Transcript The future of the Eurozone: Right and Wrong Turns on the Way Ahead"

The Future of the Eurozone:
Right and Wrong Turns
On the Way Ahead
Gabriel Glöckler
Deputy Head of the EU Institutions Division
European Central Bank
Central European University, Budapest, 24 March 2011
Outline
What future for the Eurozone?
• The Untenable Status Quo
– Succession of crises
– Market and policy failure
• The Right Turns
– Make fiscal consolidation a priority
– Be serious about reinforcing governance
• The Wrong Turns
– Default/restructuring are not the easy
options they may seem
– What to do instead
• The Way Ahead
2
Outline
• The Untenable Status Quo
• The Right Turns
• The Wrong Turns
• The Way Ahead
3
The crisis unfolds
4
Dramatic impact on growth and employment
Source: Eurostat, European Commission Autumn 2010 forecast
5
Public interventions in the banking sector
6
Situation is difficult worldwide
General government deficit
General government gross debt
(as a percentage of GDP)
(as a percentage of GDP)
250
14
2007
2009
2007
12
2015
200
10
150
8
6
100
4
50
2
0
0
Euro area
United
States
Source: IMF WEO October 2010
Japan
United
Kingdom
Euro area
United
States
Japan
United
Kingdom
Source: IMF WEO October 2010
7
…though the crisis is only partially responsible…
8
May 2010: the sovereign debt crisis escalates
9
Non-linear market reactions & contagion effects
Spread over 10-year German government bond yield, in basis points
10
… a sudden stop in certain bond markets…
Trading volumes in Greek government bonds
(1 Jan - 23 Aug 2010; EUR mil, daily data)
3000
2500
2000
1500
1000
500
0
Jan '10
Feb '10
Mar '10
Apr '10
May '10
Jun '10
Jul '10
Aug '10
Sources: Bank of Greece.
Notes: Volumes traded on Secondary Market Platform run by the Bank of Greece (HDAT).
11
… leading to widespread market dysfunction
Daily changes in bond prices, in percentages
12
Systemic risk at all time high
Percentages, probability of default
Notes: Probability of simultaneous default of two euro area LCGBs,
Source: Bloomberg, ECB calculations
13
Problematic feedback loops of politics  markets
Government bond spreads against German Bund in basis points – based on Carmassi & Micossi (2010) on voxeu.org
15
Greece
Ireland
Portugal
Spain
12
11
16
9
17
21
13
14
27 Jun
23 Jun
19 Jun
15 Jun
11 Jun
07 Jun
03 Jun
30 May
26 May
22 May
14 May
10 May
06 May
02 May
18 May
18
28 Apr
24 Apr
20 Apr
20
19
10
16 Apr
1000
900
800
700
600
500
400
300
200
100
0
1000
900
800
700
600
500
400
300
200
100
0
9. April 22: Moody’s downgrades Greece for 2nd time in 2010. German MP Schaeffler says Greece should be prepared to leave the euro if it can’t push through enough austerity measures.
10. April 23: Greece requests activation of euro area/IMF support – EU says terms of aid may be agreed in a matter of days, Merkel says Greeks must satisfy stringent conditions.
11. April 26-27: Merkel says no agreement to support until Greece shows credible plan for a sustainable deficit reduction - “Germany will help when the correspondent conditions are fulfilled”.
Standard & Poor’s downgrades Greece’s long-term credit rating to junk.
12. April 29-30: Loan programme for Greece announced to be concluded within days. Greece adopts €24 billion austerity package; Merkel confident it will keep the euro stable.
13. May 1: Merkel says EU should be able to temporarily revoke voting rights from member states who violate deficit rules.
14. May 2-3: €110 billion euro area-IMF support package for Greece adopted. ECB relaxes collateral policy for Greek sovereign debt.
