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The EU’s response to the financial crisis. YS breakfast meeting. Oslo, 29 September 2011. János Herman, Head of Delegation. Overview. Context; the EU‘s place in the world Lessons from the crisis A comprehensive response. The EU’s weight and presence in the world.

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the eu s response to the financial crisis

The EU’s response to the financial crisis

YS breakfast meeting

Oslo, 29 September 2011

János Herman, Head of Delegation

overview
Overview
  • Context; the EU‘s place in the world
  • Lessons from the crisis
  • A comprehensive response
the eu s weight and presence in the world
The EU’s weight and presence in the world
  • A Union of 27 countries, 500 million people – “Unity in diversity”
  • Over one fifth of the world economy
  • Leading trading power, biggest provider of development aid
challenges now and in the years to come
Challenges now and in the years to come
  • The economic and financial crisis, its political impact; the EU should demonstrate that it is part of the solution by helping to preserve the European welfare model
  • Tackle democratic deficit by bringing the EU closer to citizens
  • Enlargement
  • Immigration, unfavourable demographic and social tendencies
  • Give new answers to questions concerning globalisation, and the evening up of distribution of wealth and power, continue as a significant force for good in the world
the economic and financial crisis
The economic and financial crisis
  • Not an “EU- or €-crisis”, it has impacted all or most developed economies
  • Some EU member states have accumulated high (not sustainable) debt
  • Crisis has highlighted that € needs to be funded upon stronger common economic governance
public debt and financial markets
Public debt and financial markets

Bank credit to households and firms, euro area

Spreads of sovereign bonds (10 years)

Source: Reuters and European Commission

Source: ECB

debt developments and scenarios of fiscal consolidation
Debt developments and scenarios of fiscal consolidation

% of GDP

120

120

Forecast

Actual development

Scenarios

110

110

Scenario 1:

100

100

No consolidation

Scenario 2:

90

90

consolidation 0.5% of GDP

80

80

Scenario 3:

70

70

consolidation 1% of GDP

60

60

50

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

eu response to the crisis
EU response to the crisis
  • Efforts to restore confidence
    • In the countries themselves and at EU level
  • Measures to ensure that mistakes will not be repeated
    • Policy coordination, early warning of difficulties, European Stability Mechanism
  • Initiatives to promote longer-term growth
    • 20/20/20 programme for jobs and growth
  • MORE, NOT LESS EU TO COME
elements of a comprehensive response
Elements of a comprehensive response

Stability of the financial sector

Fiscal consolidation

Growth and competitiveness

Reinforced economic policy coordination

eu imf adjustment programmes
EU/IMF adjustment programmes
  • ‘Troika‘: Commission, ECB, IMF
  • In euro area:
    • Greece (€ 110 bn.; new programme)
    • Ireland (€ 85 bn.)
    • Portugal (€ 78 bn.)
  • Other Member States
    • Latvia (€ 7.5 bn.)
    • Romania (€ 5 bn. pre-cautionary programme)
financial stability
Financial stability
  • Reform of financial sector regulation: capital requirements, crisis resolution mechanism, consumer protection, etc.
  • European system of financial supervision: European Systemic Risk Board and three European supervisory authorities (banks, insurances, securities)
  • Stress tests
  • BoP facility, EFSF, EFSM, ESM
from the european financial stability facility to the european stability mechanism
From the European Financial Stability Facility to the European Stability Mechanism

Capital and structure

  • Effective capacity: € 500 bn.
  • Paid-in capital; callable capital; guarantees
  • AAA rating
  • Private sector involvement according to debt sustainability assessment; Collective Action Clauses

Instruments

  • Stability support
  • Primary market support

Pricing

  • Financial costs + risk mark up (similar to IMF)

Governance

  • Decision-making: unanimity on strategic issues; otherwise QMV
  • Contribution key: based on ECB key
the european semester
The European Semester
  • integrated approach to surveillance: simultaneous presentation of budget and reform programmes (SCP and NRP)
  • priorities identified in Annual Growth Survey
  • ex ante, concrete, country-specific recommendations
  • followed by a ‘national semester’ of implementation
the european semester calendar

February

February

January

January

February

March

March

April

April

May

May

June

June

July

July

January

March

April

May

June

July

European

European

Policy guidance

Policy guidance

Annual

Annual

including possible

including possible

Growth

Growth

Commission

Commission

Survey

Survey

recommendations

recommendations

Autumn:

Autumn:

Peer review

Peer review

Finalisation

Finalisation

at EU level

at EU level

Council of

Council of

Debate &

Debate &

& adoption

& adoption

Ministers

Ministers

orientations

orientations

of guidance

of guidance

Debate &

Debate &

European

European

orientations

orientations

Parliament

Parliament

European

European

Spring EU

Spring EU

Endorsement of guidance

Council

Council

summit

summit

Adoption of National

Adoption of National

Autumn:

Autumn:

Reform

Reform

Programmes

Programmes

Member

Member

Decisions

Decisions

(

(

NRPs

NRPs

) & Stability

) & Stability

States

States

at national

at national

and Convergence

and Convergence

level

level

Programmes

Programmes

(

(

SCPs

SCPs

)

)

The European Semester calendar
strengthening instruments of economic policy coordination
Strengthening instruments of economic policy coordination

Fiscal surveillance (Stability and Growth Pact)

Amendments in two Regulations

  • preventive arm (1466/97): prudent fiscal policy
  • corrective arm (1467/97): debt criterion

New Directive: minimum standards for national fiscal frameworks

Macroeconomic surveillance

New regulation on prevention and correction of macroeconomic imbalances

- alert mechanism

- excessive imbalances procedure (‘EIP’)

Enforcement

New regulation on effective enforcement of budgetary surveillance

Stronger incentives & sanctions

Enforcement

New regulation on effective enforcement of macroeconomic surveillance

Sanctions for continued lack of or insufficient action

the euro plus pact
The Euro Plus Pact
  • 17 euro MS + 6 non- euro MS
  • Measures in four areas:
    • Competitiveness: wage setting mechanisms, liberalisation of protected sectors, education and R&D, business environment
    • Employment: Flexicurity, life-long learning, taxation
    • Sustainability of public finances: pensions, fiscal rules
    • Financial stability: national laws for bank consolidation, stress tests
  • Pragmatic coordination of tax policies
  • Under the political guidance of Heads of State or Government
  • Integrated into the European Semester
  • Commission monitors implementation
ea summit decisions of 21 july
EA summit decisions of 21 July
  • A new Greek EU/IMF programme, including
    • voluntary debt rollovers and debt buy-back
    • reduction of interest rates, extension of maturities
  • Increased EFSF/ESM flexibility and effectiveness
    • precautionary programmes
    • recapitalisation of financial institutions through loans to governments
    • interventions in secondary markets
  • Proposals for euro area economic governance reform by mid-October
the situation today the way forward
The situation today/The way forward
  • Markets
  • Member States
  • EU Institutions
  • Give time