Economic and Monetary Union

- Unfinished Business

Howard Davies

Director, LSEConvoco

HVB Forum, Munich

10 May 2010

Source: The Economist, 29 April 2010.

1. Fiscal Discipline

Six Issues

Greece: notified vs. actual budget balances, % of GDP, 2000 – 2008

Source: Bruegel Policy Brief, March 2010.

The true Greek fiscal position was worse than reported

Fiscal tightening (% of GDP) needed between 2010 and 2020 to achieve 60% of GDP public debt ratio by 2030

Source: Citigroup Global Markets, Global Economics View, 26 April 2010.

Solvency gaps are massive

Note: Primary balance (assumed to improve gradually during 2011-20 and then maintained constant until 2030) improvement needed to stabilise debt at the end-2011 level. Japan’s target public debt ratio is 80% of GDP.

1. Fiscal Discipline2. Competitiveness

Six Issues

Real exchange rate* and relative export performance, cumulative change between 1999 and 2008

Source: Bruegel Policy Brief, March 2010.

There has been a remarkable divergence in competitiveness

*Real exchange rates are based on unit labour costs.

Greece is the frontrunner as the most vulnerable country of the euro area

Source: CEPS Policy Brief, No. 202, February 2010.

Vulnerability index

1. Fiscal Discipline2. Competitiveness3. European Monetary Fund

Six Issues

- Established under Enhanced Co-operation provisions of the Lisbon Treaty

- Subscriptions in proportion to Euro Area countries’ equity stake in ECB

- € 2 trillion subscription, of which € 200 billion paid in

- Board: Euro Area member states, EC, ECB

European Monetary Fund (Buiter)

Relative shares in the ECB’s capital in euro area, % of EA share

Germany would finance more than a quarter of the EMF

Source: Citigroup Global Markets, Global Economics View, 26 April 2010.

1. Fiscal Discipline2. Competitiveness3. European Monetary Fund4. Financial Regulation

Six Issues

Macro-prudential supervision

Micro-prudential supervision

Source: De Larosière Report, February 2009.

Members of ECB/ESCB

General Council (with alternates

where necessary)

European Systemic Risk Council (ESRC)(Chaired by President ECB)

Chairs ofEBA, EIA

& ESA

European Commission

European System of Financial Supervision (ESFS)

European Banking Authority

(EBA)

EuropeanInsurance Authority

(EIA)

EuropeanSecuritiesAuthority

(ESA)

National BankingSupervisors

National InsuranceSupervisors

National SecuritiesSupervisors

+ +

Information on micro-prudential developments Early risk warning

The de Larosière framework

1. Fiscal Discipline2. Competitiveness3. European Monetary Fund4. Financial Regulation5. Fiscal Transfers

Six Issues

1. Fiscal Discipline2. Competitiveness3. European Monetary Fund4. Financial Regulation5. Fiscal Transfers6. Euro System Reform

Six Issues

The ECB is the most independent, and least accountable central bank

Source: CEPR Discussion Paper No. 5470, January 2006

Accountability vs. Independence, adapted from Sousa (2002)

GDP and voting weights are very different

Source: H Berger (2006), Optimal central bank design: Benchmarks for the ECB.

Distribution of voting rights and economic size in EMU

Note: Relative size based on GDP.

Current situation Hypothetical EMU 24

Source: Heinemann and Huefner (2004). Is the view from the Eurotower purely European?

Central/ Regional voting in the Federal Reserve and the ECB

Ratio of regional to central votes

0

0.5

1

1.5

2

2.5

3

EMU 15 Fed Bundesbank

2.5 – 1.0

0.7 – 1.0

1.1 – 1.0

Economic and Monetary Union

- Unfinished Business

Howard Davies

Director, LSEConvoco

HVB Forum, Munich

10 May 2010