15. May 7: German Parliament approves law to release funds (€22.4 billion) to Greece.
16. May 10: EU stabilisation mechanism adopted (€500 billion from euro area and EU; €250 from the IMF). ECB adopts Securities Markets Programme and reactivates US dollar swap lines with
the Federal Reserve. German Constitutional Court refuses to block support package for Greece.
17. May 15-16: Merkel: “if euro fails, more fails”. Germany calls for more stringent euro area fiscal framework based on German model.
18. May 18: Germany adopts ban on short-selling.
19. June 7: Euro area ministers establish the €440 billion SPV (the European Financial Stability Facility) envisaged in the May 10 package.
20. June 14: Moody’s downgrades Greek sovereign debt to junk.
21. June 17: EU leaders decide that detailed results of stress tests on the health of 25 big European banks be made public.
14
New monetary policy decisions (€ billions, daily data)
1000
900
800
700
600
500
400
300
200
100
0
-100
-200
-300
-400
Sep 09
1000
900
800
700
600
500
400
300
200
100
0
-100
-200
-300
-400
Oct 09
Nov 09
Dec 09
Ja n 10
Feb 10
Ma r 10
Apr 10
Ma y 10
Jun 10
Jul 10
MRO + 6-da y FTO
1-MP STROs
3-month LTROs
6-month LTROs
1-yea r LTRO
CBPP a nd SMP
Recours e to DF
FTO Abs orbi ng
Li qui di ty needs
Latest observations: 25 July 2010.
Source: ECB.
15
European financial assistance for Greece
16
A financial stability safety net in Europe
ECOFIN/Eurogroup decisions of 9 May 2010
European Financial
Stabilisation Mechanism
(EFSM – € 60bn)
European Financial
Stability Facility
(EFSF - €440bn.)
Complementary
IMF financing
(2:1 basis)
17
The EU economic crisis – what went wrong?
1. Failure of market discipline
– Presumption of rational behaviour
– Expectation of enforcement of rules in a rule-based system
– Solidarity vs. ‘no bail-out’ clause
2. Failure of fiscal policy framework
– Principle of “non-interference”
– Reluctance to give warnings and follow-up on recommendations
– Weak enforcement by Commission, Eurogroup and EU Council
3. Lack of a competitiveness framework
– Lisbon Strategy did not deal with divergences
– Eurogroup processes informal
– Lack of overall coherence
18
Poor compliance with SGP targets
Table 1: Compliance with the preventive arm of the Stability and Growth Pact
(as a percentage of GDP)
indicates budgetary position close to balance or in surplus prior to 2005 and compliance with medium-term objective thereafter
indicates compliance with minimum benchmark only
indicates non-compliance with minimum benchmark
Belgium
Germany
Ireland
Greece
Spain
France
Italy
Cyprus
Luxembourg
Malta
Netherlands
Austria
Portugal
Slovenia
Finland
Euro area
MB
MTO
-1.3
-1.6
-1.5
-1.4
-1.2
-1.6
-1.4
-1.8
