The Euro Area: Emerging from the crisis Euro Challenge 2010 The Euro Area: Emerging from the crisis Presentation by Sarah Cartmell as of January 4, 2010, Economist at the Delegation of the European Union to the United States

Europe's ? The roots of the crisis… Rapid credit growth Low interest rates Housing bubbles Global imbalances Financial alchemy US-EU linked Europe's ?

Why is the Euro area so affected? US and Europe closely connected EU banks bought US ‘toxic’ assets After Lehman collapse, crisis worsens dramatically Sharp fall in German exports Spanish and Irish housing bubbles burst Euro area economy less flexible

Europe’s response to the crisis The ECB cuts interest rates to historically low levels, adopts unconventional measures Oct 08: euro area governments adopt concerted action plan to support their financial systems Dec 08: EU governments adopt European Economic Recovery Plan - a coordinated fiscal stimulus

Europe’s response to the crisis ECB cuts benchmark interest rate to historical low of 1.00% and injects liquidity. Bank rescue plans in effect in 17 countries (€300 billion in recapitalisation operations and €2.5 trillion in loan guarantees) European Economic Recovery Plan: 18 fiscal stimulus plans (overall fiscal injection is 5% of GDP in 2009-10)

Europe is NOT a homogenous place But remember…. Europe is NOT a homogenous place One monetary policy, many fiscal policies Different countries, different starting positions

Deep recession, fragile recovery Real GDP growth Source: IMF, World Economic Outlook, October 2009

Sharply higher unemployment Unemployment rate Source: IMF, World Economic Outlook, October 2009

Greatly subdued inflation picture Inflation rate Source: IMF, World Economic Outlook, October 2009

Deterioration in public finances… Source: IMF, World Economic Outlook, October 2009

… at a time when population aging is putting added pressure on public spending Europe in 2000: Four people of working age for every one retired person Europe in 2050: Only two people of working age for every retired person What happens to the economy when the working-age population shrinks? EU growth rate will more than halve by 2050 (fewer workers) Reduction in potential growth Social model under stress (fewer taxpayers, more social spending, e.g. on pensions, health care, long-term care)

Vs. Looking ahead: Timing is everything! Great Depression Inflation Monster Vs. Jean-Claude Trichet Ben Bernanke “We pledge today to sustain our strong policy response until a durable recovery is secured” (Leaders’ Statement, Pittsburgh G20 Summit)

I hope that we will all have an exciting Euro Challenge experience! Thank you for your attention.