1. 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

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

3. 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

4. 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

5. 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 )

6. 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

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

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

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

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

11. … 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)

12. 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)

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