The EU Financial Crisis
and the Middle East
Don’t bother?
Dr. Rolf Freier
FNF Jerusalem May 2012
Ludwig von Mises
Austrian Liberal Economist
1881 – 1973
„...the housewife is the only rational
economic being, she usually does not
spend more than she has got...“
The Debt Champions
2010 Public debts
in billion €
What constitutes financial crisis
is not just debt alone:
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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 http://vimeo.com/3261363
The Eurozone and the Debt Crisis
EU Countries International Credit Ratings
both in % of GDP
Budget deficits
Public debts
Returns on state bonds 10 years in %
GDP since pre-crisis 2008 = 100%
Economic growth in Germany GDP change in %
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) ?
Four Scenarios
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
Scenario 1 Probability
• Fiscal Pact not yet ratified
• Elections dooming, politicians want to be reelected
• It needs a change in governments/voters
attitudes
• Austerity without growth measures a painful
long-term cure without success guaranteed?
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)
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)
Scenario 3 ECEP
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Eurozone becomes political union
Eurozone becomes fiscal union
Harmonizing tax systems
Harmonizing social security
Union issues Eurobonds
Eurozone could stabilise and Euro probably
appreciate
Scenario 3 Probability
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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?
Scenario 4 Eurozone Breaking
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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?
Scenario 4 Probabiliy
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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????
Why bother, nothing to
loose for the Middle
East?
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
EU Programmes incl. MENA
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ECFR
FRIDE (EU Democracy/ Human Rights)
Tempus (Higher education)
Middle East watch E-Mail service
Pegase (Palestine socio-economic)
ENPI (refugees)
PfP
Last but not least
The European Unions Role in the Middle East
Quartet dealing with the conflict