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DG ECFIN The EU Response to the Sovereign Crisis Daniel DACO Head of Unit: Program Design and Support European Commission Economic and Financial Affairs.

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Presentation on theme: "DG ECFIN The EU Response to the Sovereign Crisis Daniel DACO Head of Unit: Program Design and Support European Commission Economic and Financial Affairs."— Presentation transcript:

1 DG ECFIN The EU Response to the Sovereign Crisis Daniel DACO Head of Unit: Program Design and Support European Commission Economic and Financial Affairs Athens, 18 April 2011

2 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 2 Search for a comprehensive approach Financial repair Fiscal consolidationGrowth and competitiveness Vulnerable countries

3 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 3 Outline Outline I. Short-term Response : Crisis Management 1. Financial Rescue 2. Fiscal Consolidation 3. Assistance to vulnerable countries 1. Balance of Payments Assistance 2. EFSM/ EFSF II. Systemic Response: Crisis Prevention and Resolution 1. Strengthened Surveillance and the European Semester 2. European Stability Mechanism 3. Pact for the Euro 4. Financial Repairs and Supervision III.Concluding remarks

4 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 4 I. Short-term Response: Crisis Management

5 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 5 I. I.Short-term Response 1. Financial Rescue European Economic Recovery plan (EERP) in coordination with national fiscal packages (Nov. 2008) Budgetary impulse of 200bn Policy Action: smart investment, car scrapping schemes, employment policies, etc European Global Adjustment Fund (EGF) and European Social Fund (ESF) to alleviate the negative social effects of the crisis Stabilising the banking system through targeted rescues

6 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 6 I. I.Short-term Response 1. Financial Rescue Stabilising the banking system through targeted rescues

7 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 7 I. I.Short-term Response 2. Fiscal consolidation Heavy legacy of the crisis on public finances But no-consolidation scenario is unsustainable. Significant efforts needed to restore sustainable public finances Excessive Deficit Procedure (EDP) in abeyance /fine-tuned with national recovery path Gross public debt in crises episodes (% of GDP) Debt path in different scenarios (% of GDP)

8 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 8 I. BoP facility I.Short-term Response 3. Assistance to vulnerable countries: BoP facility The BoP programmes (with the IMF) are producing good results with implementation of conditionality. The BoP programmes (with the IMF) are producing good results with implementation of conditionality. Regained Market confidence Regained Market confidence Fiscal consolidation well underway Fiscal consolidation well underway Enough breathing room for structural reforms Enough breathing room for structural reforms

9 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 9 Greece I. Short-term Response 3. Assistance to vulnerable countries: Greece No financial support instrument available for EA No financial support instrument available for EA Failures in fiscal reporting Failures in fiscal reporting Huge fiscal imbalances + banking problems + loss competitiveness Huge fiscal imbalances + banking problems + loss competitiveness Important financing needs + high market borrowing costs Important financing needs + high market borrowing costs Risks to financial stability for the EA as a whole Risks to financial stability for the EA as a whole Evolution of spreads:

10 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 10 I. Greece Pooled loans – general features – Ad hoc instrument I.Short-term Response 3. Assistance to vulnerable countries: Greece Pooled loans – general features – Ad hoc instrument EU legal basis EU legal basis Conditionality Conditionality Beneficiary Beneficiary Mechanism Mechanism Guaranteed by Guaranteed by Duration Duration Precautionary use Precautionary use IMF involvement IMF involvement ECB involvement ECB involvement Size Size Intergovernmental decision (May 2, 2010) Yes, programme covering Greece Bilateral loans from EA MS pooled by COM Direct loans, MS budget 7.5 years (extension: agreement in principle) Not applicable YesYes Payment agent, liaison on program design, review, disbursement, implementation 80bn ( 38.4 bn disbursed) 80bn ( 38.4 bn disbursed) + 30bn (IMF: 14.6 bn disbursed)

