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The Crisis in Eastern Europe.

The Crisis in Eastern Europe. Has membership of the EU made the problem worse?. Difference between US and Europe. Traditionally, the US depended much less on banks for the growth of business. Business raised its own money through the stock market.

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The Crisis in Eastern Europe.

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  1. The Crisis in Eastern Europe.

    Has membership of the EU made the problem worse?
  2. Difference between US and Europe. Traditionally, the US depended much less on banks for the growth of business. Business raised its own money through the stock market. In Europe a traditional link has existed between banks and business, which has made the situation much worse in Europe, though not everyone realizes that yet.
  3. EU not a “victim” What has happened in Europe is not just because of the US “Sub-prime” crisis. Three uniquely European aspects to the crisis here. The Broad Credit Crunch European Sub-prime market Baltic/Balkan over-exposure
  4. 1. Global Credit Crunch This revealed some serious underlying problems of the European economies, that had been hidden by the good times. Starts with the post 9/11 boom period and the wide spread of the Euro US and Europe lowered interest rates and flooded the system with money to restore confidence.
  5. 1. Global Credit Crunch At the same time, many new countries were adopting the Euro, or being tied to it. Thus, the benefits of conditions normally relating to strong economies, such as Germany, were made available to all members. This led to an unrealistic consumer-spending and real-estate boom, with no real basis to support it.
  6. 2. The European Sub-prime Notable in poorer countries with cheap credit (Spain, Ireland) In 2006, Spain built more new homes than Germany, France and UK combined Banks made more and more generous, and unrealistic, terms to keep the flow of money out in loans. These loans became, increasingly, unstable and dangerous.
  7. Baltic and Balkan No two regions bought into the cheap-credit boom more than these, mainly because they were the poorest. These countries had high growth rates , but all on the back of borrowed money. The reason the Baltic situation is worse is because they joined the EU sooner. Foreign banks poured money in, and they cut off the tap once the problem began.
  8. The Euro and the Banks It is almost unbelievable, but when many EU countries agreed to join the Euro, they did not surrender bank control to the ECB Therefore, you do not have a centralized quick reaction such as you have in the USA This allows individual countries to make decisions others consider dangerous.
  9. Turmoil in Europe? Riots in the Baltic and Balkans (Riga, Athens…) Greek debt reduced to junk bonds Spanish, Irish and Portuguese bonds moving into negative territory Ireland nationalized its biggest bank; legislation for this in Germany, widespread in the UK.
  10. Baltics Med. “Ring of Fire.” Celtic Balkans A ring from Eastern Europe, through the Mediterranean’s southern states, around to the Celtic Fringe (Ireland) is in, or approaching, “depression-like” conditions. Some economists blaming the EMU for this situation. 2 types of state: those in the Eurozone, others tied to the Eurozone.
  11. Baltic “Volker-Kerker” One British politician says the EMU has created a “Prison of Nations;” a term from the old Austro-Hungarian Empire. Protesters in Riga smashed the Finance Ministry; hundreds stormed the Legislature “Trust in the State’s authority of officials have fallen catastrophically.” Pres. Zatlers. Lithuania: police clash with marchers, chase protesters into the river. Balkans
  12. Bulgaria Demonstrators outside Parliament turned violent. These countries are members of the ERM, which was required of them by the terms of accession to the EU. The result of subjecting “Soviet-style” transition economies has been massive “overheating” Current account deficits—Latvia’s is 26% of GDP.
  13. Major overcapacity Where do we see this? In all of these ERM countries, one of best examples of “overheating” has been the insane rise in property prices. My salary does not pay the rent! What, then, produces these ridiculous prices? Riga is more expensive than Berlin. This has to collapse—who can pay these prices? High Rents! Poorest country In Europe 2m emigrants Crazy!
  14. The Crash is Coming The Balkan Economy? Latvia’s property group Balsts states that apartment prices in Riga have fallen 56% since mid-2007. Sofia will follow. The economy contracted 18% over the same period. IMF asked for a devaluation as part of 7.5 Euro deal to rescue Latvian economy. Blocked by Brussels because so many mortgages were in Euros. Bulgaria too?
  15. Ireland An economy that has gone through “boom and bust” cycles. “Celtic Tiger” Its economy will contract by 4% this year. The deficit will be 12% of GDP by 2010. Ireland paid itself too much when times were good. For instance, Dell has moved to Poland, and Dell was 4% of Ireland’s GDP.
  16. Spain Lost 1m jobs in 2008, and is expecting 16% unemployment by the end of 2009. Some economists expect 25%; which is the level of USA during the Depression. The EMU advice is “wage deflation” but how to reconcile that with the level of debt? How can people pay as wages shrink? Talk of “Euro-Dictatorship.”
  17. Italy Bond auctions are a nightmare, and this raises doubts about whether national debts can be covered. Who wants to buy this in these times? Problem of capital flight.
  18. The Central Question & Fear The central question is whether the “fixed exchange rates” will break. If this did happen then, possibly, the Euro would drop, but certainly the Baltic and Balkans would see a sudden drop in exchange rates. Greece is no longer able to sell its debt. Period of uncertainty. The steady fall of the lev—and the Euro to which it is tied— against the US $, reflect the confidence that the US system has the capacity to get out of the recession much faster than Europe, which has no unified structure nor package of incentives.
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