EUROPEAN CRISIS

introduction
The European debt crisis is the shorthand term for the regions struggle to pay the debts it has built up in recent decades. Five of the regions countries Greece, Portugal, Ireland, Italy, and Spain have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee its intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. In fact, the head of the Bank of England referred to it as the most serious financial crisis at least since the 1930s, if not ever, in October 2011. This is one of most important problems facing the world economy, but it is also one of the hardest to understand.

How did the crisis begin?

The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues making high budget deficits unsustainable. The result was that the new Prime Minister George Papandreou, in late 2009, was forced to announce that previous governments had failed to reveal the true size of the nations deficits. In truth, Greeces debts were so large that they actually exceed the size of the nations entire economy, and the country could no longer hide the problem. Investors responded by demanding higher yields on Greeces bonds, which raised the cost of the countrys debt burden and necessitated a series of bailouts by the European Union and European Central Bank (ECB). The markets also began driving up bond yields in the other heavily indebted countries in the region, anticipating problems similar to what occurred in Greece.

ROOT CAUSES OF THE CRISIS

When the crisis broke in the late summer of 2007, uncertainty among banks about the creditworthiness of their counterparts evaporated as they had heavily invested in often very complex and opaque and overpriced financial products. As a result, the interbank market virtually closed and risk premiums on interbank loans soared. Banks faced a serious liquidity problem, as they experienced major difficulties to rollover their short-term debt. It was also widely believed that the European economy, unlike the US economy, would be largely immune to the financial turbulence. This belief was fed by perceptions that the real economy, though slowing, was thriving on strong fundamentals such as rapid export growth and sound financial positions of households and businesses. These perceptions dramatically changed in September 2008, associated with the rescue of Fannie Mae and Freddy Mac, the bankruptcy of Lehman Brothers and fears of the insurance giant AIG (which was eventually bailed out) taking down major US and EU financial institutions in its wake.

 Panic broke in stock markets, market valuations of financial institutions evaporated, investors rushed for the few safe havens that were seen to be left (e.g. sovereign bonds), and complete meltdown of the financial system became a genuine threat. banks forced to restrain credit, economic activity plummeting, loan books deteriorating, banks cutting down credit further, and so on. As trade credit became scarce and expensive, world trade plummeted and industrial firms saw their sales drop and inventories pile up.

How did the European debt crisis impact the financial markets?
The possibility of a contagion made the European debt crisis a key focal point for the world financial markets in the 2010-2011 period. With the market turmoil of 2008 and 2009 in fairly recent memory, investors reaction to any bad news out of Europe was swift: sell anything risky, and buy the government bonds of the largest, most financially sound countries. Typically, European bank stocks and the European markets as a whole performed much worse than their global counterparts during the times when the crisis was on center stage. The bond markets of the affected nations also performed poorly, as rising yields means that prices are falling. At the same time, yields on U.S. Treasuries fell to historically low levels in a reflection of investors "flight to safety."

How euro crisis could impact India?

Trade channel can impact Indian external sector indirectly as well. When the recent crisis gripped the world 2008, most policymakers, economists and experts put forth the view that India would be only marginally affected. Two reasons were cited for that: First, India was a virtual non-entity in global trade as its share was less than 0.5%-0.7% of the total global trade volumes. Hence, it was assumed that its economy was largely insulated from the turmoil. Second, share of developed economies in trade had declined. In 1987-88 developed economies contributed 59% of exports and in 2008-09 their share has declined to 37%. The share of developing economies has increased from 14% in 1987-88 to 37% in 2008-09. In case of imports developed economies share has again fallen from 60% in 1987-88 to 32% in 2008-09 while developing economies has risen from17% to 32%. (Source: RBI)

 As crisis originated in US and developed economies with developing economies

still growing, it was felt Indian trade will continue to grow. However once the crisis struck in September 2008, Indian trade sector declined sharply and growth was negative for 13 straight months from Oct-08 to Oct-09. Impacts through financial channel: FDI: There are many European companies which have investments in India. So, there could be a possibility of slowdown in FDI in India. We looked at top 15 FDI investors in India which constitute about 92% of total FDI . However, in case of India, FDI inflows remained positive throughout the crisis. The FDI inflows actually helped keep maintain capital account when all other categories showed sharp decline. FIIs: Unlike FDI, it is difficult to pinpoint the origin of FII investment. However, the linkage here is pretty direct. With a turmoil in global financial markets, FII inflows will decline. We have a large number of global financial firms which operate across the world and in case of a decline in one major market, there is a pull out from other markets as well.

