Transcript an incomplete Euro Area enforcement and crisis

The Euro’s Growing Pains
Antonio de Lecea
European Union Delegation to the United States of America
________________________________________________________________________
The Streit Council for a Union of Democracies
SAIS
May 4, 2010
Outline
1. A Greek accumulation of policy
mistakes…
2. …an incomplete Euro Area
enforcement and crisis
resolution
3. …both now being tackled…
4. …for the benefit of the Euro
Area and the global economy.
Death throes?
The euro:
It can’t happen,
It’s a bad idea,
It won’t last.
US economists on the EMU, 1989-2002
by Lars Jonung and Eoin Drea
Economic Papers No. 395 / December 2009
1. An accumulation of policy mistakes in
Greece
Poor fiscal policies and
governance
Declining competitiveness
Poor statistics
led to miss many opportunities from
entry in the Euro Area
Poor fiscal policies




Bloated public employment
Poor procurement rules
Poor revenue performance
Serious expenditure slippage
in 2009
 Poor fiscal accounting
Deteriorating competitiveness
2. Incomplete Euro Area governance
1. Fiscal surveillance initially focused on
nominal deficits
2. Reviewed in 2005 to bring more
economic rationale
3. And expanded in 2009 to take account of
structural aspects
4. Though assessed on the basis of
statistics not sufficiently surveilled
5. Crisis resolution mechanisms available
for non-Euro Area members (and third
countries) but not for Euro area
countries.
Markets did not price risk properly for a long while
Greek spreads on 10 year benchmark bonds to German Bund
300
200
100
0
01/01/99
01/01/00
01/01/01
01/01/02
01/01/03
01/01/04
01/01/05
01/01/06
01/01/07
01/01/08
01/01/09
3. Now being tackled by Greece …
 On 15 January commitment to reduce deficit by
4% in 2010 (both revenue and expenditure).
 On 3 March additional 2% deficit reducing
measures for 2010
3. Now being tackled by Greece …
Additional fiscal consolidation measures announced on 3 March 2010
million
EUR
% GDP
(as announced by
Greece)
REVENUE
Increase in VAT rates (from 4,5%, 9% and 19% to 5%, 10% and 21% respectively)
1300
0,5%
Increases in excise taxes (additional to those previously voted in Parliament)
1100
0,5%
EXPENDITURE
Reductions in public sector nominal wages and pensions (additional to the wage cutbacks
already announced) of which:
1700
0,7%
Reductions in current and capital expenditures in the public sector
700
0,3%
TOTAL
4800
2,0%
3. Now being tackled by Greece …
 On 15 January commitment to reduce deficit by 4% in
2010 (both revenue and expenditure).
 On 3 March additional 2% deficit reducing measures for
2010
 Ambitious tax reform launched in March
 Statistical data reviewed in April
 On 2 May Greek Government approves extraordinary
adjustment programme (negotiated with the EC, ECB, and
IMF) for 2010-2014, with further consolidation for 2010
and specification of fiscal measures and structural reforms
for 2010- 2012
3. …and by the EU
 On 16 February package of enforcement measures (fiscal,
structural, statistical) addressed to Greece
 Euro Area Leaders and Finance Ministers commitment to
support stability of the Euro Area with financial support
alongside the IMF.
 Proposals for enhanced economic policy coordination
(May 12)
 Enhanced EC (fiscal, structural) surveillance in close
cooperation with ECB, IMF
 Proposal for a more permanent crisis resolution
mechanism for the Euro Area
 And an ambitious framework of structural reforms (Europe
2020)
4. for the benefit of the Euro Area
and the global economy
 Ensure stability in the Euro Area
 to enable the EU to focus on crisis recovery,
 increasing growth potential,
 contributing to a reinvigorated, balanced global
growth,
 a sound reform of global financial regulation,
 and an effective and legitimate global economic
governance.
Conclusion
Greece and some Euro Area countries are not the
only ones with large fiscal and external imbalances
Conclusion
Greece, and other members of the Euro
Area family, will still have growing pains.
But they will grow strong.
The euro is not a substitute for sound
policies.
Conclusion
Also state and local finances are a challenge
Its governance must still be perfected.
But it will certainly outlive us.
Thank you for your
attention
Antonio de LECEA