11 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 11 Creating new financial instruments: EFSM & EFSF Temporary nature (to be replaced by a permanent mechanism in 2013) Temporary nature (to be replaced by a permanent mechanism in 2013) Strict policy conditionality Strict policy conditionality High access High access Lending rates close to those of the IMF to avoid facility shopping Lending rates close to those of the IMF to avoid facility shopping Combined lending capacity 500 bn Combined lending capacity 500 bn Ireland and Portugal (?) Ireland and Portugal (?) I.Short-term Response 3. Assistance to vulnerable countries

12 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 12 II. Systemic Response: Crisis Prevention and Resolution

13 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 13 September 2010, Commission presented six legislative proposals: preventive and corrective arms SGP, budgetary frameworks, prevention and correction of imbalances, enforcement 15 March: Ecofin Council agreed on general approach 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 II. Systemic Response Strengthened Surveillance and the European Semester 1. Strengthened Surveillance and the European Semester

14 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 14 Strengthened Surveillance and the European Semester II. Systemic Response 1. Strengthened Surveillance and the European Semester Preventive 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. A strengthened Stability and Growth Pact

15 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 15 National fiscal frameworks: basic rationale of minimum requirements EU 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. II. Systemic Response Strengthened Surveillance and the European Semester 1. Strengthened Surveillance and the European Semester

16 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 16 Strengthened Surveillance and the European Semester II. Systemic Response 1. Strengthened Surveillance and the European Semester Preventive dimension to avoid the build-up of imbalances : annual review alert mechanism based on set of indicators (risk thresholds) and expert 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) A new framework to prevent and correct macro-economic imbalances

17 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 17 Enforcement: Key innovation Preventive 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). II. Systemic Response Strengthened Surveillance and the European Semester 1. Strengthened Surveillance and the European Semester

18 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 18 II. Systemic Response Strengthened Surveillance and the European Semester 1. Strengthened Surveillance and the European Semester The European Semester procedures and timelines:

19 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs Permanent crisis resolution : European Stability Mechanism II. Systemic Response 2. Permanent crisis resolution : European Stability Mechanism Objective: address liquidity crises and safeguard financial stability in the area Objective: address liquidity crises and safeguard financial stability in the area Nature: Treaty-based intergovernmental organisation Nature: Treaty-based intergovernmental organisation Implementation: Implementation: Macroeconomic adjustment programme (strict policy conditionality) Macroeconomic adjustment programme (strict policy conditionality) Intergovernmental financing instrument Intergovernmental financing instrument Case-by-case private sector involvement Case-by-case private sector involvement

20 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 20 Capital size and structure: Effective lending capacity: 500 bn Paid-in capital; callable capital; guarantees; AAA rating Instruments: Loans Bond purchases on primary market, as an exception Pricing: Funding costs + risk mark-up, in line with IMF pricing also taking into account MS debt sustainability Governance: Unanimity Contribution key ESM + EFSF package submitted to national parliaments before Summer 2. Permanent crisis resolution : European Stability Mechanism II. Systemic Response 2. Permanent crisis resolution : European Stability Mechanism

21 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs II. 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 base Governance: 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

22 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs II. 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 monitoring Implementation of financial reforms to be continued, including a reinforcement of the regulatory and supervisory framework.

23 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs II. Systemic Response: Crisis Prevention and Resolution 4. Financial repair and Supervision Creation of the European Banking Authority (EBA) in Jan Regular stress tests Latest results:

24 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 24 III. Concluding remarks III. Concluding remarks Adjustment and overcoming the crisis will take time Adjustment and overcoming the crisis will take time The adjustment is progressing but has not yet convinced markets due to looming concerns The adjustment is progressing but has not yet convinced markets due to looming concerns Comprehensive response implemented should remove these concerns: Comprehensive response implemented should remove these concerns: 1. Renewed commitments by MS to implement reforms 2. Improvements in fiscal governance at Member State and EU levels 3. Fixing banking sector issues (stress tests, address problems) 4. Credible financial backstops (EFSF, pricing, ESM)

25 DG ECFIN Daniel Daco European Commission, Economic and Financial Affairs 25 Thank you for your attention! Q&A


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