The European sovereign debt crisis and the future
The European sovereign debt crisis and the future of the euro Peter Bekx European Commission Reykjavik, 19 February 2013 1
A Vicious circle FINANCIAL BANKS STABILITY Value loss of public bonds Bailout costs SOVEREIGN DEBT Slow growth US Contagion Deleveraging Lower tax receipts Higher expenditure ECONOMIC GROWTH Fiscal consolidation 2
Overarching: Completing EMU Architecture Single Supervisory Mechanism Bank funding ESM: fully operational since October Firewalls Bank recaps BANKS Breaking the negative feedback loop SOVEREIGN DEBT Programmes in vulnerable countries OMT Structural reforms ECONOMIC GROWTH Fiscal discipline Up to EUR 100 bn to cover financing needs of the Spanish banking sector Differentiated fiscal consolidation & quality of public finances Compact for Growth and Jobs
Breaking the negative feedback loop Banking Bank funding Union SOVEREIGN DEBT FINANCIAL BANKS STABILITY Bank recaps ECONOMIC GROWTH 4
Reinforcing the banking sector Restore confidence 9% capital ratio submit plans to deal with shortfall Ø ECB measures easing of collateral requirements reduce reserve requirements LTRO with 3 -y maturities Ø SSM Ø 5
Recent Summit Decisions Ø Single banking supervisor Ø Direct recapitalisation of euro area banks Ø No preferred creditor status to EFSF/ESM support for Spain Ø Use of the EFSF /ESM in a flexible way to stabilise markets 6
SSM: legislative proposals Ø Supervisory tasks shifted to European level by 1 July 2013 Ø Defining the role of the EBA Ø Next step: proposal for a Single Resolution Mechanism 7
Breaking the negative feedback loop FINANCIAL BANKS STABILITY Firewalls SOVEREIGN DEBT Firewalls Programmes in vulnerable countries ECONOMIC GROWTH Fiscal discipline 8
Greece Ø Early 2010: confidence lost Ø May 2010: € 110 bn package Ø Mid-2011: new € 130 bn package, easier conditions for existing loan Ø End-2011: upward revisions deficit, slower growth Ø Has achieved much more than is often recognised in terms of fiscal consolidation and structural reforms 9
Action on vulnerable Member States Ireland: good programme implementation market confidence is returning Ø Portugal: structural reforms aim at switch from consumption to exports Ø Italy: government adopted package to address twin challenges Ø Spain: government adopted structural reform packages and package for fiscal reform at all levels of government. Banking sector is in difficulties Ø 10
Further developing firewalls Situation May 2010 § Capacity as of October 2012 ESM the main instrument to finance new programmes as of October 2012: § § § The maximum lending volume will be EUR 500 bn The EFSF will remain active in financing programmes before and during a transitional period The ceiling for combined ESM/EFSF lending will be EUR 700 bn § Total firewall more than EUR 800 bn - combining ESM/EFSF, EFSM and bilateral loans § European firewalls acting in conjunction with IMF support 11
Reform of the SGP Ø More focus on public debt Ø More focus on structural deficits Ø Strengthening Enforcement Ø Ø Ø Wider range of sanctions Triggered at an earlier stage More automaticity 12
Fiscal Compact Ø Legally binding balanced budget rule Ø Automatic correction mechanism Ø Ex-ante coordination of debt issuance Ø Ex-ante coordination of major economic policy reforms Ø Euro Summit meetings 13
Breaking the negative feedback loop FINANCIAL BANKS STABILITY Structural reforms SOVEREIGN DEBT ECONOMIC GROWTH Improved Governance Compact for Growth and Jobs Differentiated fiscal consolidation & quality of public finances 14
Governance Reform Ø Strengthening the SGP Ø Fiscal compact Ø Preventing and correcting macroeconomic imbalances through reinforced economic surveillance Ø Towards a genuine EMU 15
Macroeconomic Surveillance Ø Preventive arm: l l l Alert mechanism – scoreboard In-depth country analysis Recommendation on how to tackle imbalances Ø Corrective arm: l Excessive imbalances position stricter surveillance 16
Europe 2020 Structural reforms to raise potential growth l l l Smart consolidation Reforms with low costs for the budget Priority to growth-stimulating reforms 17
Growth vs. Austerity Ø Fiscal consolidation: TINA Ø But SGP is not "stupid" l l l Scope for judgement Structural sustainability Differentiation among Member States Ø MS with fiscal space: automatic stabilisers Ø Focus on structural deficits 18
Compact for Growth and Jobs: MS Action Ø Re-confirm objectives of Europe 2020 Ø Re-confirm differentiated growth-friendly consolidation Ø Complete restructuring of banking sector Ø Promote growth and competitiveness through structural reforms Ø Tackle unemployment Ø Modernise public administrations 19
Compact for Growth and Jobs: Contribution of EU Policies Ø Deepening the Single Market l l l Digital Energy Unitary patent Ø Financing l l EIB capital Project bonds Ø Taxation Ø Employment package Ø Trade 20
Towards a genuine EMU Ø Short term • Progress with banking union • Two-pack Ø Medium term • Complete banking union • Develop fiscal capacity 21
Overarching: Completing EMU Architecture Single Supervisory Mechanism Bank funding ESM: fully operational since October Firewalls Bank recaps BANKS Breaking the negative feedback loop SOVEREIGN DEBT Programmes in vulnerable countries OMT Structural reforms ECONOMIC GROWTH Fiscal discipline Up to EUR 100 bn to cover financing needs of the Spanish banking sector Differentiated fiscal consolidation & quality of public finances Compact for Growth and Jobs
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