Transcript Economic policy priorities, after the Spring European Council.

Economic policy priorities
after the Spring European Council
Presentation by Marco BUTI,
DG Economic and Financial Affairs
BUSINESSEUROPE Economic and Financial Affairs Committee
5 April 2011
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EU recovery continues to make headway,
inflation projected to increase
HICP in 2010 and 2011
GDP growth in 2010 and 2011
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
-1.0
0.0
DE
ES
FR
IT
NL
EA
PL
2010 Outco me
2011as pro jected in Autumn 2010
2011as pro jected in Interim fo recas t Feb. 2011
Source: European Commission
UK
EU
DE
ES
FR
IT
NL
EA
PL
UK
EU
2010 Outcome as in Interim forecast Feb. 2011
2011 as projected in Autumn 2010
2011 as projected in Interim forecast Feb. 2011
Source: European Commission
European Commission
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High uncertainty, main risks to growth outlook:
On the upside:
 Stronger global growth
 More pronounced spill-over from German growth
 Stronger domestic demand as a result of strong business confidence
On the downside:
 Further tensions in financial markets
 Stronger short-run impact of fiscal consolidation
 Further geopolitical tensions in the MENA region
 Impact of the events in Japan
European Commission
3
Financial markets still fragile
Bank lending to households and non-financial
corporations, euro area
Sovereign-bond spreads
pps
10
y-o-y%
16
8
12
6
8
4
4
2
0
0
-4
08
09
PT
10
ES
IT
11
EL
00
01
02
IE
03
04
05
06
07
08
09
10
11
Lo ans to hous eholds
Lo ans to non-financial co rporatio ns
Source: Reuters and European Commission
Source: ECB
European Commission
4
A comprehensive approach
Financial repair
Fiscal consolidation
Growth and competitiveness
Vulnerable countries
European Commission
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Short-term Response
1. Financial repair: stress tests + recaps
2. Fiscal consolidation: more than 0.5% of GDP a
year
3. Vulnerable countries: implementation of
programmes (EL, IE) + enhanced surveillance
(PT) +  EFSF + lowering of pricing and
increased maturity of loans
European Commission
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Systemic Response
4. Strengthened surveillance: 6 legislative
proposals
5. Permanent crisis resolution tool: European
Stability Mechanism
6. Euro Plus Pact
Integrated surveillance: European Semester
European Commission
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Where will the growth come from?
•
Do EU policies lower growth?
Fiscal consolidation, bank recaps,
monetary normalisation
•
Some avenues:
- Tapping the single market
- Financial sector reforms
- Project bonds
European Commission
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Single Market Act
• Relaunching the Single Market is a key priority as stressed by the
Monti Report (May 2010)
• A cross-cutting policy initiative of the Europe 2020 strategy
• Improve adjustment capacity of the EU economy through better
functioning of markets (especially in services)
– Removal of barriers to cross-border activity would translate into increased
competition and facilitate market entry. This competition effect will have a
positive impact on demand through lower prices and a positive income
effect.
– Removal of barriers to investment should lead to increased total FDI,
which would have a positive effect on productivity.
• This price adjustment is particularly important for the Euro Area and in
less tradable sectors
European Commission
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Single Market Act
• Relevant growth-enhancing measures by removing
persistent restrictions to the four freedoms
– improving infrastructure in energy, transport and telecommunications
– facilitating cross-border trade or investment by eliminating tax or
regulatory treatment that disadvantages cross-border transaction
– adopting measures to facilitate access to finance, especially for
SMEs and availability of venture capital
– improving cross-border activity in services sectors
– fostering labour mobility
– The final SMA to be adopted by the Commission on 13 April 2011
European Commission
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Financial Reform
Reshaping the architecture for financial regulation
Four priorities:
 Develop a more efficient supervisory
response
 More and better capital in the banking system
 Extend the perimeter of regulation and
supervision: the reform agenda
 Complete the tools to ensure financial stability
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Financial Reform
The macroeconomic impact of stronger standards for
capital and liquidity requirements on banks
•
On banks, the Basel Committee concluded that costs are
manageable
Over the short term some modest impact on growth and aggregate
output…
–
–
–
A 4-year phasing-in has only a modest impact on aggregate
output: an ex post decline by about 0.20% decline in GDP
compared to baseline path (the GDP returns to its baseline
path in subsequent years).
GDP growth rate would be reduced by an average of 0.04 pp
over a four and a half year period…
…mainly due to banks passing on higher costs to borrowers—
slowing down investment.
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Financial Reform
Overall, the cumulative impact of financial reforms on
GDP is negative but within moderate limits
Graph 2: Cumulative impact on GDP
and consumption
0
-0.1
-0.2
-0.3
-0.4
-0.5
2012 2013 2014 2015 2016 2017 2018 2019
Capital requirement
Liquidity requirement
DGS (1)
deviation from the base line in %
deviations from baseline in %
Graph 1: Impact on GDP
0.4
0.2
0
-0.2
-0.4
-0.6
2012 2013 2014 2015 2016 2017 2018 2019
GDP
Consumption
(1) Deposit Guarantee Scheme
Source: Commission Services calculations
Within stringent assumption, the impact on GDP is
moderate and consumption rises above trend due to
increase in the opportunity costs of saving.
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Europe 2020 Project Bond Initiative:
Objective and Definition
Objective
How?
Result
To increase the debt
financing availability for
large scale infrastructure
projects
EU/EIB joint support to
project companies issuing
bonds to finance
infrastructure projects
More private sector
financing attracted from
the capital markets to
implement key EU
infrastructure projects
Target areas
Form of support
•Transport
•Energy
•Broadband
Debt service guarantee or
a subordinated loan by
EIB to ensure sufficient
rating of the bonds
Potential investors
Long-term institutional
investors – pension funds,
insurance companies
European Commission
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Europe 2020 Project Bond Initiative:
Subordinated Instruments
Project
Bonds
SPV
Project
Costs
Target
rating
minimum
A-
Bond Issue and
underwriting
Project
Bond
Investor
EIB Sub-debt
Equity &
Quasiequity
up to 20%
of total
Bond issue
EIB Sub-debt participation can be combined with different types of funding sources (bonds and other senior loans)
EIB Unfunded Sub-debt participation can be flexibly used and structured in order to ensure target rating.
•Covers funding shortfalls during construction
•Comes on top of a fully funded structure
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Europe 2020 Project Bond Initiative:
Role of EU and EIB
• EU determines eligibility criteria for projects:
− Focus on TEN-T, TEN-E and broadband rollout
− Technically and economically feasible projects with
strong and stable cash flows
• The EIB selects projects and type of support
(guarantee or loan) using eligibility criteria and
credit risk policies
• Initiative based on existing EU/EIB risk sharing
mechanisms
European Commission
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Europe 2020 Project Bond Initiative
• Stakeholders’ consultation launched:
− Purpose – to find out the interest and needs of the market
− Duration: February 28 – May 2, 2011
− Consultative conference on April 11, 2011
• Commission proposal to be ready in summer 2011
• Target – to have the Europe 2020 Project Bond
Initiative fully operational in 2014
European Commission
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Conclusions
• A fundamental reshaping of economic
governance is being implemented
• Financial vulnerabilities to be tackled in
earnest
• Comprehensive strategy
• Role of stakeholders
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Thank you!
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