International Banking and Financial Law Presentation: Crisis of Euro Zone

1. International
Banking
and Finance
Law

2. Group Members:
Yanaphak
Gong Lei
Bettina Bognar
Wang Lianqiu
Fu Menxia
Argyro Savva

3. Topic
The Eurozone crisis is a crisis of ECB as
well as Eurozone political institutional
fundamentals reflecting fatal flaws in
certain laws and policy.

4. Contents
Introduction
Flaws in Eurozone Fundamentals
Greece VS Eurozone crisis
Current Solutions of Eurozone Crisis
Conclusion

5. Short history of
integration
• Treaty of Paris (1951-1952): European Coal and
Steel Community
• Robert Schuman • Jean Monnet

6. • Treaties of Rome (1957-1958): European Economic
Community and European Coal and Steel Community
• Merger Treaty (1965-1967): Common institutions >
European Communities
• Single European Act (1986-1987): to create a single
market within the European Community by 1992
• Maastricht Treaty (1992-1993):
– establishing the European Union (3 pillars: European
Communities; Common Foreign and Security Policy; Political
and Judicial Cooperation in Criminal Matters)
– amending the European Economic Community > European
Community (EC)
– single European currency, EMU
– establish CFSP, expanding the common policy areas

7. • Treaty of Amsterdam (1997-1999)
• Treaty of Nice (2001-2003)
• Treaty of Lisbon (2007-2009):
– amending the modified EC Treaty and
Maastricht Treaty > Treaty on the Functioning
of the European Union (TFEU) and Treaty on
the European Union
– only the EU exists
– no pillar structure

8. Enlargement
• 1951: BENELUX, France, Italy, Germany (West)
• 1973: UK, Ireland, Denmark
• 1981: Greece
• 1986: Spain, Portugal
• 1995: Austria, Sweden, Finland
• 2004: Malta, Cyprus, Estonia, Latvia, Lithuania,
Poland, Czech Republic, Slovakia, Slovenia,
Hungary
• 2007: Bulgaria, Romania

9. Institutions
• European Parliament
– elections, represents the citizens
– debating and passing EU law
– scrutinizing other institutions
– debating and adopting the budget with the Council
• European Council (head of states and
governments; policy making; president: Herman
Van Rompuy)

10. Institutions
• Council of the European Union (≠ Council of Europe!!!)
– governments of member states
– law making
– CFSP
– coordinating economic policies, between courts-police forces
– adopts budget
– signs international agreements
• European Commission
– promotes the public interest, commissioners for policy areas;
president: José Manuel Barroso
– proposing new law; enforcement; representing the EU
• European Court of Justice
• European Central Bank
• Court of Auditors (audit the EU finance)

11. Other
bodies
• EU High Representative for Foreign and
Security Policy (Catherine Asthon)
• European Economic and Social Committee
• Committee of Regions
• European Investment Bank
• European Ombudsman
• Other specialized agencies and representative
bodies

12. Euro
• Introduced by the Maastricht Treaty as of 1 January
2002

13. Development
of the crisis
The global financial crisis started in 2007 in the US
This crisis was a liquidity shortage (credit crunch) which
spread to Europe through the banking system after the
collapse of Lehman Brothers
The EU banking system started to feel the crunch first, then
the sovereign debt crisis developed
In this time the EU faces more crises: the credit crunch, the
sovereign debt crisis as well as macroeconomic and political
crises > certain deficiencies (political, structural) of the EU,
which need to be solved

14. The euro is under attack from the financial markets, with
Greece on the verge of default, Portuguese and Irish
Eurobonds demoted to junk status and Italian and
Belgian bonds under speculative attack, with Spain next
in line.
What is more, the real fear is that a
default in one country will trigger a
domino effect and bring down some of
Europe's major banks.

