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The Euro’s Growing Pains Antonio de Lecea European Union Delegation to the United States of America ________________________________________________________________________ The Streit Council for a Union of Democracies SAIS May 4, 2010. Outline. A Greek accumulation of policy mistakes…

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The Euro’s Growing PainsAntonio de LeceaEuropean Union Delegation to the United States of America________________________________________________________________________The Streit Council for a Union of DemocraciesSAISMay 4, 2010

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Outline

  • A Greek accumulation of policy mistakes…
  • …an incomplete Euro Area enforcement and crisis resolution
  • …both now being tackled…
  • …for the benefit of the Euro Area and the global economy.
slide3

Death throes?

The euro:

It can’t happen,

It’s a bad idea,

It won’t last.

US economists on the EMU, 1989-2002

by Lars Jonung and Eoin Drea

Economic Papers No. 395 / December 2009

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1. An accumulation of policy mistakes in Greece

  • Poor fiscal policies and governance
  • Declining competitiveness
  • Poor statistics

led to miss many opportunities from entry in the Euro Area

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Poor fiscal policies

  • Bloated public employment
  • Poor procurement rules
  • Poor revenue performance
  • Serious expenditure slippage in 2009
  • Poor fiscal accounting
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2. Incomplete Euro Area governance

  • Fiscal surveillance initially focused on nominal deficits
  • Reviewed in 2005 to bring more economic rationale
  • And expanded in 2009 to take account of structural aspects
  • Though assessed on the basis of statistics not sufficiently surveilled
  • Crisis resolution mechanisms available for non-Euro Area members (and third countries) but not for Euro area countries.
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Markets did not price risk properly for a long while

Greek spreads on 10 year benchmark bonds to German Bund

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3. Now being tackledby Greece …

  • On 15 January commitment to reduce deficit by 4% in 2010 (both revenue and expenditure).
  • On 3 March additional 2% deficit reducing measures for 2010
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3. Now being tackledby Greece …

  • On 15 January commitment to reduce deficit by 4% in 2010 (both revenue and expenditure).
  • On 3 March additional 2% deficit reducing measures for 2010
  • Ambitious tax reform launched in March
  • Statistical data reviewed in April
  • On 2 May Greek Government approves extraordinary adjustment programme (negotiated with the EC, ECB, and IMF) for 2010-2014, with further consolidation for 2010 and specification of fiscal measures and structural reforms for 2010- 2012
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3. …and by the EU

  • On 16 February package of enforcement measures (fiscal, structural, statistical) addressed to Greece
  • Euro Area Leaders and Finance Ministers commitment to support stability of the Euro Area with financial support alongside the IMF.
  • Proposals for enhanced economic policy coordination (May 12)
  • Enhanced EC (fiscal, structural) surveillance in close cooperation with ECB, IMF
  • Proposal for a more permanent crisis resolution mechanism for the Euro Area
  • And an ambitious framework of structural reforms (Europe 2020)
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4. for the benefit of the Euro Area and the global economy

  • Ensure stability in the Euro Area
  • to enable the EU to focus on crisis recovery,
  • increasing growth potential,
  • contributing to a reinvigorated, balanced global growth,
  • a sound reform of global financial regulation,
  • and an effective and legitimate global economic governance.
slide17

Conclusion

Greece and some Euro Area countries are not the only ones with large fiscal and external imbalances

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Conclusion

  • Greece, and other members of the Euro Area family, will still have growing pains.
  • But they will grow strong.
  • The euro is not a substitute for sound policies.
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Conclusion

Also state and local finances are a challenge

  • Its governance must still be perfected.
  • But it will certainly outlive us.
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