1. 1 Economic policy priorities after the Spring European Council Presentation by Marco BUTI, DG Economic and Financial Affairs BUSINESSEUROPE Economic and Financial Affairs Committee 5 April 2011

2. 2 EU recovery continues to make headway, inflation projected to increase European Commission Source: European Commission

3. 3 High uncertainty, main risks to growth outlook: European Commission On the upside: Stronger global growth More pronounced spill-over from German growth Stronger domestic demand as a result of strong business confidence On the downside: Further tensions in financial markets Stronger short-run impact of fiscal consolidation Further geopolitical tensions in the MENA region Impact of the events in Japan

4. 4 Financial markets still fragile European Commission Source: Reuters and European Commission Sovereign-bond spreads Bank lending to households and non-financial corporations, euro area Source: ECB

5. 5 A comprehensive approach European Commission Financial repair Fiscal consolidationGrowth and competitiveness Vulnerable countries

6. 6 Short-term Response European Commission 1.Financial repair: stress tests + recaps 2.Fiscal consolidation: more than 0.5% of GDP a year 3.Vulnerable countries: implementation of programmes (EL, IE) + enhanced surveillance (PT) + EFSF + lowering of pricing and increased maturity of loans

7. 7 Systemic Response European Commission 4. Strengthened surveillance: 6 legislative proposals 5. Permanent crisis resolution tool: European Stability Mechanism 6. Euro Plus Pact Integrated surveillance: European Semester

8. 8 Where will the growth come from? European Commission Do EU policies lower growth? Fiscal consolidation, bank recaps, monetary normalisation Some avenues: - Tapping the single market - Financial sector reforms - Project bonds

9. 9 Single Market Act European Commission Relaunching the Single Market is a key priority as stressed by the Monti Report (May 2010) A cross-cutting policy initiative of the Europe 2020 strategy Improve adjustment capacity of the EU economy through better functioning of markets (especially in services) –Removal of barriers to cross-border activity would translate into increased competition and facilitate market entry. This competition effect will have a positive impact on demand through lower prices and a positive income effect. –Removal of barriers to investment should lead to increased total FDI, which would have a positive effect on productivity. This price adjustment is particularly important for the Euro Area and in less tradable sectors

10. 10 Single Market Act European Commission Relevant growth-enhancing measures by removing persistent restrictions to the four freedoms –improving infrastructure in energy, transport and telecommunications –facilitating cross-border trade or investment by eliminating tax or regulatory treatment that disadvantages cross-border transaction –adopting measures to facilitate access to finance, especially for SMEs and availability of venture capital –improving cross-border activity in services sectors –fostering labour mobility –The final SMA to be adopted by the Commission on 13 April 2011

11. 11 Financial Reform Reshaping the architecture for financial regulation Four priorities: Develop a more efficient supervisory response More and better capital in the banking system Extend the perimeter of regulation and supervision: the reform agenda Complete the tools to ensure financial stability

12. 12 Financial Reform The macroeconomic impact of stronger standards for capital and liquidity requirements on banks On banks, the Basel Committee concluded that costs are manageable Over the short term some modest impact on growth and aggregate output… –A 4-year phasing-in has only a modest impact on aggregate output: an ex post decline by about 0.20% decline in GDP compared to baseline path (the GDP returns to its baseline path in subsequent years). –GDP growth rate would be reduced by an average of 0.04 pp over a four and a half year period… –…mainly due to banks passing on higher costs to borrowers slowing down investment.

13. 13 Financial Reform Overall, the cumulative impact of financial reforms on GDP is negative but within moderate limits Graph 1: Impact on GDP Source: Commission Services calculations Within stringent assumption, the impact on GDP is moderate and consumption rises above trend due to increase in the opportunity costs of saving. Cumulative impact on GDP and consumption Graph 2: Cumulative impact on GDP and consumption (1) Deposit Guarantee Scheme (1)

14. 14 Europe 2020 Project Bond Initiative: Objective and Definition European Commission Objective To increase the debt financing availability for large scale infrastructure projects Target areas Transport Energy Broadband How? EU/EIB joint support to project companies issuing bonds to finance infrastructure projects Form of support Debt service guarantee or a subordinated loan by EIB to ensure sufficient rating of the bonds Result More private sector financing attracted from the capital markets to implement key EU infrastructure projects Potential investors Long-term institutional investors – pension funds, insurance companies

15. 15 Project Bonds Target rating minimum A- Bond Issue and underwriting SPV Project Costs EIB Sub-debt Equity & Quasi- equity EIB Sub-debt participation can be combined with different types of funding sources (bonds and other senior loans) EIB Unfunded Sub-debt participation can be flexibly used and structured in order to ensure target rating. Covers funding shortfalls during construction Comes on top of a fully funded structure Project Bond Investor up to 20% of total Bond issue Europe 2020 Project Bond Initiative: Subordinated Instruments

16. 16 Europe 2020 Project Bond Initiative: Role of EU and EIB European Commission EU determines eligibility criteria for projects: Focus on TEN-T, TEN-E and broadband rollout Technically and economically feasible projects with strong and stable cash flows The EIB selects projects and type of support (guarantee or loan) using eligibility criteria and credit risk policies Initiative based on existing EU/EIB risk sharing mechanisms

17. 17 Europe 2020 Project Bond Initiative European Commission Stakeholders consultation launched: Purpose – to find out the interest and needs of the market Duration: February 28 – May 2, 2011 Consultative conference on April 11, 2011 Commission proposal to be ready in summer 2011 Target – to have the Europe 2020 Project Bond Initiative fully operational in 2014

18. 18 Conclusions A fundamental reshaping of economic governance is being implemented Financial vulnerabilities to be tackled in earnest Comprehensive strategy Role of stakeholders

19. 19 Thank you!