction of the euro (which began in January 1999). Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain adopted the Euro for non-cash transactions. Greece joined them on 1 January 2001. 2. Economic and Monetary Union

  19. The Stability and Growth Pact (SGP) The Stability and Growth Pact is a political agreement reached at the European Council in December 1996, aimed at imposing discipline in the government finances of member states. It built on the Maastricht criteria and binds all euro area members to implement the so-called excessive deficit procedure if they do not meet the provisions of the pact, particularly that the budget deficit should be below 3% of GDP and government debt should be below 60% of GDP. Following the euro-crisis the SGP has been reformed with the aim of strengthening fiscal discipline and promote growth. More information about the SGP is given in appendix 3. 3. Stability and Growth Pact 20

  20. The European Central Bank (ECB) The European Central Bank took over from the EMI in 1998 and became responsible for the monetary policy of the EU as a collegial system with the Governors of the Central Banks of member states. Euro notes and coins were issued on January 2002 in twelve euro-area countries. National currencies were eventually withdrawn from circulation. Sweden, Denmark and the UK did not adopt the euro. Following the 2004 enlargement, Slovenia (2007) Malta, Cyprus (2008), Slovakia (2009), Estonia (2011) Latvia (2014) and Lithuania (2015) also adopted the euro. Bulgaria, Croatia, Czech Republic, Hungary, Romania and Poland will adopt the euro when they are ready to do so in line with the Maastricht criteria. More information about the ECB is given in Appendix 2 2. Economic and Monetary Union

  21. The convergence (Maastricht) criteria An EU member state must meet the five convergence criteria in order to adopt the euro. These criteria are: Price stability:the rate of inflation not to exceed the average rates of inflation of the three member states with the lowest inflation by more than 1.5 %; Interest rates:long-term interest rates not to vary by more than 2 % in relation to the average interest rates of the three member states with the lowest inflation; Deficits:national budget deficits to be below 3 % of GDP; Public debt:not to exceed 60 % of GDP; Exchange rate stability:exchange rates must have remained within the authorised margin of fluctuation with the euro for the previous two years. 2. Economic and Monetary Union

  22. Countries that adopted the euro 2. Economic and Monetary Union Nineteen member states of the European Union have so far adopted the euro as their currency, and thus have moved to the third stage of the EMU. The other nine EU members which use their own currencies, are also members of the EMU, but have remained at the second stage. Of the 10 non-adopters: (a) Denmark and the UK obtained opt-outs and are legally exempt from joining the eurozone.* (b) Sweden must convert to the euro at some point but has not yet joined the ERM II. (c) Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania are yet to converge. * (Denmark however is participant in the Exchange Rate Mechanism - ERM II - tying its currency to the Euro within a 2.25% band). 23

  23. The eurozone 2. Economic and Monetary Union Blue shaded countries: 19 Participants in the Eurozone: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovak Republic, Slovenia, Spain Green shaded countries:7 countries obliged to eventually join the Eurozone (Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania and Sweden). Brown shaded countries: 2 EU states with an opt-out on Eurozone participation (UK and Denmark). Purple: Non-EU members that use the euro Andorra, Kosovo, Montenegro, Monaco, San Marino, and the Vatican City. 24

  24. Euro notes and coins Coins have one common face, indicating their value, while the other side carries a national emblem. Coins circulate freely within the euro area. Notes are the same throughout the euro area. There are denominations of 5, 10, 20, 50, 100, 200 and 500 euro and the notes increase in size as the denomination rises. 2. Economic and Monetary Union

  25. The Euro Crisis 3 26

  26. Origins of the crisis Fears that the global financial system, including the euro system could be on shaky grounds started in 2008, much before the Greek problem emerged in its fullest. In February 2009 European members of the G20 group, which represents the world’s largest economies, met in Berlin and agreed on the need for a common approach to combat the financial crisis. Within the euro area, it was obvious that economic governance differed markedly between member states. Even before 2010, it was already known that the Greek government did not say the whole truth regarding its public finances when it applied to join the euro area. 5. Greece and the euro crisis 27

  27. Explaining the crisis 5. Greece and the euro crisis There are various explanations for the crisis. One explanation is that countries with weak economic fundamentals were able to free-ride on the euro area high creditworthiness. When in 1992, the EU member states signed the Maastricht Treaty, they undertook to limit their debt levels. However, some member states failed to abide by these rules, often hiding their malpractice through various methods including false data and inconsistent accounting. When joining the euro area, countries like Italy and Greece were able to enjoy high credit worthiness and favourable credit terms, leading to high private and government spending and housing bubbles. 28

