The reasons of the current sovereign debt crisis and crisis management in the EU

1. The reasons of the current sovereign debt crisis and crisis management in the EU Prepared by Dr. Endre Domonkos (PhD) Budapest Business School, College of International Management and Business, Department of Foreign Trade and EU Institute

2. I. The background of the economic and financial crisis I. • Financial and world economic crisis in 2008. • Problems: economic downturn + raising unemployment in the eurozone. • Raising budget deficits in all Member States of the EU + spiral of public debt. • Difficulties in the financing of the national budgets of the Member States.

3. I. The background of the economic and financial crisis II. • Vulnerability of the national currencies of the non-eurozone Members. • IMF-EU bridging loans were given to Hungary, Latvia and Romania. • The Greek sovereign debt crisis broke out, which ultimately led to the eurozone crisis. • Problems with Portugal, Spain and Ireland. • Greek bailout: it was unprecedented in magnitude.

4. I. General government deficit/surplus in the eurozone members (percentage of GDP) between 2009 and 2011 Source: European Commission, Eurostat.

6. II. The current situation of the monetary union in the light of the sovereign debt crisis I. • The European Council meeting in October 2008. • Key priorities: maintenance of financial stability, support to major financial institutions and the protection of depositors’, and taxpayers’ money. • The European Economic Recovery Plan: response to the economic crisis (EUR 200 billion, 1.5% of EU GDP). • To encourage investment in infrastructure, energy and rural development projects.

7. II. The current situation of the monetary union in the light of the sovereign debt crisis II. • The creation of the European Financial Stabilisation Mechanism: guarantees from the EU budget up to €60 billion. • The establishment of European Stabilisation Mechanism. • It has got three components. • This Mechanism was established on the basis of Article 122 of the TFEU. • The ESM: loan capacity of 500 billion.

8. II. The current situation of the monetary union in the light of the sovereign debt crisis III. • Repair and safeguard measures – financial sector repair • The creation of European Systemic Risk Board (ESRB) for macro-prudential oversight of the financial system. • Micro-prudential control of the financial system in the EU is provided by the European System of Financial Supervision (ESFS). • It consists of three European Supervisory Authorities (ESAs). • The ESAs: ban of financial products or services that are too risky.

9. II. The current situation of the monetary union in the light of the sovereign debt crisis IV. • On 21 July 2011: Summit of the Heads of State or Government. • Additional measures were adopted in order to mitigate the Greek crisis. • Agreement on new a new financial support programme for Greece. • Financial assistance was given to Ireland and later to Portugal.

10. II. The current situation of the monetary union in the light of the sovereign debt crisis V. • The European Semester: economic policy coordination. • Introduction of an annual planning cycle. • Various elements of economic policy coordination are organised in the same policy cycle. • Taking into account common guidelines by the Member States when elaborating their national budgets.

11. Source: European Commission, Economic and Monetary Affairs

12. II. The current situation of the monetary union in the light of the sovereign debt crisis VI. • The Euro Plus Pact was signed by 23 Member States of the EU. • To achieve a stronger economic policy coordination at European level + reinforce the pillar of the EMU. • Four objectives of the Euro Plus Pact. • Cooperation between the Member States in the fields such as wage reform, pension reform, health and social care reform. • Adoption of common goals by the Heads of State or Government of the EU.

13. II. The current situation of the monetary union in the light of the sovereign debt crisis VII. • Surveillance of economic and fiscal policies: • The main elements of the „Six-Pack”: 1. Stronger preventive action through a reinforced Stability and Growth Pact (SGP) and deeper fiscal coordination. 2. Stronger corrective action through a reinforced SGP. 3. Minimum requirements for national budgetary frameworks. 4. Preventing and correcting macroeconomic and competitiveness imbalances.

14. II. The current situation of the monetary union in the light of the sovereign debt crisis VIII. • The signature of the ESM Treaty on 2 February 2012. • The Treaty on stability, coordination and governance in the Economic and Monetary Union on was signed on 2 March 2012. • Its aims are the followings: to strengthen fiscal discipline + introduce stricter surveillance within the euro area. • Establishment of „balanced budget rule”. • Adoption of a package of recommendations for budgetary measures and economic reforms by the Commission on 30 May 2012.

15. Conclusion • The transformation of economic policy coordination within the EU. • The vulnerability of the eurozone. • To enforce the economic governance between the Member States, to reduce high budget deficit and gross government debt + to provide the application of the rules of Stability and Growth Pact appropriately. • Austerity measures aren’t enough to achieve a sustainable economic growth.

16. Literature • Zoltán Horváth (2011): Handbook on the European Union, Hungarian National Assembly, Fourth Edition, Chapter 8., The economic and monetary union, Hvgorac, pp. 305-335. • Zoltán Horváth – Bálint Ódor (2010): The Union after Lisbon. The Treaty Reform of the EU, Chapter 8., The Union’s policies, pp. 295-311. • The homepage of the European Commission, Economic and Financial Affairs: EU economic governance. • The homepage of the Council of the European Union. European Stability Mechanism Treaty signed. • The homepage of Eurostat. In: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsieb080&plugin=1

17. Thank you for your attention!