Slide 1CHAPTER OUTLINE17 Countries, 17 CurrenciesEuropean Economic CommunityMaastrict TreatyImportant ProvisionsEffect of the Euro : GDP GrowthThe Effect of the Euro: Per Capita GDPThe Effect of the Euro: Long Term Interest RatesThe Effect of the Euro: Housing PricesDebt to GDPDeficit to GDPWhat the U.S. Did During 2008-2010What the Europeans Did & Did Not DoWhy Did Europe Not Stimulate?Unemployment Rates In EuropeToo Late to Leave?Going Forward19-1©2015 McGraw-Hill Education. All Rights Reserved ©2015 McGraw-Hill Education. All Rights Reserved Chapter 19European Debt Crisis19-2©2015 McGraw-Hill Education. All Rights Reserved CHAPTER OUTLINE•Introduction•In the Beginning There Were17 Currencies in 17 Countries•The Effect of the Euro•Why Couldn’t They Pull Themselves Out?•Is It Too Late to Leave the Euro?•Where Should Europe Go from Here?19-3©2015 McGraw-Hill Education. All Rights Reserved 17 Countries, 17 Currencies•Germany-Mark•France-Franc•Italy-Lira•Greece-Drachma19-4©2015 McGraw-Hill Education. All Rights Reserved European Economic Community•Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. Bold=original members19-5©2015 McGraw-Hill Education. All Rights Reserved Maastrict Treaty•The Treaty created the Euro•Used only for financial transactions (1999-2001)•Only circulated currency (2001-present)•Great Britain refused to join•Current Signatories: •Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Estonia joined in 201019-6©2015 McGraw-Hill Education. All Rights Reserved Important Provisions•Article 123•European Central Bank cannot buy member nation bonds•Article 125•No EU nation can bail out any other EU nation unless there is a risk of a systemic financial collapse.•Article 126•Deficit to GDP: 3%•Debt to GDP: 60%19-7©2015 McGraw-Hill Education. All Rights Reserved Effect of the Euro : GDP Growth2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-8-6-4-202468Euro area (changing composition) GermanyIreland GreeceSpain FranceItaly NetherlandsUnited Kingdom United States19-8©2015 McGraw-Hill Education. All Rights Reserved The Effect of the Euro: Per Capita GDP2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20118090100110120130140150160Euro area (17 countries)GermanyIrelandGreeceSpainFranceItalyNetherlandsUnited KingdomUnited States19-9©2015 McGraw-Hill Education. All Rights Reserved The Effect of the Euro: Long Term Interest RatesJan-01Jun-01Nov-01Apr-02Sep-02Feb-03Jul-03Dec-03May-04Oct-04Mar-05Aug-05Jan-06Jun-06Nov-06Apr-07Sep-07Feb-08Jul-08Dec-08May-09Oct-09Mar-10Aug-10Jan-11Jun-11Nov-11Apr-12Sep-1205101520253035Germany Ireland Greece SpainFrance Italy Netherlands United Kingdom19-10©2015 McGraw-Hill Education. All Rights Reserved The Effect of the Euro: Housing Prices2000Q12000Q32001Q12001Q32002Q12002Q32003Q12003Q32004Q12004Q32005Q12005Q32006Q12006Q32007Q12007Q32008Q12008Q32009Q12009Q32010Q12010Q32011Q12011Q32012Q1050100150200250300Ireland US Spain19-11©2015 McGraw-Hill Education. All Rights Reserved Debt to GDP1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011020406080100120140160180France Germany Greece IrelandItaly Netherlands Portugal Spain19-12©2015 McGraw-Hill Education. All Rights Reserved Deficit to GDP19-13©2015 McGraw-Hill Education. All Rights Reserved What the U.S. Did During 2008-2010•TARP•Monetary Policy•QE1-QE3•Near zero short term interest rates•Low long term interest rates•Fiscal Policy•Bush stimulus•Obama stimulus19-14©2015 McGraw-Hill Education. All Rights Reserved What the Europeans Did & Did Not Do•U.K. & France•Fiscal Policy but not Monetary Policy•Germany•Very little19-15©2015 McGraw-Hill Education. All Rights Reserved Why Did Europe Not Stimulate?•Articles 123, 125, 126 prevented the types of actions the U.S. took•Bailouts of Greece and Spain were only authorized by the “systemic risk” clauses.•Italy, Greece, Spain, and Ireland were unable to get reasonable interest rates on their debt.19-16©2015 McGraw-Hill Education. All Rights Reserved Unemployment Rates In Europe2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110510152025EU (27 countries) Germany Ireland GreeceSpain France Italy United Kingdom19-17©2015 McGraw-Hill Education. All Rights Reserved Too Late to Leave?•Grexit: Term applied to Greece leaving the Euro.•If Greece announced they would leave, everyone with Euros in Greek banks would take them out of the country.•Unless it is unnecessary, it would have to be a surprise to work.19-18©2015 McGraw-Hill Education. All Rights Reserved Going Forward•New Rules that would decrease the likelihood of a future crisis or allow for actions to be taken in response to a future
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