-1.0
-1.7
-1.1
-1.6
-1.5
-1.6
-1.2
0.5
BB
CTBOIS
BB
BB
BB
BB
BB
-0.8
BB
-1 to -0.5
BB
-0.5
-1.0
2.0
General government structural net lending (+)/borrowing (-)
1998
-0.6
-1.9
2.0
-3.3
-3.1
-2.4
-2.5
-3.7
4.3
-10.3
-1.3
-2.5
-3.8
-2.5
0.6
-2.1
1999
-0.8
-1.3
1.5
-2.6
-1.7
-2.1
-1.6
-4.5
3.0
-8.5
-0.8
-2.8
-3.5
-2.4
0.6
-1.6
2000
-0.9
-1.9
3.0
-3.3
-1.9
-2.6
-2.9
-3.1
4.0
-7.8
-0.4
-3.0
-4.5
-4.1
5.2
-2.0
2001
0.1
-3.4
-0.2
-4.9
-1.4
-2.5
-4.1
-3.4
5.3
-6.5
-1.3
-0.3
-5.4
-4.5
4.0
-2.6
2002
-0.1
-3.6
-1.7
-4.7
-0.9
-3.5
-3.4
-5.1
1.6
-5.8
-1.9
-0.3
-3.4
-2.2
4.1
-2.7
2003
-1.1
-3.3
-0.1
-5.9
-0.3
-4.0
-5.1
-8.1
1.2
-6.5
-2.0
-0.6
-4.7
-1.9
3.3
-3.1
2004
-0.9
-3.0
2.1
-8.0
-0.2
-3.8
-4.7
-5.2
-0.9
-4.2
-1.1
-3.1
-4.9
-1.6
2.9
-2.9
2005
-0.2
-2.4
1.3
-5.7
1.2
-3.6
-4.5
-2.8
0.4
-4.1
0.8
-0.8
-5.2
-0.9
3.7
-2.2
2006
-0.6
-1.4
2.9
-3.7
2.0
-2.7
-2.8
-0.7
1.4
-2.9
1.1
-1.4
-3.2
-1.3
4.2
-1.2
2007
-0.3
-0.3
0.2
-3.5
2.4
-2.7
-1.5
3.5
2.8
-2.4
0.3
-1.0
-2.2
-0.7
4.9
-0.7
19
Slow correction of excessive deficits
Table 2: Compliance
with
the corrective
arm ofnominal
the Stability and Growth Pact
Unit labour costs
in selected
euro area countries,
(as a percentage of(index
GDP)2000Q4 = 100, relative to Germany, based on sa data)
Germany
France
Italy
Spain
indicates a deficit ratio
below the 3% reference
value (a debt ratio below
the 60% reference
value)
Netherlands
Belgium
Austria
Greece
indicates a deficit ratio
above the 3% reference
value which was not
recognised
as excessive
in the following year (usually
Ireland
Finland
Euro
area
Portugal
because
the deficit was revised upwards ex post)
135
135
indicates a deficit ratio above 3% of GDP which was recognised as excessive in the following year (a debt ratio above 60%)
130
130
General government:
125
120
Belgium
Germany
Ireland
Greece
Spain
France
Italy
Cyprus
Luxembourg
Malta
Netherlands
Austria
Portugal
Slovenia
Finland
Euro area
125
Net lending (+)/borrowing (-)
120
Gross debt
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
1998
117.1
-0.9
-0.5
0.1
0.4
0.0
0.0
0.0
-2.3
0.3
-0.2 115
115
60.3
-2.2
-1.5
-1.1
-2.8
-3.7
-4.0
-3.8
-3.4
-1.6
0.0
2.4
2.7
4.7
0.9
-0.6
0.4
1.4
1.6
3.0
0.3
110
110 54.0
105.8
-3.9
-3.1
-3.7
-5.0
-4.7
-5.6
-7.4
-5.1
-2.6
-2.8
105
-3.2
-1.4
-1.1
-0.6
-0.5
-0.2
-0.3
1.0
1.8
2.2 105 64.1
59.4
-2.6
-1.8
-1.5
-1.6
-3.2
-4.1
-3.6
-2.9
-2.4
-2.7
100
-2.8
-1.7
-2.0
-3.1
-2.9
-3.5
-3.5
-4.2
-3.4
-1.9 100 114.9
58.4
-4.1
-4.3
-2.3
-2.2
-4.4
-6.5
-4.4
-2.4
-1.2
3.3
95
95
7.4
3.4
3.4
6.0
6.1
2.1
0.5
-1.2
-0.1
1.3
2.9
2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1
53.4
-9.9
-7.7
-6.2
-6.4
-5.5
-9.8
-4.6
-3.2
-2.5
-1.8
65.7
-0.9
0.4
1.3
-0.2
-2.1
-3.1
-1.7
-0.3
0.5
0.4
Source: Eurostat.
