The European sovereign debt crisis EMU and Turkey

The European sovereign debt crisis, EMU and Turkey Dirk Verbeken European Commission Istanbul, 24 February 2012 European Commission, Economic and Financial Affairs 1

The global financial crisis has evolved through phases Phase 1: US mortgage market crisis Phase 2: Global credit crisis Phase 3: Global economic and financial crisis Phase 4: Sovereign debt crisis European Commission, Economic and Financial Affairs 2

Interaction of sovereign and bank-balance sheets Credit risk transferred from banks to government 2008/9 Government finances weakened further by recession Investors focus on public debt sustainability Pressure in sovereign debt markets Banking sector vulnerable via sovereign exposures European Commission, Economic and Financial Affairs 3

The vicious circle Slowing economy Sovereign crisis European Commission, Economic and Financial Affairs Banking sector fragility 4

Responses to the crisis Ø Remove market uncertainty relating to Greece Ø Budgetary consolidation and growth in vulnerable Member States Ø Firewall against contagion in sovereign debt markets Ø Reinforcement of the EU banking sector Ø Strengthening of euro-area governance framework European Commission, Economic and Financial Affairs 5

Greece Early 2010: confidence lost n May 2010: € 110 bn package n Mid-2011: new package, easier conditions for existing loan n End-2011: upward revisions deficit, slower growth n Feb 2012: € 130 bn package n European Commission, Economic and Financial Affairs 6

Action on vulnerable Member States n n Ireland: good programme implementation market confidence is returning Portugal: structural reforms aim at switch from consumption to exports Italy: new government adopted package to address twin challenges Spain: new government adopted package for fiscal reform at all levels of government European Commission, Economic and Financial Affairs 7

Firewall 1 Up to € 750 bn financial stability package (support in the form of loans under strict conditionality) EFSM - € 60 bn European Financial Stabilisation Mechanism EFSF - € 440 bn European Financial Stability Facility European Commission, Economic and Financial Affairs Delegation of the European Union to China IMF – up to € 250 bn International Monetary Fund 8

Firewall 2: ESM n Capital size and structure: § Size: € 500 bn § Paid-in capital; callable capital; guarantees; § AAA rating n Instruments: § Loans (ESM stability support) § Bond purchases (Primary market support facility) n Pricing: in line with IMF pricing European Commission, Economic and Financial Affairs 9

Reinforcing the banking sector n n Restore confidence 9% capital ratio submit plans to deal with shortfall ECB measures easing of collateral requirements reduce reserve requirements LTRO with 3 -y maturities European Commission, Economic and Financial Affairs 10

Governance Reform n Strengthening the SGP n Preventing and correcting macroeconomic imbalances n Reinforcing economic surveillance European Commission, Economic and Financial Affairs 11

Reform of the SGP n More focus on public debt n Strengthening Enforcement ØWider range of sanctions ØTriggered at an earlier stage ØMore automaticity European Commission, Economic and Financial Affairs 12

Macroeconomic Surveillance n Preventive arm: – – – n Alert mechanism – scoreboard In-depth country analysis Recommendation on how to tackle imbalances Corrective arm: – Excessive imbalances position stricter surveillance European Commission, Economic and Financial Affairs 13

Europe 2020 n Structural reforms to raise potential growth – Smart consolidation – Reforms with low costs for the budget – Priority to growth-stimulating reforms European Commission, Economic and Financial Affairs 14

Fiscal Compact Legally binding balanced budget rule n Automatic correction mechanism n Ex-ante coordination of debt issuance n Ex-ante coordination of major economic policy reforms n Euro Summit meetings n European Commission, Economic and Financial Affairs 15

Route to a stable EMU Restore confidence via n Sound public finances n Spur growth and competitiveness n Stable achitecture (‘reinvent EMU’) n Deepening integration and financial market reform European Commission, Economic and Financial Affairs 16

What about Turkey? Declining demand confidence in the EU markets affect Turkish exports, FDI and growth prospects. n In a G 20 and IMF context, Turkey has a say and a role to play. n The Derviş-plan and the way it was implemented by the government show that there is a way out… n European Commission, Economic and Financial Affairs 17

European Commission, Economic and Financial Affairs 18