  28. The meaning of the crisis 5. Greece and the euro crisis The European debt crisis was essentially a major financial problem, leading to a situation where some euro area member states could not repay or re-finance their government debt. When a particular country defaults on its sovereign debt the creditor nations also experience difficulties - the contagion effect. 29

  29. Apart from the explanation just put forward, there was a combination of factors that may have led to the euro crisis, including: Lack of fiscal prudence and loose financial regulatory frameworks in some countries; Slow growth in major eurozone countries; Lack of competitiveness, which could not be corrected by devaluation of the domestic currency in the euro area; Rigidity in the labour market. . 5. Greece and the euro crisis Factors that may have led to the crisis 30

  30. Was it a sovereign debt crisis? In some instances the euro area crisis was not just a sovereign-debt crisis, but was also caused by massive capital flows across borders, which led to private sector debt that eventually got banks into serious trouble, forcing governments to come to the rescue. This in turn led to excessive sovereign debt burdens. The euro crisis would seem to have abated since 2013 and the financial markets which were in turmoil threatening the very existence of the euro have calmed down. However, as we shall show below, trouble in the euro area did not disappear, as the financial crisis has been followed by what seems to be chronic slow growth and persistent high unemployment rates. . 5. Greece and the euro crisis 31

  31. Recent developments re Greece...1 Greece has benefitted from a number bailouts so far, and has undertaken a major debt restructuring, but the problem is not yet solved. Greek unemployment remains the highest in Europe. Many companies have left the country and relocating in Bulgaria, Albania, Romania and Cyprus as a result of over-taxation. To make matters worse, tourism has been negatively affected because of immigration problem. However it would seem that 2017 ushered in good news for Greece and for the euro area as a whole. See Appendix 1 for more information about the Greek conandrum. 5. Greece and the euro crisis 32

  32. Recent developments re Greece...2 5. Greece and the euro crisis Recent developments indicate that Greece is on the mend. It looks as it is set to enter the financial market again selling its debt and even offering to buy back some existing debt. The interest rates on Greek bonds has fallen away from their levels at the height of the crisis, fuelling hopes that it could fund itself without the help of painful bailouts.

  33. Ireland, Portugal and Spain Ireland and Portugal to exited their bailout programmes in 2014 while Greece and Cyprus both managed to partly regain market access in 2015. Spain never officially received a bailout programme. Its rescue package from the ESM was earmarked for a bank recapitalization fund and did not include financial support for the government itself. 5. Greece and the euro crisis 34

  34. Slow Growth and Recent Upswing 4 35

  35. 6. Slow Growth in the euro area Fear of a Japanese-type deflation The slow-growth within the EU following the 2009 financial crises wasprobably due to lack of competitiveness and rigid labour market regulations. This may have led to high rates of unemployment. Up to 2016m there was fear of a Japanese-type deflation. Even the German economy, the European powerhouse, was experiencing relatively slow growth. Deflation may be more problematic to counteract than inflation because there is a limit as to how much interest rates can be reduced, and if negative deposit rates do not kick-start lending and spending, the fear would be warranted. 36

  36. The ECB Expansionary Monetary Policy 4. The European Central Bank In March 2015 the European Central Bank (ECB) ushered in a Quantitative Easing (QE) scheme (buying government bonds) €60 billion monthly (even though there was German opposition to this). This resulted in a drastic depreciation of the euro (making EU exports cheaper and imports more expensive. The objective was to lower borrowing costs and restore inflation to the ECB's target of just below 2%. In December 2015 the ECB extended QE by six months until March 2016, raising the programme’s total size to €1.5 trillion. Interest rates, which first fell below zero in 2014, went deeper into negative territory. The deposit rate was lowered from -0.2% to -0.3%. 37

  37. The 2016 monetary bazooka 4. The European Central Bank On 10 March 2016, the ECB decided to further reduce the rate on the deposit facility to -0.40% and to expand the QE programme to €80 billion monthly, starting in April 2016 and ending in April 2017, but could remain in place until the ECB Governing Council sees a sustained adjustment in inflation. Investment grade euro-denominated bonds issued by non-bank corporations within the euro area have been included in the list of assets eligible for purchase. In addition four-year loans to banks at negative interest rates were introduced, which means the ECB will be paying the banks to lend them money. See appendix 4 for a discussion on the Quantitative Easing and the fall in interest rates within the EU. 38

  38. The 2017 Upswing 7. Impact on the Philippines This year, there seems to be a makred upswing in the growth of the EU. According to Eurostat, the statistical office of the EU, seasonally adjusted GDP rose by 1.9% in the euro area and by 2.1% in the EU28 in the first quarter of 2017 compared with the same quarter of the previous year. In the previous quarter the growth rates were +1.8% and +2.0% respectively. This upswing may be due to the European Central Bank’s loose monetary policy, which may have served to prod the EU economies – about which there was considerable sceptisim up to a year ago. 39

