1. Afternoon Discussion Topics – Lecture #3 Problems with the EU Economy 1. The EU Banking and Financial Crisis 2. The Current Greek Debt Crisis 3. Declining Growth of Population in the EU 4. Eurosclerosis 5. EU Integration – Legal, Economic, and Political 6. Is the Euro Succeeding?

2. 1. The EU Banking and Financial Crisis 1. Banking Crisis in the EU began after the fall of Lehman Bros. Sept. 2008 2. Some major banks in the EU had to be bailed out by governments 3.Sovereign Debt Crisis began in 2010 and mainly concerned Greece 4.Spain has highest unemployment with 20%. Germany 7.2%, France 10%, Italy 8.5%, UK 7.7% 5.Euro was lowest at $1.1942 on June 8 and has climbed back to $1.4101 on Oct. 14 an increase of 18% for that time period. 6.In 2008 the Royal Bank of Scotland, and the newly merged HBOS-Lloyds TSB were partly nationalized (80% and 40% respectively)

3. 2. The Current Greek Debt Crisis 1. Early 2010 spreads on 10 year Greek to German bonds began to rise. 2.Problem areas are Greece. Ireland, Spain, Italy, and Portugal 3.Concern arises over the fiscal sustainability creates record high spreads in May 2010 4.European Financial Stability Facility created during May 2010 5.ECB buys bonds on secondary markets and conducts sterilization at the same time. 6.Greek government hides its debt problem 7.Germany, France and IMF organizes 500 billion euro bailout. 8.Greece is facing austerity and some bondholders face “haircuts”. 9.Greece may be forced out of the euro zone

4. 3. Declining Growth of Population in the EU 1.Ageing of EU is influenced by three main factors – 1.5 children per woman (2.1 is the minimum replacement rate), life expectancy rose 8 years between 1960 and 2006, and immigration, which might help reverse the first two trends. 2.EU will become much older and the working age population will fall by 48 million by 2050. 3.EU is facing a baby boomer retirement, like the US. This means that profound social and economic changes will occur in the EU in the coming decades. 4.EU has a five point plan for dealing with the ageing of the population: encourage greater childbearing with incentives, promoting job creation for the older segment of the population, flexible inter-EU regulations that help accommodate the aged in the workplace, accepting more immigrants, creating fiscally sound public finance operations. 5.There will be profound cultural changes in the EU in the next 50 years

5. 4. Eurosclerosis 1.During the 1970s and 1980s the EU faced very high and persistent unemployment, despite economic growth, which was termed “eurosclerosis” 2.This unemployment was thought to be due to employment protection and generous unemployment benefits. 3.Today the EU does not suffer from eurosclerosis. However, the EU still seems to have high and persistent unemployment. One possible reason might be the lack of good mobility between the countries of the EU. 4.Skilled workers are less likely t be unemployed in the EU, and companies that provide training to workers are 2.5 times less likely to go out of business. 5.Some companies are looking to hire temporary or contract workers and are less likely to invest in training.

6. 5. EU Integration – Legal, Economic, and Political 1.EU has gone through five enlargements – real question as to whether additional enlargements are wise. What benefits to the EU come from enlargement. What costs? 2.Economic integration 3.Political Integration 4.Cultural Integration 5.Should there be a European Constitution?

7. 6. Is the Euro Succeeding? 1. The Euro is the second largest reserve currency as well as the second most traded currency in the world after the U.S. dollar. 2. The consensus from the studies of the effect of the introduction of the euro is that it has increased trade within the eurozone by 5% to 10%. 3. Studies have found a positive effect of the introduction of the euro on investment. Physical investment seems to have increased by 5% in the eurozone. 4.Euro has only had a small effect on reducing risk in the eurozone. 5.Euro is linking the countries together and now that some face a sovereign debt crisis, the other countries will suffer. 6.Some people believe that the Euro will not last. Who are these people?