Euro Challenge 2010 The Euro Area Emerging from

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

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

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)

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? Ø EU growth rate will more than halve by 2050 (fewer workers) Ø Reduction in potential growth Ø Social model under stress (fewer taxpayers, more social spending, e. g. on pensions, health care, long-term care)

Looking ahead: Timing is everything! Vs. Jean-Claude Trichet Ben Bernanke “We pledge today to sustain our strong policy response until a durable recovery is secured” (Leaders’ Statement, Pittsburgh G 20 Summit)

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