Quarterly
data
up
to
2010
Q1
for
EA,
GR,
IT,
ES,
FI,
BE,
FR;
2009Q4
for
NL
and
AT;
2009Q3
for
IE;
PT
is
based
on
64.3
-2.3
-2.2
-2.1
0.0
-0.6
-1.4
-3.7
-1.5
-1.5
-0.5
annual data-3.4
(up to 2009).
52.1
-2.8
-3.2
-4.3
-2.9
-2.9
-3.4
-6.1
-3.9
-2.6
Note: The -2.4
ULC indices-2.0
are set to 100
in
the
last
quarter
before
the
euro
area
accession
of
Greece.
23.1
-3.8
-4.6
-2.5
-2.7
-2.3
-1.5
-1.2
-0.1
The ULC developments presented for Greece and Portugal might differ from the calculations made by the National Central Banks.
48.2
1.7
1.6
6.9
5.0
4.1
2.6
2.4
2.9
4.1
5.3
The quarterly pattern in Greek ULC is affected by substantial volatility in quarterly compensation of employees figures.
72.8.
-2.3
-1.4
-1.0
-1.9
-2.5
-3.1
-2.9
-2.5
-1.3
-0.6
2007
84.8
65.0
25.5
94.5
36.2
63.9
104.0
59.8
6.9
62.6
45.4
59.1
63.6
24.1
35.4
66.3.
20
Resulting in an increase in public debt…
160
IE
140
GR
120
ES
100
FI
FR
80
DE
60
PT
40
IT
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
20
Public Debt in % of GDP
Source: EC and 2010 Stability Programmes targets for Government debt. For IT available up to 2012, for IE up to 2014 and for
the remaining countries up to 2013. For GR EC/ECB/IMF programme
21
Diverging competitiveness developments…
22
… and widening economic imbalances
Current account balances (in % of GDP)
Average 1999-2008
2009
2010
10
5
0
-5
-10
-15
LU
NL
FI
BE
DE
AT
EA
FR
IT
IE
SI
MT
ES
SK
CY
PT
GR
Source: European Commission, Autumn 2010 Forecast. Note: Countries are ranked in descending order according to the average balance over
1999-2008.
23
Sovereign risk – an alternative explanation
24
Outline
• The Untenable Status Quo
• The Right Turns
• The Wrong Turns
• The Way Ahead
25
Finding a way back should be priority…
Source: European Commission Autumn Forecast 2009
26
No consolidation is not an option…
Source: European Commission Autumn Forecast 2009
27
… carrying a large debt burden…
Interest expenditures
as % of GDP
Source: European Commission, Morgan Stanley
28
… with increasing age-related spending over the
next 40-50 years…
Projected change in age-related government expenditure, 2007-2060
(percentage points of GDP)
20
16
12
8
Euro area
4
UK
Finland
Slovakia
Slovenia
Portugal
Austria
Netherlands
Malta
Luxembourg
Cyprus
Italy
France
Spain
Greece
Ireland
Estonia
Germany
Belgium
0
Source: European Commission Ageing Report 2009
29
… raising questions about debt sustainability
Sample of 32 high-grade sovereigns. Source: What A Change A Year Makes: Standard & Poor's 2007 Global Graying Progress Report
30
Inflating away the debt mountain is no option
Inflation expectations are well anchored
Five-year forward break even inflation rate five years ahead
Euro area
3.50
US
UK
3.25
3.00
2.75
2.50
2.25
2.00
1.75
Jan.09
Apr.09
Jul.09
Oct.09
Jan.10
Apr.10
Jul.10
Oct.10
Jan.11
Sources: Reuters, ECB, Federal Reserve Board staff calculations, Bank of England
31
Inflation expectations based on surveys ECB policy and commitment credible
Inflation expectations six to ten years ahead
(annual percentage changes)
5.0
5.0
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
1990
1992
1994
1996
Euro area
1998
2000
2002
United Kingdom
2004
2006
2008
2010
United States
Source: Consensus Economics.
