1 The European sovereign debt crisis and the future of the euro Peter Bekx European Commission Reykjavik, 19 February 2013

2 FINANCIAL STABILITY SOVEREIGN DEBT ECONOMIC GROWTH BANKS SOVEREIGN DEBT ECONOMIC GROWTH A Vicious circle Bailout costs Value loss of public bonds Slow growth US Contagion Deleveraging Fiscal consolidation Lower tax receipts Higher expenditure

BANKS SOVEREIGN DEBT ECONOMIC GROWTH Breaking the negative feedback loop Structural reforms Fiscal discipline Differentiated fiscal consolidation & quality of public finances Bank funding Bank recaps Firewalls Compact for Growth and Jobs ESM: fully operational since October Single Supervisory Mechanism Up to EUR 100 bn to cover financing needs of the Spanish banking sector Programmes in vulnerable countries OMT Overarching: Completing EMU Architecture

4 FINANCIAL STABILITY SOVEREIGN DEBT ECONOMIC GROWTH Bank funding Bank recaps BANKS SOVEREIGN DEBT ECONOMIC GROWTH Banking Union Bank recaps Breaking the negative feedback loop

5 Reinforcing the banking sector  Restore confidence  9% capital ratio  submit plans to deal with shortfall  ECB measures  easing of collateral requirements  reduce reserve requirements  LTRO with 3-y maturities  SSM

6 Recent Summit Decisions  Single banking supervisor  Direct recapitalisation of euro area banks  No preferred creditor status to EFSF/ESM support for Spain  Use of the EFSF /ESM in a flexible way to stabilise markets

7 SSM: legislative proposals  Supervisory tasks shifted to European level by 1 July 2013  Defining the role of the EBA  Next step: proposal for a Single Resolution Mechanism

8 FINANCIAL STABILITY SOVEREIGN DEBT ECONOMIC GROWTH Fiscal discipline Firewalls BANKS SOVEREIGN DEBT ECONOMIC GROWTH Programmes in vulnerable countries Breaking the negative feedback loop Firewalls

9 Greece  Early 2010: confidence lost  May 2010: € 110 bn package  Mid-2011: new € 130 bn package, easier conditions for existing loan  End-2011: upward revisions deficit, slower growth  Has achieved much more than is often recognised in terms of fiscal consolidation and structural reforms

10 Action on vulnerable Member States  Ireland: good programme implementation  market confidence is returning  Portugal: structural reforms aim at switch from consumption to exports  Italy: government adopted package to address twin challenges  Spain: government adopted structural reform packages and package for fiscal reform at all levels of government. Banking sector is in difficulties

Further developing firewalls 11 Situation May 2010 Capacity as of October 2012  ESM the main instrument to finance new programmes as of October 2012:  The maximum lending volume will be EUR 500bn  The EFSF will remain active in financing programmes before and during a transitional period  The ceiling for combined ESM/EFSF lending will be EUR 700bn  Total firewall more than EUR 800bn - combining ESM/EFSF, EFSM and bilateral loans  European firewalls acting in conjunction with IMF support

12 Reform of the SGP  More focus on public debt  More focus on structural deficits  Strengthening Enforcement  Wider range of sanctions  Triggered at an earlier stage  More automaticity

13 Fiscal Compact  Legally binding balanced budget rule  Automatic correction mechanism  Ex-ante coordination of debt issuance  Ex-ante coordination of major economic policy reforms  Euro Summit meetings

14 FINANCIAL STABILITY SOVEREIGN DEBT ECONOMIC GROWTH Improved Governance Structural reforms Differentiated fiscal consolidation & quality of public finances BANKS SOVEREIGN DEBT ECONOMIC GROWTH Structural reforms Differentiated fiscal consolidation & quality of public finances Breaking the negative feedback loop Compact for Growth and Jobs

15 Governance Reform  Strengthening the SGP  Fiscal compact  Preventing and correcting macroeconomic imbalances through reinforced economic surveillance  Towards a genuine EMU

16 Macroeconomic Surveillance  Preventive arm: Alert mechanism – scoreboard Alert mechanism – scoreboard In-depth country analysis In-depth country analysis Recommendation on how to tackle imbalances Recommendation on how to tackle imbalances  Corrective arm: Excessive imbalances position Excessive imbalances position  stricter surveillance  stricter surveillance

17 Europe 2020 Structural reforms to raise potential growth Smart consolidation Smart consolidation Reforms with low costs for the budget Reforms with low costs for the budget Priority to growth-stimulating reforms Priority to growth-stimulating reforms

Growth vs. Austerity  Fiscal consolidation: TINA  But SGP is not "stupid" Scope for judgement Scope for judgement Structural sustainability Structural sustainability Differentiation among Member States Differentiation among Member States  MS with fiscal space: automatic stabilisers  Focus on structural deficits 18

19 Compact for Growth and Jobs: MS Action  Re-confirm objectives of Europe 2020  Re-confirm differentiated growth-friendly consolidation  Complete restructuring of banking sector  Promote growth and competitiveness through structural reforms  Tackle unemployment  Modernise public administrations

20 Compact for Growth and Jobs: Contribution of EU Policies  Deepening the Single Market Digital Digital Energy Energy Unitary patent Unitary patent  Financing EIB capital EIB capital Project bonds Project bonds  Taxation  Employment package  Trade

21 Towards a genuine EMU  Short term Progress with banking union Progress with banking union Two-pack Two-pack  Medium term Complete banking union Complete banking union Develop fiscal capacity Develop fiscal capacity

BANKS SOVEREIGN DEBT ECONOMIC GROWTH Breaking the negative feedback loop Structural reforms Fiscal discipline Differentiated fiscal consolidation & quality of public finances Bank funding Bank recaps Firewalls Compact for Growth and Jobs ESM: fully operational since October Single Supervisory Mechanism Up to EUR 100 bn to cover financing needs of the Spanish banking sector Programmes in vulnerable countries OMT Overarching: Completing EMU Architecture

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