Presentation on theme: "DG ECFIN, European Commission"— Presentation transcript:
1DG ECFIN, European Commission Vejen mod en økonomisk union Netværkskonference 2012, Odense Jakob Wegener FriisDG ECFIN, European Commission
2From a financial crisis …. – A systemic crisis of the euro?Subprime crisis2008 – Financial crisis2009 – Economic crisis2010 – Sovereign debt crisesAssistance programmes +EA financial backstopThe sovereign debt crisis is a consequence of the unprecedented financial and economic crisis we went through.Briefly: - The origin of the crisis is to be found in the subprime crisis in the US: the increases in interest rates in the US - from 1% in 2004 to above 5% in led to a sharp increases in subprime mortgages cost as a high percentage of these mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. Coupled with the burst of the housing-bubble and the associated decrease in property valuations, this will lead to large losses on these mortgages.- The crisis began to affect the financial sector in February 2007, when HSBC, the world's largest (2008) bank, wrote down its holdings of subprime-related mortgage-backed-securities by more than USD 10.5 bn, the first major subprime related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold.- in March 2008, Bearn Sterns as rescued by the Fed and sold to JP Morgan. In November, Fannie Mae and Freddie Mac representing slightly less than half of US mortgages had to be nationalised. Overall capital injections in banks represented 1.5 trillion USD: 700bn from US treasury, 360bn from the Europeans.- As of November 2008, financial firms around the globe had written down their holdings of subprime related securities by $750 billion. These have wiped out much of the capital of the world banking system. When Lehman Brothers and other important financial institutions failed in September 2008, the crisis hit a key point. During a two day period in September 2008, $150 billion were withdrawn from US money funds, a key source of credit for banks and nonfinancial firms.This credit freeze brought the global financial system to the brink of collapse. The response of the Federal Reserve, the European Central Bank, and other central banks was immediate and dramatic: they put in motion the largest liquidity injection into the credit market, and the largest monetary policy action in world history.- The massive reduction in bank capital reduced the credit available to businesses and households. The transmission of financial distress to the real economy evolved at record speed, trough tighter credit conditions, collapsing confidence and sharp contraction in global demand and trade.. It is the most severe financial and economic crisis in several generations.Stimulus packages + automatic stabilizersBank recapitalizations + guarantees22
3……. to an unprecedented economic crisis At the end of 2008, policy makers were confronted with the sharpest downturn since the 30s. GDP growth was in free fall moving from 3% in 2007 to close to zero in 2008 and with a massive further contraction in the offing for Unemployment sharply increased, reaching in the US its highest level over 15 years.3
4Heartbeat of the crisis At the end of 2008, policy makers were confronted with the sharpest downturn since the 30s. GDP growth was in free fall moving from 3% in 2007 to close to zero in 2008 and with a massive further contraction in the offing for Unemployment sharply increased, reaching in the US its highest level over 15 years.4
5Legacy of the crisis: 4 key messages A lasting impact on growth and job creation: more than ever a need for comprehensive policy actionRecovery in question: uneven and protracted, re-building confidence of paramount importanceFiscal consolidation a necessary but not sufficient condition for sustainable public financesThe EU response has been comprehensive, albeit incremental. Stronger EMU governance and commitment to euro area cohesion essentiel
6The crisis as an eye opener External shock: the crisis has exposed shortcomings in EMU‘s design and governance systemGaps in original EMU design : monetary and fiscal discipline not enough, no crisis resolution mechanism foreseenPrediction of closing structural reform gap did not materialise fullyWeaknesses in enforcement of existing rulesThe crisis has suddenly and largely unexpectely invalidated the main tenets of the ‘Great moderation paradigm’The combination of fiscal and monteray discipline turned out not to be the reliable safeguards of overall macro stability.Countries which had scored well in terms of both monetary and fiscal discipline suddenly found themself off track .Lasrgely undetected or ignored by the radar of conventional macro surveillance they had accumulated macroeconmic imbalances , such as large current account deficits and/or housing bubbles, which when they unwound, turned into serious vulnerabilities.66
7The broad ‘geography’ of EMU reform 7The broad ‘geography’ of EMU reformPrevention and correction of macro imbalancesBetterenforcement:disincentives/SanctionsNationalframeworksMore effective preventive arm of SGPFocus on debt developments (corrective arm of SGP)Sound fiscalpolicyCrisisresolutionStructural reform strategy (Europe 2020)Sound fiscalpolicyBalancedgrowthRegulation and supervision of financial systemsMacro-prudential supervision77
8Learning the lesson: the EMU of tomorrow Growing again: The pre-crisis need for structural reform is reinforced. Releasing Europe’s growth potential is a pressing priority. A well-functioning EMU will help.A choice to be made: the « safe harbour » of Maastricht or further fiscal integration. More intrusive surveillance and forceful enforcement paired with a credible last-resort financial backstop.Beyond fiscal: Broader surveillance to prevent unsustainable imbalances build up. Strengthened financial regulation and supervision in support of the internal market.Hanging together: Realisation of scope and depth of governance required to protect the benefits of common currency. EU rules interacting with increased attention of financial marketsEver closer Union: Political challenge of wide-reaching financial solidarity and « pooling of powers » within the Community method.
