Transcript The-Euro-Crisis-An-Update-2013-Euro

The euro crisis: an update
Euro Challenge 2013
Delegation of the European Union to the United States
www.euro-challenge.org
What this presentation will cover
• Background: origins of the crisis
• Update on the economic situation in the
euro area
• “Rebalancing” the euro area economy
• Europe’s policy responses: “EMU 2.0”
The never-ending crisis?
?
FINANCIAL
STRESSES
and
ECONOMY
SLOWING
?
FINANCIAL
CRISIS 2008
SOVEREIGN
DEBT CRISIS
ECONOMIC
CRISIS 2009
SURGE IN
GOVERNMENT DEBT
POLICY
RESPONSE:
STIMULUS
Government (sovereign) debt levels ballooned
Debt to GDP
in the Euro Area Countries and the US
( a s % o f GD P )
200
2007
18 0
2012 (P r oj ect ed)
16 0
14 0
12 0
10 0
80
60
40
20
0
AT
BE
CY
EE
FI
FR
DE
Source: European Commission, Spring 2012
EL
IE
IT
LU
MT
NL
PT
SK
SI
ES
US
Mild recession in the euro area
• The euro area economy
is projected to experience
a mild recession in 2012
and early 2013. Gradual
recovery expected starting
in 2nd half of 2013
Euro Area & US GDP with Forecasts
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Euro area
United States
-3.0%
-4.0%
-5.0%
06
20
07
20
08
20
09
20
10
20
Source: European Economic Forecast - Autumn 2012
11
20
12
20
13
20
14
20
• Several years of negative
growth in countries
hardest hit by the crisis
(Greece, Portugal); but
growth has slowed even in
stronger countries like
Germany and France
• A slowing global
economy is not helping
Europe overcome its crisis
faster (and vice-versa).
Unemployment remains unacceptably high
• The unemployment rate
is rising and currently
stands at a high of 11.6%
in the euro area
Euro Area & US Unemployment with Forecasts
14.0%
Euro area
United States
12.0%
• There are huge
differences between
countries’ unemployment
rates, which range from a
low of 4.4% in Austria to a
high of 25.8% in Spain
10.0%
8.0%
6.0%
4.0%
2.0%
Source: European Economic Forecast - Autumn 2012
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
0.0%
• Meanwhile, inflation
(2.5%) is above the ECB’s
preferred “close to but
below 2%”, but is
expected to decline further
due to slower growth and
thus is not a threat
Financial market tensions have eased…
Ten-year government-bond interest
rates, selected euro-area Member States
%
16
DE
IT
ES
PT
IE
FR
• These actions have brought
down interest rates on
government bonds of troubled
euro area countries, further
reducing the risk of default
(not being able to pay back
their debts)
12
8
4
0
09
10
11
• Euro area countries have set
up a permanent assistance
fund and the European Central
Bank has said it will buy bonds
if necessary (like the US Fed is
doing).
12
• European stock markets have
also stabilized.
…but banks are not lending as they should
• An economy needs a
functioning banking sector to
support growth, through bank
lending to consumers and
businesses
• Banks have tightened their
“credit standards” and are
lending out less money. Less
money in the economy means
less economic growth.
• There was too much (private
sector) borrowing before the
crisis hit, but not enough now to
support growth.
A process of “rebalancing” has started
“Periphery”
Countries that lived
“beyond their means”
need to reduce spending
and raise revenues
Countries that lost
competitiveness need to
regain it, for instance by
reducing costs so that
they can sell more
abroad (i.e., increase
their exports)
Some euro area
countries fall between
these two broad
categories!
“Core”
Countries in better
economic shape must
sustain economic
growth. But they also
need to keep their
budgets under control
S
because of long-term
o pensions
costs (e.g., of
and health care
u in aging
societies)
In the short run, “core”
countries have room to
spend more money at
home and buy more
goods from abroad
(import more).
Public finances set to improve further
• Governments are gradually
bringing their spending in line
with revenues (working to
balance budgets)
General government debt,
euro area
100
% of GDP
• Government debt is on a path
to stabilize and eventually
decline in the euro area
95
90
85
80
75
70
65
60
05
06
07
08
09
10
11
12
13
14
• Improvement in public
finances will help restore
investor and public confidence;
however, it must be done in a
way that does not choke off
growth
Note: Debt is measured as a share of economic output (debt/GDP)
It is VERY difficult to reduce the numerator (debt)
if the denominator (GDP) is shrinking!
Europe’s response to the crisis
Strengthening the “E” in EMU
BANKS
PROGRAMS
Strengthen the banking
system, including
stronger supervision at
the EU level
Financial assistance for
countries in difficulty
(but with conditions
attached)
RULES
FIREWALL
Stronger, more effective
fiscal rules and greater
coordination of
economic policies
A permanent
mechanism (ESM)
to stem the risk of
contagion to other
countries
GROWTH
Boost growth through “structural
reforms” and completing the
single market
More “union”, now and later on…
Political Union
Growth Union
Fiscal Union
Banking Union
The European Union is gradually solidifying
The case for the euro
Strong political commitment of
leaders to defend the euro
Break-up or shrinking of the euro area
would involve huge costs, make it
harder for countries to borrow.
Governance of euro area is being
strengthened, flaws fixed
Balanced emphasis on growth and
fiscal adjustment
More sustainable public finances and
economic reforms will help countries
“The euro is at the core of our
European project.”
Statement by Heads of State or
Government of the euro area and EU
institutions, Oct. 26th, 2011
Good luck in the
Euro Challenge 2013 !
“The Euro Challenge
High School Competition”
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