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The Eurozone Crisis: Causes and Solutions Klaas Knot President, De Nederlandsche Bank Asia Society, Hongkong 15 October 2012 1 The eurozone and the global economy Population GDP 95% 81% 19% 5% RoW euro area RoW Trade in Goods Bonds, equities and bank assets 23% 86% 14% RoW 2 euro area euro area 77% RoW euro area European debt crisis 2-year government bond yields Percent 25 20 15 10 5 0 jan-11 jul-11 Spain 3 jan-12 Ireland jul-12 Portugal Italy Some convergence prior to the crisis... Cumulative growth differentials with Germany 160 Ireland Greece Spain 140 Italy Netherlands Portugal 120 100 80 1998 4 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 …but with borrowed money… Average annual growth rate of credit to private sector: 2000-2011 16 14 12 10 8 6 4 2 0 DE 5 NL IT PT IR SP GR …and accompanied by inflation… Cumulative differentials compared to EMU total : 2000-2007 12 10 8 6 4 2 0 -2 -4 -6 DE 6 IT NL PT SP IR GR …reflecting wage developments 7 Current account balance percent of GDP 10 5 0 -5 -10 -15 Netherlands Germany Italy Ireland Spain Portugal Greece -20 1998 8 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Governments went back to old habits Budget deficits (% Gdp) 3 Start EMU 0 -3 -6 -9 but relapse after admission Improvements in the run-up to EMU -12 -15 -18 1992 1995 Greece 9 1998 2001 Italy 2004 2007 2010 Portugal “On/off”market discipline 20 Germany Italy Netherlands 18 16 Greece Portugal Ireland Spain Start EMU 14 12 10 8 6 4 2 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 10 A stable design of EMU • Strengthening growth potential and competitiveness • Politically independent enforcement of the fiscal rules, guarding the debt ceiling of 60% • European supervision, resolution and DGS • Eurobonds as the capstone of EMU? 11