9Completion of EMU's architecture Banking Union – closer integration in supervisory structures and practices, in cross-border crisis management/resolution and burden sharingFiscal Union – Moving from coordination towards integration in the surveillance of economic and budgetary policies in the euro areaStability Bonds – Consider joint issuance of euro area debt, once crisis has abated
10Why do we need a Banking Union? Necessary for achieving a genuine EMU.Break the negative feedback loop between sovereigns and banks.Prevent bank runs and strengthen overall financial stability.Preserve the single market.Single supervision is the precondition for the introduction of potential direct recapitalisation of banks by ESM.
11Banking crisis triggered dangerous feedback loops Higher Government Bond YieldsDeeperRecessionHigher Government Debt-to-GDP RatioMore Banking / Financial StrainsBank solvency concernsTighter financial conditions indexBailout costsHigher debt serviceDefaultworriesCalls for fiscal tighteningLower tax receiptsLower nominal GDPCredit lossesLower corporate profitsReduced loan supplyNegative wealth effectUn dels principals problemes que ha sorgit cap a la fi de 2011 és la retroalimentació negativa entre:La feblesa en les balances dels bancsLa sostenibilitat de les finances públiques, en concret, la sostenibilitat del deuteLes febles previsions de creixementÉs evident que els problemes en cadascuna creen a la vegada problemes en les altres dues. I es reforcen mútuament.I el que s’està fent per gestionar la crisi vol atacar totes les components a la vegada.L’objectiu és convertir un cercle potencialment viciós en un de virtuós.Aconseguir això és difícil i exigeix disciplina i perseverança.Source: Goldman Sachs, Global Economics Weekly 11/38, 30/11/2011
12Key elements of the Banking Union Single Supervisory MechanismSingle Resolution MechanismDeposit GuaranteesSingle Rulebook28/03/2017
13Single Rulebook ECB Single Supervisory Mechanism National central banks / supervisors of non-participating Member StatesCoordination by EBAECBsend preparation and Board Members execution of taskscentral banks / supervisors of participating Member StatesSingle Rulebook
14A Euro area SSM open to other MS All Euro-area Member States shall participate.Non-Euro area countries may join by establishing a close cooperation between their competent authorities and the ECB.28/03/2017
15The debate about fiscal union Discipline(Austerity)Solidarity(Growth)6-Pack2-PackFiscal CompactVeto over national budgetary policyExecutive tasks at EA-level (e.g. EA Treasury)New enforcement toolsCommon growth and stabilization instrumentsFiscal backstopsFinancial transactions taxEurobondsSocial pillarESM
16Europe’s Prosperity Triangle "Social market economy" FAIRNESS- participation- generational- territorialGROWTH- single market- catching-up and convergence- investment and innovationSTABILITY-monetary/financial-fiscal-environmental
17Political "musts" for long-term solutions Political will and leadership for a great leap forwardNecessity of Treaty changes UnanimityConstitional questions in some MSPolitical and economic cohesion among countriesEU27 vs. EU10?Rules vs. discretion: An accepted authority neededBuilding legitimacy of the EU-level executive - preferences of Member States and citizensIssues: Too little too late? Are we sure about EMU.2? Credible incentives and mutual trust?