 External Commercial Borrowings: External commercial borrowings could also decline if the European crisis spreads to other economies. ECBs declined in the first stage of the crisis as well. NRI deposits & Remittances: Former shows whether NRI depositors withdrew funds in wake of crisis and latter shows whether Indians living abroad stopped sending funds to their homes again because of the crisis. We see an interesting trend in the case of NRI deposits. The deposits increase in the crisis periods OctDec 2008 and Jan- Mar 2009 and decline thereafter. It could be that NRI preferred to invest higher proceeds in India seeing crisis in their own economies ! In case of remittances, we see a decline in crisis period Oct 08 Mar 09 but see improvements as crisis eases. There were huge concerns of remittances collapsing because of the crisis.

Positive effects of euro crisis on India

The volatility is again increasing. If we see the NSE VIX index. It had increased from 20 level in Jan 2008 to 85 levels in Nov-08. It then declines to go back to pre-crisis level of 17-18. It has again started increasing to touch 34 levels now. Yields in bond markets have eased considerably to 7.35% levels looking at the global crisis. This is quite a turnaround as most market participants expected yields to touch 8-8.25% levels after April Monetary Policy. The market participants were also expecting RBI to increase interest rates even before its monetary policy in July 2010. This crisis has reversed the sentiment and most now expect RBI to keep interest rates unchanged in July policy. Oil and commodity prices have declined as well. This could be a positive factor as inflation might just become lower.

Negative effects of euro crisis on India

The investments might not increase seeing the global uncertainty. Investment was a key driver in Indian 9% growth period (2003-08). Again it is expected to play the key. We have seen business confidence evaporating in thin air quick time. IIP could again decline as it did post September 2008 crisis. Credit growth could decline both because of banks becoming uncertain and business not demanding credit. The decline in inflows along with global uncertainty has led to decline in equity markets. The expectations of BSE Sensex reaching soon to 21,000 levels are being revised downwards. GDP growth is slowing, but from a breakneck 9.3 per cent in last year's June quarter to just under 8 per cent now. Inflation stood at a worryingly high 9.74 per cent in the latest quarter and it would be no surprise to see continued rate increases slowing the economy further and bringing inflation to heel. In other words, we are dealing with a typical cyclical, managed slowdown in an economy where demand has outstripped supply in a number of areas.

I M P A C T O N T H E N A T I O N S
CURRENCY PRESSURE

EXPORTS

GROWTH

INVESTMENTS

EMPLOYMENT

SOLUTION
The European Financial Stability Facility (EFSF) the main part of a European Union aid package.(tried with greece) Further beefing up the EFSF.(440BN) ECB making the purchases. creation of a fiscal club.(like us fed) EUROPEAN STABALIZATION METHOD(2013)

WHY IS THE BAILOUT PACKAGE NOT WORKING

The debt crisis in Europe has never been a liquidity crisis. Investors are fleeing the bonds of certain European countries because they believe their economies are fundamentally broken, simply uncompetitive compared to either stronger countries in Europe or up-and-coming emerging markets DOUBTS ON long-term ability to prosper within the constraints imposed by the monetary union.

Structure of the euro zone is seriously flawed

With no unified authority controlling fiscal policy overall, investors dont believe it can be controlled. little evidence that the individual members of the euro zone will ever sacrifice the degree of sovereignty required to achieve such a union. Thus investors will remain unconvinced that any euro zone policies or programs can actually be effective.

CONCLUSION
HOW CAN A CURE BE MORE OF A DISEASE..AN EXACT SITUATION OF EUROPEZONE..TRYING EVERYTHING MAY HAVE A BAD EFFECT. ULTIMATELY PEOPLE GET SCREWED. FINALLY SOLUTION PRINT MORE MONEY????

 Over recent months, Europe has gone through a serious financial crisis. Although economic recovery in Europe is now on track, risks remain. The European Council today adopted a comprehensive package of measures to respond to the crisis, preserve financial stability and lay the ground for smart, sustainable, socially inclusive and job-creating growth. This will strengthen the economic governance and competitiveness of the euro area and of the European Union. Within the new framework of the European semester, the European Council underscored the need to give priority to restoring sound budgets and fiscal sustainability, reducing unemployment through labour market reforms and making new efforts to enhance growth.