Presentation on theme: "The EU Response to the Sovereign Crisis"— Presentation transcript:
1The EU Response to the Sovereign Crisis Daniel DACO Head of Unit: Program Design and Support European Commission Economic and Financial AffairsAthens, 18 April 2011
2Search for a comprehensive approach Financial repairFiscal consolidationGrowth and competitivenessVulnerable countries
3Outline Outline Short-term Response : Crisis Management Financial RescueFiscal ConsolidationAssistance to vulnerable countriesBalance of Payments AssistanceEFSM/ EFSFSystemic Response: Crisis Prevention and ResolutionStrengthened Surveillance and the European SemesterEuropean Stability MechanismPact for the EuroFinancial Repairs and SupervisionIII. Concluding remarks
5Short-term Response 1. Financial Rescue European Economic Recovery plan (EERP) in coordination with national fiscal packages (Nov. 2008)Budgetary impulse of € 200bnPolicy Action: smart investment, car scrapping schemes, employment policies, etcEuropean Global Adjustment Fund (EGF)and European Social Fund (ESF) to alleviate the negative social effects of the crisisStabilising the banking system through targeted rescues
6Short-term Response 1. Financial Rescue Stabilising the banking system through targeted rescues
7Short-term Response 2. Fiscal consolidation Heavy legacy of the crisis on public financesBut no-consolidation scenario is unsustainable. Significant efforts needed to restore sustainable public financesExcessive Deficit Procedure (EDP) in abeyance /fine-tuned with national recovery pathGross public debt in crises episodes (% of GDP)Debt path in different scenarios (% of GDP)
8Total assistance package Short-term Response 3. Assistance to vulnerable countries: BoP facilityThe BoP programmes (with the IMF) are producing good results with implementation of conditionality.Regained Market confidenceFiscal consolidation well underwayEnough breathing room for structural reformsBoP facilityHungaryLatvia1/RomaniaTotal assistance package€20bn7.5EU (Art. 143)6.53.15IMF12.51.712.95Other multilaterals10.52Bilaterals…2.2 bn/11/ Contributions by SE, DK, FI, NO, CZ, PL, EE.
9I. Short-term Response 3. Assistance to vulnerable countries: Greece No financial support instrument available for EAFailures in fiscal reportingHuge fiscal imbalances + banking problems + loss competitivenessImportant financing needs + high market borrowing costsRisks to financial stability for the EA as a wholeEvolution of spreads:
10Short-term Response 3. Assistance to vulnerable countries: Greece Pooled loans – general features – Ad hoc instrumentEU legal basisConditionalityBeneficiaryMechanismGuaranteed byDurationPrecautionary useIMF involvementECB involvementSizeIntergovernmental decision (May 2, 2010)Yes, programme coveringGreeceBilateral loans from EA MS pooled by COMDirect loans, MS budget7.5 years (extension: agreement in principle)Not applicableYesPayment agent, liaison on program design, review, disbursement, implementation€ 80bn (€ 38.4 bn disbursed)+€ 30bn (IMF: € 14.6 bn disbursed)
11Short-term Response 3. Assistance to vulnerable countries Creating new financial instruments: EFSM & EFSFTemporary nature (to be replaced by a permanent mechanism in 2013)Strict policy conditionalityHigh accessLending rates close to those of the IMF to avoid facility shoppingCombined lending capacity € 500 bnIreland and Portugal (?)
12Crisis Prevention and Resolution II. Systemic Response:Crisis Prevention and Resolution
131. Strengthened Surveillance and the European Semester II. Systemic Response1. Strengthened Surveillance and the European SemesterSeptember 2010, Commission presented six legislative proposals:preventive and corrective arms SGP,budgetary frameworks,prevention and correction of imbalances,enforcement15 March: Ecofin Council agreed on “general approach”+- 20 April: Parliament (Econ Committee) determines its negotiating position. Four proposals in co-decision (not corrective arm and budgetary frameworks)April – June: trilogues with aim of agreement by end June 2011
14II. Systemic Response 1. Strengthened Surveillance and the European Semester A strengthened Stability and Growth PactPreventive arm :Two co-existing criteria for assessing adjustment:the structural balance as the reference,and an analysis of expenditure net of discretionary revenue measures.Corrective arm:Need for quantitative benchmark for debt reduction.Operationalisation of the debt criterion of the EDP through a numerical benchmark for sufficiently diminishing debt.
