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The Euro Crisis: A Washington Perspective

The Euro Crisis: A Washington Perspective. Nick Parikh Bureau of European & Eurasian Affairs & Craig Pike Office of Monetary Affairs September 2013. Office of Monetary Affairs. What OMA Can Do for You. Coordinate compliance with the Foreign Account Tax Compliance Act (FATCA )

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The Euro Crisis: A Washington Perspective

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  1. The Euro Crisis:A Washington Perspective Nick ParikhBureau of European & Eurasian Affairs & Craig Pike Office of Monetary Affairs September 2013

  2. Office of Monetary Affairs

  3. What OMA Can Do for You • Coordinate compliance with the Foreign Account Tax Compliance Act (FATCA) • Lead efforts to combat foreign bribery • Interagency Country Risk Assessment System (ICRAS) ratings reviews • Resolve sovereign debt issues through the Paris Club • Promote fiscal transparency and conduct annual reviews • Arrange for briefings with the IMF for ambassadors

  4. Why the Eurozone Crisis Matters • We share close financial, trade, investment and security linkages. • A protracted stagnation in Europe with weak government, business and consumer demand adversely affects the U.S. economy.

  5. Low interest rates after 1999 ... Benchmark (10-year) yields

  6. ... fueled credit boom in periphery... ∆ Bank Credit as Share of GDP, 1999- (source: Bloomberg)

  7. Construction activity booms ... ∆ Construction Activity, 2000-2007 (source: Bloomberg)

  8. ... Periphery imports increase Current Account Deficit, 2000-2008 Source: Bloomberg (Quarterly data, annualized)

  9. Prices & Wages Diverged CPI inflation vs. euro area average, 1999-2011

  10. From 2009, sovereign bonds diverge Benchmark (10-year) government bond yields

  11. Jobs Picture Varies Radically Source: Eurostat

  12. Four Years of Euro Crisis Within months after the Lehman collapse,Euro area issuers start losing market access • Greece debt crisis - 2009 • Ireland crisis - 2010 • Portugal crisis - 2011 • Spain crisis – 2012* (*retained market access) • Cyprus crisis - 2013

  13. Response to Crisis • Shore up financial stability • Drive towards banking union • Economic surveillance and policy coordination • “European Semester” - yearly cycle of economic policy coordination • Macroeconomic Imbalance Procedure

  14. Financial Stability Tools • Austerity and structural reforms programs • European Financial Stabilization Mechanism and European Stability Facility (2010) • European Stability Mechanism (2012) • Outright Monetary Transactions (OMT) (2012) • IMF programs

  15. A Banking Union – in three steps • Single Supervisory Authority (SSA) the European Central Bank is scheduled to take over in Fall 2014 following asset quality review • Single Resolution Mechanism (SRM) No available funding for bank resolutions. Germany is opposed to the idea and says it requires a treaty change • Deposit Insurance Any type of debt mutualization is a non-starter for Germany

  16. The Real Issues • Problem Countries • (incl. Portugal, Greece, Cyprus) • Zombie banks undercapitalized banks crimp lending and hobble the recovery • Long-term GDP stagnation best-case-scenario GDP growth rates of 1.4 to 1.7% all the way to 2017 • Near-record unemployment Cyprus, Greece, Spain, Portugal and Italy are most affected • Debt-to-GDP is still rising further exacerbated by political instability

  17. U.S. Government Messaging • Support a fuller banking union • Urge more domestic demand and job creation, especially in countries that do not have a debt problem • Continued implementation of Troika programs for problem countries • Implement structural reforms, including pension, product and labor market reforms in order to bolster medium-term growth

  18. What Should Post Report On? • The ‘what,’ ‘when’ and ‘who’ is already reported by the media • Helping understand the meaning or significance, i.e. reporting on the ‘why’ of any situation is useful • Most valuable is looking ahead or reporting on ‘what’s (likely) next’

  19. Questions? Nick Parikh – parikhn@state.gov, 7-1605 Craig Pike – pikect@state.gov, 7-4630

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