Economics 434 Theory of Financial Markets

1. Economics 434Theory of Financial Markets Professor Edwin T Burton Economics Department The University of Virginia

2. The Eurozone, Etc. • 17 Countries • Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain • Six other countries use the euro as their national currency: Monaco, San Marino, Vatican City, Kosovo, Montenegro, Andorra • Monetary Policy: responsibility of the European Central Bank (ECB) • Established January 1, 1999 • 332 million people • 9.4 trillion euro GDP in 2011 (12.2 trillion dollars) • European Union has 27 members (1993) • Pop 504 million; GDP 17.5 trillion dollars • Bulgaria, Czech Rep, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia, Sweden, United Kingdom • Switzerland is not in either Eurozone or European Union (8 million people; per capita income of $ 43,000

3. Prior to Eurozone • Germany strongest economy in Europe, southern economies (Spain, Italy, Greece) were the weakest • Interest on sovereign debt high in weak economies, low in Germany • That changed with the Euro • Interest rates on sovereign debt converged for all countries to the low German rates

4. So, what happened • In 2010, Greek debt surged passed 100 percent of GDP and rates on Greek debt began to skyrocket • Then what? • Let Greece go bankrupt (when no one will buy their debt anymore • Should they, other Eurozone members, “bailout” Greece

5. Ireland was first to be bailed out • Then Portugal • Then Greece • Waiting on deck: Spain, Italy and more rounds for Greece, Portugal, and Ireland • France next up • Then Germany?

6. Economies began to collapse • First Ireland, then Portugal, then Greece • Now Spain and Italy, • France and Germany slip into negative territory

7. ECB Buys Bonds! • Coordinated with Federal Reserve in the US which doing the same thing • Essentially printing money

8. The End