from emergency support to enhanced governance: eu response to the economic crisis

EC/DNB conference Riga, 24 November 2011

From emergency support to enhanced governance:

EU response to the economic crisis

Gabriele GiudiceHead of Unit, DG ECFIN

Mission Chief for EU BoP Assistance to LV

European Commission

24 November 2011 EC/DNB conference Riga 2

The macroeconomic context

• The recovery which started in 2009 has stalled.• A negative feedback loop of sovereign debt

distress, financial market distress and faltering growth.

• Several countries in the EU under financial assistance

• Strong action is needed to restore macro-financial stability and to rekindle growth

• Lack of fiscal space => structural reforms a priority to enhance growth


3

EU Policy response so far

• Co-ordinated EU and IMF lending to Hungary, Latvia, Romania, Greece, Ireland, Portugal

• Creation of new European Financial Stability Facility (EFSF) and European Financial Stability Mechanism (ESM)

• Lending accompanied by strict conditions on deficit reduction and economic reform

• Recent European Council decision to leverage EFSF and negotiate debt reduction for Greece

• Six-pack of governance in force in mid-December


Significant steps

• Strengthening of Stability and Growth Pact with more automaticity of sanctions and fines, focus on debt as well as deficit, stronger institutions

• Excessive Imbalances Procedure to guard against non-fiscal imbalances

• European Systemic Risk Board to monitor stability risks

• New system to enhance the quality and consistency of EU financial regulation and supervision


New efforts are needed for economic renewal

• Further strengthen euro area governance, • Safeguard future financial stability • Boost growth and employment.

New package on 23/11 contains four elements: • The 2012 Annual Growth Survey setting out the

economic priorities for the coming year; • Two Regulations to tighten economic and

budgetary surveillance in the euro area; • A Green Paper on Stability Bonds.


The Annual Growth Survey 2012

Calls for the EU and Member States to focus on five priorities: – pursuing differentiated, growth-friendly

fiscal consolidation; – restoring normal lending to the economy; – promoting growth and competitiveness; – tackling unemployment and the social

consequences of the crisis; – modernising public administration.


Two Regulations on strengthened surveillance for the euro area

• Common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area

• Explicit rules for enhanced surveillance for those euro area Member States facing severe difficulties with regard to their financial stability, those in receipt of financial assistance on either a precautionary basis or as part of a full-scale assistance programme, and those in the process of exiting such assistance.


Monitoring and assessing draft budgetary plans

Introduction of a common budgetary timeline and common budgetary rules

• EA Member States will be required to submit in the autumn their draft budgetary plans for the following year to the Commission and the Council.

• The Commission will examine them and will address an opinion to a Member State if these plans do not appear to be in line (with the Stability and Growth Pact and the recommendations from the European semester)

• Independent macroeconomic forecasts and fiscal councils monitoring the implementation of national rules.


Enhanced surveillance for EA MS facing severe difficulties

• The Commission would be able to decide whether a Member State should be subject to enhanced surveillance

• The Council will be able to issue a recommendation to such Member States to request financial assistance.

• tighter monitoring by the Commission will go further than the requirements for EDP Member States.

• Assessments to be made about the content and direction of fiscal policy at any point while a Member State is in an EDP.


Green Paper on Stability Bonds

The Commission puts forward three options:

1. Full substitution of national bonds with joint-and-several guarantee

2. Partial substitution of national bonds, joint-and-several guarantee (“middle” option)

3. Partial substitution of national bonds, but only several guarantee and credit enhancements

Provides a detailed analysis of their financial and legal implications,

Formal contribution to this debate, as well as setting out a clear timeline for the next steps


Stability Bonds: clear benefits associated with challenges

Benefits: financial stability• reduced funding costs for MS (liquidity, credit risk)• lower volatility• more complete financial integration in Europe

Challenges: fiscal stability/discipline• Incentive implications (“moral hazard”); • If weaker market discipline => stronger governance

Potentially requires changes in the Treaty• Risk sharing -> Art 125 (“no bail-out”)• Stronger governance

Many important technical/implementation issues (Issuing body; relationship with ESM; Legal, market convention, accounting issues)


Latvia’s experience with crisis: what lessons for Europe?

• Can be overcome if there is, first and foremost, national commitment and incisive action to ensure solvency

• Adjustment does not need a devaluation nor a sustained deflation, and leads to lower interest rates (both good for debt dynamics)!

• Growth can return faster, esp. if adjustment based on reforms• Liquidity problems must not lead to insolvency : important that EU

provides ample support and shelter• Ultimately much less money needed : LV only €4.3bn out of 7.5, the

EU banking sector also used a fraction.• Political paradox : PM re-elected after massive consolidation and

reform (the same in Estonia).• However, realism is necessary, more needs to be done, including to

avoid the pitfalls of the next boom

EC/DNB conference Riga, 24 November 2011

Thank you for your attention!

Gabriele GiudiceHead of Unit, DG ECFIN

Mission Chief for EU BoP Assistance to LV

European Commission


AGS 2012:growth-friendly consolidation

• Consolidation should continue with a differentiated speed of fiscal adjustment

• Expenditure-based adjustments should be favoured, while protecting growth-enhancing expenditure. Quality of expenditure important.

• Tax structures to be made more growth-friendly• Reforms in pension systems should ensure

their financial sustainability while preserving an adequate level of pensions


AGS 2012: financial sector

Sever the link between the sovereign crisis and the financial sector to facilitate that the financial sector can provide the necessary financing to the real economy.

• The capacity of the EFSF and of the ESM should be maximised

• Mechanisms to support Member States in their efforts to strengthen financial sectors

• Rapid adoption: the capital requirements legislation, EU crisis resolution for financial institutions


AGS 2012: structural reform

• Structural reforms to lift growth quickly without large budgetary costs => focus on productivity

• Labour market reforms, in particular wage setting mechanisms => boost job creation

• Reforms of the tax and benefit systems and employment protection legislation => reduce unemployment

• Improve the efficiency of public institutions => support fiscal consolidation and competitiveness

• Facilitate resource reallocation and structural change towards dynamic sectors and high-productivity activities: labour mobility, human capital, competition policy


Stability Bonds: background

Discussion in 1990s: common bonds by EA=> financial market integration + lower borrowing costs from high liquidity

Recent discussion: 1. Short-term: way out of sovereign debt crisis?2. Long-term: Fiscal and monetary union?

European Parliament request: COM should investigate “future system of Eurobonds” by the end of this year

from emergency support to enhanced governance: eu response to the economic crisis

Documents

growth ecdnb conference

macrofinancial stability

eu response

stability bonds

growth pact

faltering growth

financial market distress

euro area governance