151. Strengthened Surveillance and the European Semester II. Systemic Response1. Strengthened Surveillance and the European SemesterNational fiscal frameworks: basic rationale of minimum requirementsEU rules necessary but not sufficient.Consistency of domestic frameworks rules with EU rules required.Defining minimum standards for domestic budgetary frameworks aims at- fostering national ownership of the EU budgetary framework,- strengthening national structures to promote budgetary discipline.
16II. Systemic Response 1. Strengthened Surveillance and the European Semester A new framework to prevent and correct macro-economic imbalancesPreventive dimension to avoid the build-up of imbalances :• annual review• alert mechanism based on set of indicators (risk thresholds) andexpert analysis• in-depth country-specific analysis where warranted• country-specific recommendations to tackle imbalances (Art. 121(2))Corrective dimension with strong enforcement mechanisms:• Member States with serious imbalances are placed in an“excessive imbalances position”• stricter surveillance on basis of more prescriptive recommendation to tackle imbalances• deadlines for taking corrective action• possible sanctions for euro-area Member States in case of repeated non-compliance (0.2% GDP channelled though EFSM/EFSF)
171. Strengthened Surveillance and the European Semester II. Systemic Response1. Strengthened Surveillance and the European SemesterEnforcement: Key innovationPreventive arm of the SGP : interest-bearing deposit in case of failure to correct significant deviation from MTO or adjustment path towards it .Corrective arm of the SGP:(i) non-interest-bearing deposit when EDP opened (Art TFEU) in case of ‘particularly serious non-compliance’;ii) fine in case of no effective action (Art TFEU).Reverse QMV voting: Commission recommendation for sanctions considered adopted unless Council rejects by QMV within ten days.Distribution of fines : fines channelled to EFSF/ESM (instead of non-EDP countries).
181. Strengthened Surveillance and the European Semester II. Systemic Response1. Strengthened Surveillance and the European SemesterThe European Semester procedures and timelines:
19II. Systemic Response 2. Permanent crisis resolution : European Stability Mechanism Objective: address liquidity crises and safeguard financial stability in the € areaNature: Treaty-based intergovernmental organisationImplementation:Macroeconomic adjustment programme (strict policy conditionality)Intergovernmental financing instrumentCase-by-case private sector involvement
20II. Systemic Response 2. Permanent crisis resolution : European Stability Mechanism Capital size and structure:Effective lending capacity: € 500 bnPaid-in capital; callable capital; guarantees;AAA ratingInstruments:LoansBond purchases on primary market, “as an exception”Pricing:Funding costs + risk mark-up , in line with IMF pricingalso taking into account MS debt sustainabilityGovernance:UnanimityContribution keyESM + EFSF package submitted to national parliaments before Summer
21II. Systemic Response 3. Pact for the Euro Content:- Competitiveness: wage setting, opening sheltered sectors, improving education, R&D and the business environment- Employment: flexicurity, life long learning, tax reforms- Fiscal sustainability: pension reforms, national fiscal rules- Financial stability: national legislation for banking resolution, stress tests- Tax policy coordination: structured discussion, proposal for a common corporate tax baseGovernance: Political leadership from heads of State, making use of and strengthening existing instruments, integrated into the European Semester.Role of Commission: “strong central role” in the monitoring of the implementation of commitments
22II. Systemic Response 4. Financial repair and Supervision European System of Financial Supervision (ESFS) :European Systemic Risk Board (ESRB): macro-financial stability (Nov. 2010)European Supervisory Authorities (ESAs): new financial regulation, capital requirements (Jan. 2011)Commission will take recommendation of ESRB into account in Economic Imbalances Procedures (EIP) as it complements macro-financial monitoringImplementation of financial reforms to be continued, including a reinforcement of the regulatory and supervisory framework.
23II. Systemic Response: Crisis Prevention and Resolution 4 II. Systemic Response: Crisis Prevention and Resolution Financial repair and SupervisionCreation of the European Banking Authority (EBA) in Jan. 2011Regular stress testsLatest results:
24III. Concluding remarks Adjustment and overcoming the crisis will take timeThe adjustment is progressing but has not yet convinced markets due to looming concernsComprehensive response implemented should remove these concerns:Renewed commitments by MS to implement reformsImprovements in fiscal governance at Member State and EU levelsFixing banking sector issues (stress tests, address problems)Credible financial backstops (EFSF, pricing, ESM)