• ELIEVE 

 - The headlines and Europe’s worst

economic headache by far is Greece,
financially reckless and socially volatile. The
Euro’s future and European Union’s credibility
are at risk
Why economic crisis in euro – zone
 Comparison with American continent
(to enable us learn the euro – zone)
 Production risen in America and slumped in
Europe
 Rise in standard of living implies producing
more and working less
 Hence there has to be a trade off efficiency and
jobs.
 America has squeezed extra output from
smaller workforce and as a consequence
suffered a big rise in unemployment.
 However Europe has opted to hold job cuts at
the cost of lower productivity.
Conclusion :
 American firms were panicked into shredding
jobs too quickly and Europeans were calmer
as firing workers is costly and unemployment
benefits are generous.
Shock of recession is longer in Euro – zone

Reasons for recession to persist longer

I. Falling productivity
II. Weak profits
III. Standard of living reduces
 Main Countries in Picture
• Greece
 Sovereign – debt default in Greece infects the rest of the Euro
area and hence determined and coordinated action has to be
taken to protect it.
• Greece stuck in Euro;
1. Its exchange rate with its main trading partners is fixed; hence
it cannot devalue.
2. Countries that seek IMF help generally undergo brutal cuts in
public spending which deepens the recessions.
3. Therefore IMF counsels to weaken the currency but this is not
possible in this case.
 German’s Anger
 Under the terms of Euro deal, any short term
support would have to be approved by all 16
countries in Euro zone
 German’s anger to Greece’s recklessness could easily
delay the cash it needs for the bond markets
resulting in liquidity crisis.
 Moreover Germany insisted that EU cash should
only be furnished on near market’s rate; hence
Greece has to suffer every turn in market sentiment.
 At the end
 A formula was found for interest rate threat both
met Greece’s need and satisfied Germans
 Investors may reduce their exposure because
I. Greek government bonds are downgraded by
Fitch, a credit rating agency and also Standard
and Poor’s
II. More creditworthy euro bonds exists in market
III. High rate of yield may result that Greek may be
unable to repay as in past.
 Finance Minister Pranab Mukherjee

 European sovereign debt crisis and “possible

fragmentation of the European region, then
there are chances of adverse capital flows,”
which could be a major area of concern for
the country.
 Euro crisis may trigger more capital flows
into India: RBI

"Money probably tries to come to places where

it gets better returns. So from the point of
view of capital flows, you do have the
likelihood of more uncertainty in the rest of
the world and therefore more money coming
to India," RBI Deputy Governor, Usha Thorat
 India can turn euro crisis into opportunity
The Euro zone crisis has some positive factors for India.

 First, India will be able to contain its fuel subsidy bill as the crisis
has pulled down commodity prices, including petroleum products. 
 Second, lower prices will also contain inflation (around 9% at
present). According to a senior economist, if inflation comes down
with lowering of prices of commodities, the country will be able to
achieve 8.5% growth. 
 Third is the continuation of the soft interest rate regime. Earlier,
there was speculation that RBI may push up interest rates to
control inflation. If inflation starts to cool off, RBI may continue
with its soft interest rate regime. 
These countries lived beyond their means on borrowed
money, which they are finding it difficult to repay now.

2009
Country FISCAL DEFICIT on GDP
Greece 13.6%
UK 11.6%
Spain 11.2%
Ireland 11%
India 9.5%
 Another problem of Euro zone countries is that
they can't tweak their currency to improve
competitiveness by pushing up exports and
containing imports to fund loan-repayment .
 Europe's crisis has again brought dollar to the
centre stage. Investors, who had started putting
money into Euro zone after the sub-prime crisis,
are reverting to dollar assets. This has made
dollar appreciate in the last couple of months.