32
Be serious about stronger governance
ECB Opinion on all 6 legislative acts (21 February 2011)
1. Greater automaticity

Non-compliance must have predictable consequences; Council to
have less room for manoeuvre to halt or suspend procedures
2. Strict deadlines

to avoid lengthy procedures; deletion of “escape clauses”
3. Focus – asymmetrically – on problematic countries

i.e. those with current account deficits, competitiveness losses,
high levels of public and private debt.
33
Be serious about stronger governance (II)
4. Political and reputational incentives

Increased reporting obligations; escalation to European Council;
Commission/ECB surveillance missions.
5. Earlier and graduated sanctions (in macro-surveillance)

interest-bearing deposit after the first instance of
non-compliance in EIP, fine after repeated non-compliance
6. Ambitious benchmarks for establishing excessive deficit

Reduce scope of “relevant factors”
34
Be serious about stronger governance (III)
7. Ambitious medium-term budgetary objective

Improvement of structural balance to be significantly higher than
0.5% of GDP for high debt countries.
8. Quality and independence of economic analysis

Body of wise (wo)men to perform ex post assessment of
surveillance
9. Strong national fiscal frameworks

Swift and uniform implementation of directive
10. Improved statistics
35
Important steps taken … more to come
In less than one year:
 March 2010: financial support to Greece (€10bn)
 May 2010: creation of EFSF (€440bn) and EFSM (€60bn)
 September 2010: launch of economic governance reform
 November 2010: EFSF/EFSM activated for Ireland (€85bn)
 December 2010: Agreement to change Treaty
 March 2010: “Pact for the Euro”
 March 2011: Comprehensive package + ESM
36
Outline
• The Untenable Status Quo
• The Right Turns
• The Wrong Turns
• The Way Ahead
37
A challenging environment: Sovereign
redemptions and refinancing needs 2011
38
What it takes to stabilise debt
39
What if adjustment is beyond Greece’s &
Ireland’s capacity?
Greece:
primary balance to adjust
by 14.6% over 6 years
(2009-2015)
Ireland:
primary balance to adjust
by 13.8% over 6 years
(2009-2015)
40
Such large adjustments in the primary balance are
not unprecedented – e.g. Italy, Canada
General Government Primary Balance
(as a percentage of GDP)
2000
1999
1998
1997
-6.0
1996
-6.0
1994
-4.0
1993
-4.0
1992
-2.0
1997
-2.0
1996
0.0
1995
0.0
1994
2.0
1993
2.0
1992
4.0
1991
4.0
1990
6.0
1989
6.0
1988
8.0
1987
8.0
1995
Canada
Italy
Source: OECD
41
Markets have their doubts
5-yr Sovereign CDS Spreads
(basis points)
1250
Germany
France
Italy
Spain
Greece
Ireland
Portugal
1000
750
500
250
0
Jan.09
Apr.09
Jul.09
Oct.09
Jan.10
Apr.10
Jul.10
Oct.10
Jan.11
Source: CMA DataVision via Datastream
42
Stop scaring the markets
Government bond spreads against German Bund in basis points (10 yr)
23/11/10: Merkel:
“We are facing an
exceptionally serious
situation.”
28/11/10 :
ECOFIN approves
€85 bn Irish package
12/11/10: G-20 Joint
F/D/IT/ES/UK
statement “Any new
[bail-out] mechanism
only after mid-2013;
no impact on current
arrangements.’’
16-17/12/10 :
European Council
confirms private
creditors’ involvement
in the ESM
28-29/10/10 :
European Council
endorses the Van
Rompuy report but
divided on sanctions.
10/01/11:
After China, Japan
announces bond buys
to boost confidence in
EFSF.
18/10/10:
Deauville Summit
declaration: private
creditors to be
involved in the crisis
resolution mechanism
25/01/11: EFSF first
bond issue.
