EUROPEAN ECONOMY

Alicia de Villalonga ZafortezaCristina Picón Sánchez

INDEX: • What were the reasons for the founding of the

EU?................................................................................................................3• Causes of the crisis…………………………........................................................…..6• Colapse of world growth………………………………………………………………………....9• Action against crisis………………………………………………………………………………10• Public deficit……………………………………………………………………………………….….11• Taking mesures……………………………………………………………………………………….14• Differents aspects of the crisis in spain………………………………………………….15• Taking mesures in Spain………………………………………………………………………....16• Extreme case: Greece……………………………………………………………………………..17• European solution…………………………………………………………………………………..19

INDEX:• Impact of EU alternatives……………………………………………………………………..20• Comparing Greece and Spain……………………………………………………………...21• Europe after the crisis…………………………………………………………………………..23

WHAT WERE THE REASONS FOR THE FOUNDING OF THE EU?

• The EU is a community born right policy to encourage and accommodate the integration and joint governance of the peoples and states of Europe. The phases of integration are:

• 1951- European coal and steel community (signatory countries: Germany, Belgium, France, Luxemburg and Netherlands).

• 1957-Traties of Rome (signatory countries: Germany, France, Luxemburg, Belgium and Neederlands)

• 1967-Merger Treaty, establishing a Single Council and a Single Commission of the European Communities.

• 1973- Denmark, Ireland and United Kingdom join the EU.• 1986- Spain , Portugal and Greece join The EU.• 1993- Maastricht treaty.• 1995- Sweden , Finland and Austria join the EU.

WHAT WERE THE REASONS FOR THE FOUNDING OF THE EU?

• 1999-Amsterdam Treaty• 2003- Treaty of Nice.• 2004-Cyprus, Malta, Slovenia, Estonia, Latvia, Lithuania, Poland, Hungary,

Czech Republic, join the EU.• 2007-Romania and Hungary join the EU.• 2009- Lisbon Treaty.

WHAT WERE THE REASONS FOR THE FOUNDING OF THE EU?

The main reasons for the founding of the EU are:

• Peace-keeping.• Membership of a community of values.• Increasing economic prosperity.• A common foreign security policy.• Prospect of greater success in solving transnational problems, such as

environmental protection.• Strengthening neighborhood relations.

CAUSES OF THE CRISIS• Subprime mortgage crisis

Credit modality of USA`s financial market, is characterized by a higher default risk than the average of the rest of the credits. Most of them are secured by mortgages on properties.

Why are not regulated?EDF regulates the proportion in the banks of these credits in theirs portfolio

Titling: MBS mortage backed securities

CDO, collateralized debit obligationsSale CDS, credit default swaps

CAUSES OF THE CRISISKEY POINT:

On September 15, 2008 the U.S. government chooses to let go bankrupt Lehman Brothers (investment bank suffered losses 54 000 million in subprime and its shares fell 95%)

The government preferred to assist with warranties 85,000 million to the global insurer AIG, which was nationalized by 80%.

CAUSES OF THE CRISIS

• Boom of the property bubble• Increase the price of raw materials

– Oil (147$/barrel)– Food

• Rising prices for industrial materials – copper (8940 $/Ton)

• Rising prices for construction materials – sulfuric acid and caustic soda (600%)

• Decrease competitiveness, hard to maintain the welfare state.

1996-2005 2007 2008 2009 2010REAL GDP GROWTH 3,2 2 1,1 -4 0UNITED STATES 2,1 2,6 0,7 -4,1 -0,3EU16 1,1 2,4 -0,6 -6,6 -0,5JAPAN 3,4 4,1 2,2 -2,7 1,2OCDE + BRIC

REAL WORLD TRADE 7 6,9 2,5 -13,2 1,5UNEMPLOYED RATE THE OECD 6,6 5,6 6 8,4 9,9

COLAPSE OF WORLD GROWTH

ACTION AGAINST CRISIS

A) Use of automatic stabilizers triggered by the crisis itself:

Lower economic activity resulting from the crisis decreases the government revenue raised by taxation and increases public costs associated with social benefits and unemployment.

Consecuence:Impact of public deficits and the corresponding increase in public debt to the overcoming of the crisis.

PUBLIC DEFICIT• (in % of GDP)• COUNTRIES 2008 2009 2010• Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0,1 –3,9 –5,9• Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –3,8 –8,6 –9,8• France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –3,4 –6,6 –7,0• Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –2,7 –4,5 –4,8• United Kingdom . . . . . . . . . . . . . . . . . . . . . . –5,5 –11,5 –13,8• United States . . . . . . . . . . . . . . . . . . . . . . . . .. –5,9 –12,1 –14,2• Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –2,9 –6,7 –8,7

ACTION AGAINST CRISISB) Rescue measures taken to prevent the collapse of the financial system and provide

liquidity to economics traders.

