La mise en place de l'euro et la crie économique -synthèse en anglais

Subject #1: “The euro area has experienced a severe recession, followed by a sovereign debt crisis. Swift policy action helped to stabilize the economy and a modest recovery is now underway, although risks remain. Structural reforms would facilitate on-going economic adjustment and lift growth prospects. Excessive economic, financial and fiscal imbalances built up in some euro area countries during the upswing, misallocating resources and creating growing vulnerabilities. Diverging pressures on national economies were compounded by movements in real interest rates. The banking system channeled funds from countries with high savings to deficit economies. Market discipline, together with fiscal and financial policies, failed to prevent the build-up of imbalances. Rebalancing economies with large imbalances has already begun, but will be a difficult and prolonged process.”

(Euro Area OECD report 2011)

Executive Summary

In the week following September 15, 2008, global financial markets broke down and they had to be put on artificial life support. The life support consisted of substituting sovereign credit—backed by the financial resources of the state—for the credit of financial institutions that had ceased to be acceptable to counterparties.

Since then, the European economy is in its deepest recession since the 1930s, when the Deep Recession happened . And the situation is eerily reminiscent from this period. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banking system and the economy may not be strong enough to do without fiscal and monetary stimuli.

As per Keynes statement, budget deficits are essential for countercyclical policies in times of deflation, yet governments everywhere feel compelled to reduce them under the pressure of the financial markets.

Coming at a time when the Chinese authorities have also put on the brakes, it is liable to push the global economy into a slowdown or possibly a double dip. Europe, which weathered the first phase of the financial crisis relatively well, is now in the forefront of causing the downward pressure because of the problems connected with the common currency.

Rebalancing economic growth in the Eurozone will then probably be the hardest to execute, but it is essential if future crises are to be avoided. Governments need to support the Commission's drive to foster closer economic integration and to co-ordinate their policies to ensure that they are compatible with balanced economic growth across the Eurozone.

Huge current account balances are not consistent with a stable currency union, because one way or another they require massive transfers between the participating economies.

In this report, we will then analyse the origin of the crisis, the remaining risks into the Eurozone since the first action has been implemented, especially to reduce economic imbalances, and what are the next options for Europe to move out from the crisis, and face the Euro-sceptical pressure.

Table of contents

1 The current situation 3

1.1 The origin of the crisis: the facts – mid 2007 to May 2010 3

1.2 What were the swift policy actions taken? 3

1.3 Current troubles in the Eurozone: the remaining risks,, 4

2 Imbalances and financial flows in the Eurozone 5

2.1 Diverging pressures on national economies were compounded by movements in real interest rates 6

2.2 The banking system channeled funds from countries with high savings to deficit economies 7

2.3 Economic, financial and fiscal imbalances issues 7

3 Improvements to be addressed 8

3.1 What reform would facilitate on-going economic adjustment and lift growth prospects? 8

3.1.1 Stability and Growth Pact 8

3.1.2 Fiscal Integration and Policy coordination 8

3.1.3 Financial Integration 9

3.1.4 Euro Plus Pact 9

3.2 Rebalancing economies with large imbalances has already begun, but will be a difficult and prolonged process 10

3.2.1 Public sense of an unjust crisis management 10

3.2.2 The Euro currency future? 11

3.2.3 The Euro crisis global impacts 11

3.3 Open challenges 11

Conclusion 12

Appendix 13

Bibliography 15

1 The current situation

1.1 The origin of the crisis: the facts – mid 2007 to May 2010

• Mid-2007, the end of a prolonged global credit and asset price boom in the US led to turmoil in interbank markets. In September 2008: Lehman Brothers failed and this turmoil intensified into a full-blown international financial crisis, spreading rapidly to Europe.

Consequently, in the Eurozone as a whole, industrial production fell in May, 2008 for the first time since 1992 and the Eurozone entered in its first official recession during the third quarter of 2008, official figures being confirmed in January 2009.

• Early 2010, fears of a sovereign debt crisis developed concerning Eurozone countries such as Greece, Spain, Ireland, Portugal and Italy. The focus was made on the Greek crisis because its economy was one of the fastest growing in the Eurozone during the 2000s - annual rate of 4.2% from 2000 to 2007, but running large structural deficits. On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the implementation of harsh Greek austerity measures. A €85 billion rescue package for Ireland in November and a €78 billion bail-out for Portugal in May 2011 then followed.

1.2 What were the swift policy actions taken?

• Based on what happened in the 1930s, the countries of the Eurozone decided this swift policy plan in order to avoid a financial meltdown (i.e. bank runs). The monetary policy has been eased aggressively, and governments have released substantial fiscal stimuli.

For Portugal, Greece and Ireland, the scenarii were similar: the country

...