43
Allegedly easy options are not easy (I)
• Inconceivable expulsion from the euro area
–
not compatible with political
foundations of the euro
– inconsistent with crisis
response so far
– economic and political
“suicide” for countries
concerned
44
Allegedly easy options are not easy (II)
• Default or sovereign debt restructuring
– No recent precedents in
advanced economies
– not really a significant relief
– Costly and traumatic
economic and social experience
– “Orderly” restructuring in monetary union a myth
– contagion effects in monetary union
45
Past experience with defaults/restructuring
Experience so far only from emerging markets
Reputational/penalty costs
• Loss of market access
• Higher future borrowing costs
• Trade sanctions by creditor countries
Broader costs to the domestic economy
• Output losses
46
Past experience with defaults/restructuring
Over the last 20 years, 19 countries out of 120 IMF
programmes had debt restructuring:
•
•
•
•
•
•
•
•
•
1998 Ukraine, Russia, Pakistan,Venezuela
1999 Gabon, Indonesia, Pakistan, Ecuador
2000 Ukraine, Peru
2001 Argentina, Cote d'Ivoire
2002 Moldova, Seychelles, Gabon
2003 Dominican Republic, Paraguay, Uruguay
2004 Grenada
2005 Dominican Republic
2006 Belize
47
Defaults/restructuring nearly always associated with
sharp output losses - but worse in case of default
Evolution of GDP growth around crisis episodes (in percent)
Pre-emptive restructuring cases
15
Dom. Republic (t=2003)
Moldova (t=1998)
Uruguay (t=2002)
Default cases
15
Ukraine (t=1998)
Pakistan (t=1998)
Ecuador (t=1999)
Argentina (t=2002)
10
10
5
5
0
0
-5
-5
-10
-10
-15
Russia (t=1998)
-15
t-3
t-2
Source: IMF WEO.
t-1
t
t+1
t+2
t+3
t-3
t-2
t-1
t
t+1
t+2
t+3
48
Default/restructuring associated with higher
borrowing cost and contagion
Evolution of the EMBIG spreads around crisis episodes (in basis points)
Argentine crisis (2001-02)
8000
3000
Argentina
Uruguay (rhs)
Brazil (rhs)
7000
2500
6000
2000
5000
4000
1500
3000
1000
2000
500
1000
Source: Haver Analytics.
0
2001
0
2002
2003
2004
49
… although some solutions tend to be less costly
• Extensive prior consultations with investors
• Inclusion of collective action clauses (CACs)
• Accompanying IMF programmes with strong
conditionality
50
Restructuring would have major impact on
domestic financial wealth…
Euro area: holdings of government debt by residents and non-residents (end 2009)
(share of total debt)
1
0.9
0.8
0.7
0.6
Debt held by non-residents of the Member State
0.5
0.4
Debt held by residents of the same Member States
0.3
0.2
0.1
0
Source: ECB
51
… and the banking system
Strong correlation between sovereign and banks’ CDS
Banks
1250
Sovereigns
Deutsche
Unicredito
Nat. Bk of Gr.
Banco Com. Port.
BNP Paribas
Santander
Bk. Of Ireland
ING
Germany
Italy
Greece
Portugal
1250
1000
1000
750
750
500
500
250
250
0
0
Jan.09
Jul.09
Jan.10
Jul.10
Jan.11
France
Spain
Ireland
Netherlands
Jan.09
Jul.09
Jan.10
Jul.10
Jan.11
Latest observation: 25 Jan. 11. Note: Five-year CDS; basis points.
Sources: CMA DataVisiosn via Datastream
52
Industrialised countries differ from emerging
markets
• Advanced economies have higher debt tolerance
• Stronger institutions
• More favourable composition of debt
• More stable revenue basis
• Advanced economies have highly integrated financial
markets, especially inside a monetary union
• No government of an advanced economy has defaulted/
restructured since World War II
53
If no restructuring – then what?