  39. Conclusion 5 40

  40. Conclusion 7. Impact on the Philippines This presentation has given a brief overview of the EU structure and how it works, an account of the euro crisis and its aftermath and recent developments. The major problems now facing the EU are slow growth, migration and Brexit. However, 2017 ushered in an optimistic outlook. The summer 2017 Eurobarometer shows that trust in the EUis growing – it is at its highest level since 2010, and support for the euro is greater than it has been since 2004. 41

  41. Conclusion 7. Impact on the Philippines Brexit did not negatively affect optimism in the EU and, as it turned out, may even have served to persuade eurosceptic countries that life outside the EU is not a bed of roses. On 13th September 2017, Jean-Claude Juncker, during the State of the European Union speech, stated that he wants a stronger European Union, based on common values, freedom and the rule of law, and suggesting that the UK would “regret Brexit”. 42

  42. Conclusion 7. Impact on the Philippines Migration still poses a major problem and is distabilising many regions within the EU. It is one of the most worrying problem among Europeans, particularly in Italy where the migration flows have reached very high levels. This problem is yet to be solved. In his recent speech Juncker said “real progress” had been made on the migration front, with irregular arrivals from the EU’s eastern borders and central Mediterranean both down significantly.  Migration is therefore causing Brussels fewer sleepless nights for the European Commission. 43

  43. Conclusion 7. Impact on the Philippines Presently there seem to be plans within the European Commission to create a stronger EU, involving a closer collaboration on defence, asylum and foreign policy. A eurozone finance minister could be appointed, and all member states would join the European Banking Union, making bank supervision common across the bloc. There could also be a directly elected president, as in the USA. Mr Juncker called for a special summit of the 27 remaining member states in March 2019 to map out the future of the EU, claiming that the “wind is back in Europe’s sails”. 44

  44. THANK YOU FOR YOUR ATTENTION!

  45. The Greek Conandrum Appendix 1 46

  46. The Greek Problem In 2010, when the possibility of a Greek default started to be taken seriously, the crises started to unfold in an alarming manner. Although Greece is a small country and its share of the euro area economy is less than 3%, many banks are exposed to the Greek sovereign debt. In addition, it was feared that a Greek exit from the Euro area could have a domino effect, as other countries could feel the pressure to exit, aided and abetted by the growing Eurosceptic political movement. 5. Greece and the euro crisis 47

  47. The Greek economy needed drastic reforms Greece was in dire need of economic reform and a high debt ratio was not the only major problem. The were various barriers to entry, open and hidden, which mostly benefit and protect vested interests. Public sector unions were very strong and a considerable proportion of the economy was, directly or indirectly, in government hands. In addition the tax system was very inefficient, leading to tax evasion and corruption. To complicate matters there is the ticking bomb in an aging population which is adversely affecting the welfare system. 5. Greece and the euro crisis 48

  48. Harsh austerity measures for Greece 5. Greece and the euro crisis • Public sector limit of annual bonuses. • Cut in wages for public sector utilities employees. • Limitations on payments to high earning pensioners. • A special tax on high pensions. • Limitations on overtime pay. • Special taxes on company profits. • Increases in VAT and increases in on alcohol, cigarettes, and fuel. • Scaling of pension age to life expectancy changes. • retirement age for public sector workers has increased • Public-owned companies to be reduced. • In the second bailout, the European Commission, the ECB and the IMF also requested Greece to take measures to render its economy more competitive.

  49. Economic and social implications of austerity 5. Greece and the euro crisis The austerity measures have the desirable aim of reigning in fiscal imbalances and generating confidence in government finances and in the euro area. However there are drawbacks associated with these measures. They may have a negative effects on economic growth and therefore may be counter-productive in that the tax base will be reduced They also generate hardship among families leading to social unrest, resulting in the government diverting its attention from solving the economic problems. 50

  50. Political implications of the austerity measures 5. Greece and the euro crisis The austerity programme, as expected, was considered to harsh and unfair by the Greeks as this led to heavy spending cuts and enormous tax increases to pay off Greek debts. This resulted in the electoral victory of the radical left (ironically in alliance with the populist right). The Greek debacle soured relationships between Germany and Greece, and unbecoming accusations by Greece could have a major negative effect on the euro zone. The former Greek Finance Minister Yanis Varoufakis, had, in 2013 made a rude gesture at Germany suggesting that the Greeks should simply refuse to pay the debt. 51

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