Public performances:-Liquidity injections-Ad hoc interventions to save banks or financial institutions-Bank stock purchase-Granting of credits to banks and financial institutions-Acquisition of toxic assets-Guarantees for bank liabilities-Protection for assets-Asset swap-Deposit insurer-Restrictions on wages and salaries of executives of financial

institutions

ACTION AGAINST CRISISC) Financing mobilized

To prevent the failure of industrial and services enterprises, boost the real economy and in particular, some economic sectors deemed strategic (automotive sector and alternative energy)

-Increase spending on market policies: subsidies for hiring new workers-Reduction of taxes and social security contributions-Aid business access to financing, state aid and export subsidies-Increase public investment in infrastructure, environmental improvement, energy efficiency improvements-To support the improvement of the purchasing power of families, purchase of vehicles, energetic consumption, access to housing

and decrease VAT

TAKING MEASURES IN SPAIN

• Review labor market – Decrease in firing costs– Decentralization of wage fixing methods

• Pension reform, – Increasing the retirement age to 67 years

• Construction: remove incentives for homeownership, encourage rent• Reduced restrictions on retail and professional services• Accelerate the restructuring of the financial system

– Reduce the overcapacity – Decrease the risk of “savings banks”

DIFFERENCIAL ASPECTS OF THE CRISIS OF SPAIN

• Zero growth in real average wages in 18 years ( 0.7%)• The debts of families has duplicate• Low productivity and low added value• High levels of latent unemployment ( 8%- 10%)• Low rates of formation• Low percentage of GDP spent on technology and energy• Sun tourism

TAKING MEASURES IN SPAINOBJECTIVE: reduce the public deficit

FORECASTS FOR 2010 AND 2011

• Reduction salaries of public officials (2400 mill in 2010, 4800 mill en 2011)• Review medicine prices (1000 mill)• Baby check elimination (1250 mill)• Budget cut in autonomous communities and city councils (1200 mill)• Suspension of pension increases• Elimination of the partial retirement (1150 mill)• Elimination of the retroactive in application of dependency• Reduction of the budget for development aid (600 mill)• Cuts in the government itself (15%)

EXTREME CASE: GREECE

• Greece economic data in the period of the crisis:

• GDP growth: -1.1%• Inflation: 1.30%• Unemployment rate: 9.2% (Data for the third quarter 2009)

• Fiscal deficit : -12.7%• Public debt : 113% (in% of GDP)

EXTREME CASE: GREECE

Explanation of the crisis:

• Successive Greek governments mask their accounts, to be admitted to the European currency.

• The Greek economy is not competitive and is heavily indebted.

• Wages and prices, according to Eurostat, increasing more than in richer countries and the EU competitive.

• Heavy reliance on foreign investment.

EUROPEAN SOLUTION

The EU has made a salvation plan for Greece, which Greece is committed to undertake the following measures:

• Controlling the fiscal crisis.• A package of measures worth 4.8 billion euros, with a

distribution: half will be for public spending cuts and the other for the tax increase .

• Increase by 21% VAT.• 30% cut in subsidies for public sector wages.• Pensions will be frozen for one year the public sector.

IMPACT OF EU ALTERNATIVES

• If these alternative measures are not taken across Europe would be threatened, so they take hard decisions and courageous. These measures, want to avoid contagion to other countries like Portugal and Spain, and increase international confidence."

COMPARING GREECE AND SPAIN

Greece

• GDP: 241.119 (EUR million)

• GDP GROWTH : -1.1%

• INFLATION: 1.3%

• UNEMPLOYMENT RATE: 9.2%

• FISCAL DEFICIT: -12,7%

• PUBLIC DEBT: 113% ( in % of GDP)

Spain

• GDP: 1.049.316 ( EUR million)

• GDP GROWTH: -3.6%• INFLATION: -0.3%• UNEMPLOYMENT RATE:

18.1%• FISCAL DEFICIT: -11.7%• PUBLIC DEBT: 55.2% ( in % of

GDP)

COMPARING GREECE AND SPAIN

Explanation of the comparation of the two countries:• The public deficit has very high levels in the two economies, it

makes the two are now dependent on international funding.• The deficit is cyclical in Spain, while Greece is structural• Greece's public debt due soon, and have no solutions for pay, while

the debt is the strongest Spanish Moody's• Regarding the funding Greece has a problem accessing finance

because markets do not want to buy their debt, while that of Spain is a matter of price

• Unemployment in Spain is very high, more than Greece (18% in Spain, 9% in Greece). Experts believe that it is not a priority problem in the financial market, what they care about is the solvency

EUROPE AFTER THE CRISIS• Objective: to reduce the public debt without compromising growth.• We need:

– Closer international cooperation– Strengthening of fiscal institutions– European Council of systematic risk and the European system of

financial supervisors– Benefit reform of health and pension systems– Deficit countries: increase intern savings and increase exports– Countries with surplus: increase domestic demand and promote

consumption– Improve productivity– Increase labor market flexibility– Fight against tax havens