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HIRAL PATEL 111SIRJAN GUPTA 113
SWATI PRABHU 115RUPAL DIXIT 117SUMIT JAISWAL 119
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The Euro and Economic and Monetary UnionManaging the Euro
1999 Belgium, Germany, Ireland, Spain, France, Italy,
Luxembourg, the Netherlands, Austria, Portugal and Finland
2001 Greece
2002 Introduction of euro banknotes and coins
2007 Slovenia
2008 Cyprus, Malta 2009 Slovakia
2011 Estonia
2011 Estonia
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Fiscal Policies
- Broad Economic Policy Guidelines- Stability and Growth Pact- Inflation measurement
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Confidence in the prospects of growth and stabilityof GIIPS economies
Lower interest rates drove up domestic demandIncreased price of domestic activities attractedinvestment in non-tradable sectors other than
exportsExport goods from historically stable countries likeGermany, the Netherlands, etc more affordable
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Domestic demand boom in the GIIPS inducedrapid wage growth outpacing productivity
Increased labour costs erode externalcompetitiveness
Lower borrowing costs and expansion ofdomestic demand boosted tax revenues
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US consumer retrenchment directly affected thesales opportunities of European exporters
Implosion of the European banking sector
Massive rate cuts by the US Federal Reserve
The crisis hit emerging economies leading themto cut imports
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Effect of global crisis on shipping and tourismLarge public deficits and large debts
Lack of transparency
Downgrading of debt
Austerity
Loan AgreementDanger of default
Objections to proposed policies
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Ireland, Italy, Portugal and Spain
Iceland
Slovania
The UK
Latvia, Lithuania and Estonia
Belgium
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Currency Devaluation not possible
Monetary policy was too loose
Tourism affected
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Stock and debt market reactionsFiscal AusterityMoral HazardPolarized CommunityWorld Trade DisruptedCredit ShortageInflation, Hyperinflation and Social SecurityDisruptive Consequences
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Contagion effect
Criticism of euro-model
Degradation of euro
Pressure building on the currency
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ECB injected liquidity into European banksunable to obtain short-term funds in market.
Federal Reserve used Euro-dollar swaps tomake dollars available to ECB to lend to banks.
ECB did not lower interest rates until October2008 because of its focus on inflation.
Euro fell against the dollar due to safe haven
flight to US Treasury securities.
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European Financial StabilityFacility (EFSF)
IMF
Japans financial assistance
Investment from Germany
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Impact On India
European Sovereign Debt Crisis :
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There Are Five Principle Channels Through Which T
Developments In Europe Can PercolateTo The Indian Economy. Those Channels Are :
TradeCurrencyInvestmentBankingCommodity Price
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Impact On IndiaImpact On India
T r a
d e
Trade Channels :
T r a d
eMerchandise goods & commercial services.Major Exports To Germany, France, & UK.India Contributes Around 25% Of CommercialServices To European Countries.This Channel Did Not Affect Indian Economy Much.
I O I di
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Impact On IndiaImpact On India
Impact On IndiaImpact On India
C u r r e n c y
C h a n n e
l
Currency Channel :
C ur r
en c y
C h
a
nn el
Depreciation Of Euro Against Currencies Including Rupee.Profit Margin Negatively Impacted for Indian Exporters.Imports Relatively Cheaper; Benefits Imports of Machinery &equipments.
Appreciation Of Rupee Could Also Undermine Indias ExportCompetitiveness.
I t O I diI t O I di
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Impact On IndiImpact On India
Impact On IndiImpact On India
B a
n k i n g
C h a n n e
l s
Banking Channels :
B ank i n
g
C h
ann el s
Merchandise goods & commercial services.Major Exports To Germany, France, & UK.India Contributes Around 25% Of Commercial
Services To European Countries.This Channel Did Not Affect Indian Economy Much.
I t O I diI t O I di
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Impact On IndiImpact On India
Impact On IndiImpact On India
C o m m o
d i t y
C h a n n e
l s
Commodity price Channels :
C om
m o d i t y
C h
ann
el s
Global CommodityPrices
Directly Affects Price OfImports Cost Of
Products
Oil Is One Of The Major Commodity Imported.Oil Imports In India Are Relatively Price Inelastic.Crude Oil Prices Were Raised To US$ 147/Barrel In July 2008The Demand For Crude Oil & Primary Commodities Was & Was
Soaring Higher,Where as The Price Became The Supply Constraint.
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53 billion needed to avoid the increasing massive debt; an
unachievable target even with foreign taxpayers' contributionProposed plans of buying back own debt by using EU/IMF bailout funds are not sufficient since:
Debt is transformed, not removed
Huge moral hazard concernsNo sources to meet 6.85 billion fund deficit
11% interest rate denies borrowing money as an optionGreek economy expected to shrink by 4% in 2011
Tax evasion costs Greek Funding gap 2011 bnPrimary Budget Deficit 4.95Debt Repayments 32.5Interest payments on debt 15.9Total debt 53.35EU bail out fund 46.5Unmet Fund deficit 6.85
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Lack of economic competitiveness is the coreproblem.
Options to address it-1. Completely reform the economy
2. Rely on permanent subsidies from strongereconomies, or3. Seek monetary independence, allowing for currency
devaluation
2.4% inflation forces Germany to pressurize ECB toincrease interest rates, which is detrimental for Greekeconomy
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Any Questions, Comments,Suggestion or Doubt..!!