15. Flaw in the Eurozone Fundamentals
Fatal Flaw 1 Expanded Private Credit, Toothless
Fiscal Discipline
Fatal Flaw 2 Profits Are Private, Losses Are Public
Fatal Flaw 3 Low Interest Credit Spurred Misallocation of
Capital
Fatal Flaw 4 The Imbalance Between Exporting and
Importing Nations
Fatal Flaw 5 The Euro Removed the Mechanism of
Currency Devaluation
Fatal Flaw 6 Crushing Private and Public Debts

16. Flaw in the Eurozone Fundamentals
Fatal Flaw 1: Expanded Private Credit, Toothless Fiscal Discipline
Rising Risk Leads to Rising Rates
Needless to say, it was highly profitable for the big European and
international banks to expand lending to these new, previously marginal
borrowers.
Fatal Flaw 2: Profits Are Private, Losses Are Public
Once the unlimited credit issued by financialization poisons the
sovereign states’ balance sheets and cash flows, then there is no
mechanism to bail out all the players

17. Flaw in the Eurozone Fundamentals
Fatal Flaw 3: Low Interest Credit Spurred Misallocation of Capital
Free money soon flows to malinvestments whose risks and marginal nature
are masked by the asset bubble which inevitably results from massive
quantities of free money seeking a speculative return.
Fatal Flaw 4: The Imbalance Between
Exporting and Importing Nations
Another intrinsic source of instability is the
imbalance between export powerhouse Germany
that generates huge trade surpluses and its trading
partners in the EU that run large trade and budget
deficits— Portugal, Italy, Ireland, Greece, and
Spain.

18. Flaw in the Eurozone Fundamentals
Fatal Flaw 5: The Euro Removed the
Mechanism of Currency Devaluation
The Euro had another deceptively pernicious
consequence: the overall strength of the currency
enabled debtor nations to rapidly expand their
borrowing at low rates of interest.
Fatal Flaw 6: Crushing Private and Public Debts
Banks around the world have a major challenge in the next few years: trillions
of dollars in debt must be "rolled over" or refinanced.

19. Greece VS Eurozone crisis
Greece joined in 2001 between the Euro’s
establishment and introduction

20. Origins and Prospect :
Greece Sovereign debt crisis
• European monetary integration
- The common currency and its monetary policy.
- Not sufficiently integrated and lacked a fiscal union.
• In 2001 when joining the Euro, Greece already had a public debt in
excess of 100% of GDP
• Adoption of the Euro currency allowed more favorable terms for the
refinancing of government debt.
• Greece Fiscal Policy
- Over-borrowing of public spending.
- Moral Hazard
• In 2009 Greece’s government debt reached 115% of GDP

21. Greece receive a bail-out
(EU and IMF)
• In May 2010, Greece signed a memorandum of economic and
financial polices for a three-year programme with the International
Monetary Fund, The European Commission and the European
Central Bank.
• The programme provided 110 billion Euro loans.
• The programme is focused on two key problems:
– High public debt and deficits
– Lack of competitiveness.
• The programme is accompanied by severe austerity measures and
structural reform programs.

22. Current Solutions and Conclusion

23. Continuing Problems
Policy Problems
Future Banking System

24. Solutions
• Fiscal Consolidation.
• ECB role
• EFSF
• Euro Fractures
• Policies to argument
resources

25. Interesting Issues
Using the stability of European Stability
Mechanism?
-- Is it really the only access to solve the crisis?
-- The stability of the European stability mechanism
Main role the ECB playing
--saver vs. viewer?

26. Suggestions
• Short-term suggestions
1)Bailout package: The European Central Bank and
IMF should offer bailout package to the countries in
serious sovereign debt trouble like Greece and
Ireland.
2)Bebt Write-off and restructuring: The creditors
especially the financial institutions with large amount
of junk sovereign bond might try to write off a certain
percent of total debt.

27. Suggestions
• Long-term suggestions
1) Integration of euro zone: First of all, we think the Euro
zone should rebuild its fiscal system, which would
coordinate the fiscal policy in each country soundly.
2) Regulation of government debt: First, the euro zone
should strengthen the regulation of government fiscal
deficit. Second, we think the Eurostat should verify the
budget deficit and government debt in order to avoid the
problem of hiding the real situation.
3) Economic growth:The real solution to the debt crisis
is economic growth.

28. Conclusion
• Direct intervention
• Redefining institutional competences among
international organisations
• Strengthening ECB policy as ‘lender of last
resort’ for its members
• Increasing coordination among euro area
members around fiscal policies

29. Team Work
Part 1-Bettina Bognar
Part 2-Gong Lei
Part 3-Argyro Savva & Yanaphak
Part 4-Wang Lianqiu & Fu Menxia
Powerpoint organising-Gong Leri

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31. Thank you!