Eurocrisis

Question 1

Wall Street Crash

Answer 1

1. 1929
2. No regulation of the banking sector
3. The Glass-Steagall act is introduced in 1933 - Clinton gets rid of it in 1999
4. People borrow from the banks - The banks group these loans in an investment product - These investment products are offered to investors with different interest rates depending on the risk - Banks are investing their own revenues
5. Banks now also offer NINJA loans (people can borrow to easily)
6. Rating agencies classify it AAA

Question 2

Housing bubble

Answer 2

1. 2005
2. Credit is easy - People borrow too much - People buy houses - The price increases
3. The federal banking increases the interest rates for loans - People cannot pay them anymore - People sell their houses - Price goes down - People cannot repay their loans

Question 3

Lehman Brothers

Answer 3

1. 2008
2. The banks and the investors are not getting their money - Lehman Brothers crash
3. Everyone is interconnected so they all crash - Because they do not trust each other and won’t buy each other’s debts
4. Banks do not offer credit anymore - No more investment

Question 4

Why this recklessness in the US?

Answer 4

1. Competition
2. Blindness
3. ‘Too big to fail’

Question 5

What were the different construction failures of the €? N°1

Answer 5

1. One size does not fit all
2. Currencies must be converged enough (because not possible to devaluate anymore)
3. MS did not think whether it was actually beneficial for them to join because this had become a political project

Question 6

What were the construction failures of the €? N°2

Answer 6

1. ECB controls monetary policy but MS control the budget
2. No compliance with the convergence criterion
3. Convergence on interest rates too means that certain MS can borrow a lot more

Question 7

What were the construction failures of the €? N°3

Answer 7

1. MU but no EMU

2. Asymmetric shocks cannot be controlled if there is no budget control, fiscal union and banking union

Question 8

Greece - 2001 to 2009

Answer 8

1. 1981 - Greece joins EEC
2. 2001 - Greece suddenly meets the convergence criterion - Goldman Sachs changed the debt to a different currency so it’s not ‘debt’ anymore
3. Greece borrows more and more
4. 2009 - It is revealed that the deficit is much higher - Negotiations start to pay the debt

Question 9

Greece - 2010 to now

Answer 9

1. 2010 - IMF gives €100B bailout
2. Bailout requires interest rate because of art. 125 TFEU
3. EFSF and EFSM are created (temporary, ad hoc, became permanent with the ESM)
4. Greece is downgraded - Cannot afford loans anymore - The investors agree to cut back the debt (‘Haircut’)
5. Austerity measures - 2015 referendum with new government - Passes anyways

Question 10

Eurocrisis - 3 negative spirals

Answer 10

1. Between banks and governments - Banks are in shit - Governments must save them - Now governments are I shit - Negative ranking of government bonds
2. Between government and interest rates - Gov. borrows to save banks - Investors fear bankruptcy - Interest rates increases - Debt increases
3. Between savers, banks and government - People take money out of the bank - There is no more money for investment - Interest rate increases - Rating agencies downgrade

Question 11

Why was it worse in the Eurozone?

Answer 11

Because budget and banking are separate - Governments cannot print more money - It can actually run out

Question 12

What are solutions?

Answer 12

1. Short-term - EFSM and EFSF - ECB (OMU pledge to take over the sovereign debt)
2. Long-term
   - Fiscal Union - One central bank + 1 central government to control budget + Strict budge discipline (Sixpack, Twopack, Europlus pact, European Semester)
   - Banking Union - Banks must be more controlled + Safety mechanism for banks in need (ESM)
   - Political Union - Creation of a finance minister?