• Seek new sources of growth
• structural reform
• regain competitiveness
• confidence effects
• Identify other measures to reduce debt burden
• privatisation
• improved tax collection
• debt buybacks
54
The Greek government ‘under supervision’
Structural reforms demanded by EU/IMF:
– Pension reform
– Labour market and
welfare system reform
– Health system
– Public administration
reform
– Public procurement
– Opening up closed professions (transport, energy,
retail sectors, pharmacists, notaries, etc.)
– Tackling tax evasion and the informal economy
– Privatisation (€50bn programme)
55
Need to improve growth prospects via
structural reforms in Greece
Competition and productivity
•
•
•
•
Deregulation of transport and energy sectors
Opening up of closed professions
Implementation of Services Directive
Restructuring of state-owned enterprises and bringing in of private management
Labour market flexibility and labour supply
•
•
•
Reduction of employment protection
Facilitating use of part-time work/flexible work arrangements
Reform of the arbitration system
Pension reform
•
•
•
Extensive reform to improving long-run sustainability, simplify system and
increase participation
New accrual rates with same profile for all workers
Increase in retirement age to 65 and contributory period for full pension from
35 to 40 years
56
Greece – good progress but with pains
HICP inflation
Annual % change
HICP
Unemployment
% of the labour force
quarterly series
HICP at constant tax rates
6
monthly series
Annual average
16
6
15
5
5
4
4
14
13
12
3
3
2
2
1
1
11
10
9
8
Jan-12
Source: Eurostat and ECB. Last observations:
December 2010 for HICP and October 2010 for HICP
at constant tax rates.
Jan-11
2010
Jan-10
2009
Jan-09
2008
Jan-08
2007
Jan-07
2006
Jan-06
2005
Jan-05
6
Jan-04
-1
Jan-03
-1
Jan-02
7
Jan-01
0
Jan-00
0
Source: Greek LFS for monthly, Eurostat for quarterly,
green triangles give EC/ECB/IMF projection Last
observations: October 2010 for monthly series, 2010 Q3 for
quarterly.
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Initial impact on competitiveness
58
Create a credible financial safety net
European Stability Mechanism
• Effective lending capacity of €500bn; subscribed capital of
€700bn (€ 80bn paid-in capital; €620bn guarantees)
• Interest rates: financing costs + 2%; further +1% for longerterm loans
• Link to adjustment programme (EU/IMF) – conditionality
• Instruments: (1) loans; (2) primary market purchases of
government bonds
• To be ready by 2013 (Treaty change procedure underway)
• Private sector involvement: debt sustainability analysis;
collective action clauses, preferred creditor status
59
Outline
• The Untenable Status Quo
• The Right Turns
• The Wrong Turns
• The Way Ahead
60
Temporary decrease in market pressure
should not lull sense of urgency
Government bond spreads against German Bund in basis points (10 yr)
15-Feb-11:
Finland to dissolve parliament by 15/03;
last chance to agree on comprehensive
package is the 11 March summit.
15-Feb-11:
Comprehensive package: EU officials
announce that extra meetings are needed;
Olli Rehn admitted that ‘’there is work still
to be done’’.
4-Feb-11:
France and Germany introduce a joint
proposal for a ‘’’competitiveness pact’’ at
the European Council, facing reluctance
from the other members.
25-Feb-11:
German coalition MPs rule out bond
buying by ESM.
61
Way ahead
• Commission proposals +
• EP ambition
• Franco-German Competitiveness Pact
• “Comprehensive Package”+ agreement on ESM
• Demonstration effect of Spanish reforms
Make it work!
Markets will not forget & forgive
62
Debt burden not only relevant for euro area
Source: OECD, Eurostat, Morgan Stanley (estimates)
63
The euro area is ahead of others
64
Thank you!
For further questions or enquiries:
Email:
[email protected]
Or visit:
www.ecb.europa.eu
65