1. The EU Financial Crisis and the Middle East Don’t bother?
Dr. Rolf Freier
FNF Jerusalem May 2012

2. Ludwig von Mises Austrian Liberal Economist 1881 – 1973 „
Ludwig von Mises Austrian Liberal Economist 1881 – „...the housewife is the only rational economic being, she usually does not spend more than she has got...“

3. The Debt Champions
2010 Public debts
in billion €

4. What constitutes financial crisis is not just debt alone:
Lack of restraint
Lack of regulation
Easy money
Private debt
Public debt
Lack of trust of lenders
Lack of credit for business
Lack of growth
watch: The Crisis of Credit, splendid video animation under

5. The Eurozone and the Debt Crisis

7. EU Countries International Credit Ratings

8. both in % of GDP
Budget deficits
Public debts

9. Returns on state bonds 10 years in %

10. GDP since pre-crisis 2008 = 100%

11. Economic growth in Germany GDP change in %

12. Elements of the Euro Debt Crisis
Bank crisis (debts, high risk assets, bank interdependence)
Public debts (national and foreign debts)
Private debts
Real estate bubble (Spain)
EU Target accounts ‘pre-finance’ balance of payment deficits
Trade imbalances
ECB: indirect state financing (state bond buying)
Governance deficiencies
Cultural incompatibilities (institutions & preferences) ?

13. Four Scenarios

14. Scenario 1 EU manages crisis
Euro Zone remains as it is
Fiscal pact and austerity work (Maastricht criteria: budget deficit <3%, Sovereign debt <60% GDP
Markets regain trust
Euro Zone stabilises
Continuing reform efforts

15. Scenario 1 Probability Fiscal Pact not yet ratified
Elections dooming, politicians want to be re-elected
It needs a change in governments/voters attitudes
Austerity without growth measures a painful long-term cure without success guaranteed?

16. Scenario 2 EU introduces Eurobonds
Countries do not (re)finance debt by national bonds but through collective bonds (no ECEP)
Harmonizing effect on interests to be paid by successful and less successful economies
Structural imbalances could grow long term (no reform discipline enforced on crisis countries)

17. Scenario 2 Probability Eurobonds violate existing EU-law (no bailout)
Germany still resists, would have to foot the bill
To maintain reform pressure on PIGSF need to advance with controversial ECEP
Higher probability of so called ‚project bonds‘ intended to spur growth in EU countries (highly problematic because of its focus on infrastructure)

18. Scenario 3 ECEP Eurozone becomes political union
Eurozone becomes fiscal union
Harmonizing tax systems
Harmonizing social security
Union issues Eurobonds
Eurozone could stabilise and Euro probably appreciate

19. Scenario 3 Probability Differences in political culture
Differences in social policies
Differences in savings
Differences in political and economic weight and size
Differences in preferences?
Long term goal or European pipe dream?

20. Scenario 4 Eurozone Breaking
Individual PIGS countries departing from Eurozone
Northern core Eurozone?
Loss of credits and guarantees
Capital flight
International containment possible?
Bank and state insolvencies
Monetary renationalisation = political renationalisation?
Europe fractious and inward looking?

21. Scenario 4 Probabiliy Possible but not high probability
Risk of 20% or higher???
Eurozone fragmenting or only weakest go?
Greek could go and the rest gets the act together??
Should Germany foot the big bill to keep everybody happy and going????

22. Why bother, nothing to loose for the Middle East?

26. Israel Budget 2013 ?? Increases in government outlays
2011: 18 Billion NIS
2012: 15 Billion NIS
Needs > 6% growth to be accommodated
Growth currently 3%
Balance of payment negative
Sovereign debt currently 72% of GDP

27. EU Programmes incl. MENA
ECFR
FRIDE (EU Democracy/ Human Rights)
Tempus (Higher education)
Middle East watch service
Pegase (Palestine socio-economic)
ENPI (refugees)
PfP

28. The European Unions Role in the Middle East Quartet dealing with the conflict
Last but not least