Transcript What are the implications of joining the euro area ?

What are the implications of joining
the euro area ?
Benjamin Angel - European Commission - 03/02/14 -
4 main effects
• (1) A more stringent fiscal framework
• (2) A protection by a sovereign insurance scheme (ESM)
• (3) The benefits of a worldwide currency
• (4) A full participation to banking union
1. A more stringent fiscal framework
SGP: preventive arm
MTO: a country-specific reference value for individual Member States'
medium-term budgetary positions, defined in structural terms (that is,
cyclically adjusted and net of one-off and temporary measures).
MS must reach their MTOs or be on an appropriate adjustment path
towards it, with an annual improvement of their structural balance of
0.5% of GDP as a benchmark (more ids debt >60%).
Range: between -1% of GDP and balance or surplus. Under the fiscal
compact, MS have further committed to MTOs of at least -0.5% of GDP,
unless the debt-to-GDP ratio is significantly below 60% and there are low
risks for the sustainability of public finances.
What happens
when SGP
rules are
breached in
the
preventive
arm?
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SGP: corrective arm
Opening EDP: if MS Member State has a deficit >3% GDP or a nondiminishing debt >60% GDP (the gap between a country's debt level
and the 60% reference needs to be reduced by 1/20th annually on
average over three years).
Assessment: Countries in EDP have six months (or 3 for a serious
breach) to comply. EA MS that have already been sanctioned under the
preventive arm or whose breach of the threshold values is especially
serious, may also face a stricter sanction in the form of a non-interestbearing deposit of 0.2% of GDP at this point.
Once the deadline has passed, Commission and Council assess the
action the Member State has taken, with a view to either putting the
procedure on hold or stepping it up if the Member State has not done
enough.
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What
happens
when SGP
rules are
breached in
the
corrective
arm?
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The MIP
Preventive arm
Commission presents a report identifying countries that may be affected by or
at risk of being affected by imbalances, based on the economic reading of a
scoreboard of indicators
Commission prepares in-depth review for the selected countries taking on board
a broad range of variables and using analytical tools and country-specific
information.
Corrective arm
The Council recommends corrective action and the Member State concerned
submits a Corrective Action Plan
Backed up by financial sanctions (euro area only)
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Autumn
Presentation of draft
budgetary plan for
following year
End of Year
Budget Law
 Opinion by the Commission
 Overall assessment
 Discussion by Eurogroup
European Semester – Spring
Presentation of medium-term fiscal and economic policy
plans
 Assessment of compliance with preventive arm of SGP
 Macroeconomic surveillance
 Policy guidance and recommendation
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2. A Sovereign protection
A very robust structure
The world biggest IFI
Lending capacity roughly
equivalent to the one of
the IMF
ESM % Contribution Key, €700 billion total
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Mission : to safeguard financial stability in Europe by
providing financial assistance to euro area Member States
Instruments
Direct recaps
Loans
Primary Market
Purchases
Secondary Market
Purchases
Precautionary
Programme
Bank recapitalisations
through loans to governments
All assistance is linked to appropriate conditionality
EFSF and ESM finance their activity by issuing bonds or other debt instruments
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The benefits of a worldwide currency
 A credit enhancing step
 Easier to attract FDI
 Access without exchange rate risk to the euro area market and
beyond (65% of euro area exports to non-euro area countries
are in euro)
 Lower interest rate
 Possibility to travel the world with euro notes
But no free lunch
 Like any wedding, joining a monetary union is not a one off
commitment: it calls for lasting good behavior
 No monetary adjustment possible: real adjustment can be
painful for countries having misbehaved
 Lowering of interest rates can favor credit bubbles
• A Banking union:
• 1. A single supervisor, implementing a single
rulebook
1. 2. A single resolution mechanism
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Why do we need a Banking Union?
- To reduce the vicious loop between the Sovereign
and its banks
• cost of bank resolution can sometimes be excessive for
one country in isolation
• the same goes for bank recapitalization
- To improve supervision:
• no more captures
• no more excessive ring-fencing
Distribution of work between ECB and NSAs
 - SSM composed of ECB & national supervisors.
 - National supervisors assist
implementation of its tasks.
ECB
with
preparation
and
 - For less significant banks national supervisors take the daily
supervisory decisions.
o Definition based on size (< 30 Bn assets), importance for
national economy (<20% national GDP; in any case 3 most
important banks), significance of cross-border activities
o ECB in charge of 128 banking groups (some strange choices),
+/- 85% of bank assets
o - ECB framework regulation on practical modalities.
Distribution of work between ECB and national
supervisors
• ECB responsibilities for all banks:
• Authorization and withdrawal; assessment of acquisitions.
• Defines framework by issuing regulations, guidelines or general
instructions "for groups or categories of credit institutions".
• Can take over any bank at any time "to ensure consistent
application of high supervisory standards".
• Oversight, including ex ante notification of "material sup.
procedures and draft decisions".
• May request information.
Resolution
Components:
• (a) BRRD. 3 components: prevention, early
intervention, resolution
• (b) SRB: only in a Regulation
• (c) SRF: partly in a Regulation, partly in an IGA
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Prevention
Recovery Plans. Drawn up by banks. Outline viable options and realistic
timeframes to overcome financial distress and regain long-term viability
Resolution Plans. To be drawn up by authorities to split up entities and
secure continuity of critical functions. If authorities identify significant
impediments to the resolvability of an institution, they can require
appropriate measures such as restrictions on business activities and
changes to legal or operational structures.
•
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Early Intervention
• In case of breach of prudential requirements and
deteriorating solvency, the national resolution authorities
can require:
•
•
•
•
an action program (with timetable)
a shareholders' meeting, to adopt vital decisions
a plan for restructuring of debt with its creditors
appoint a temporary special manager
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Resolution: 4 main tools
1. Sale of business. Total or partial sale to another commercial
entity
2. Bridge bank. Transfer all or part of the business to a publicly
controlled temporary entity
3. Asset separation/Bad bank. Transfer of
liquidation could cause market disruption
management vehicle
4. Bail-in
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assets whose
to an asset
Single Resolution Board
• Who is covered ?
• All the banks of the countries that participate to SSM
• What is the composition of the SRB ?
• 'Executive session': 1 executive director, 4 full time members,
ECB and Commission as observers
• 'Plenary session': executive session + 1 representative / NRA
• What decision making rules ?
• Simple majority for the executive session.
• Simple majority as well for the plenary session, except when the
fund is used (majority of 2/3, representing at least 50% of the
contributions).
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Banking Union' Timing
• 1. IGA: agreement at IGC by end February 2014, endorsed in March
• 2. SRM: deal in codecision by April 2014 ?
• 3. Publication of results of AQR/ST: October 2014
• 3. Start of ECB direct supervision: around November 2014
• 4. Entry into force of BRRD: January 2015
• 5. Entry into force of SRM and bail-in under BRRD: January 2016
What about Lithuania ?
State of convergence - ER developments
vs. the euro, monthly averages (index numbers, Jan 2007 = 100)
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State of convergence - HICP inflation
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State of convergence - Fiscal positions
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State of convergence – Long-term IRs
Reference value currently around 5%
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Convergence Report 2014 – Key dates
• 15 May: cut-off date (publication of the April 2014 HICP data)
• 4 June: planned College adoption date
• 12-13 June: 2014 Convergence Reports to EFC
• 19-20 June: potential Eurogroup recommendation and ECOFIN
discussion
• 26-27 June: potential European Council discussion
• 14-17 July: potential EP Opinion
• 22 July: potential decision by the Council
• 1 January: €-day ?
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Thank you for your attention