Transcript From a financial crisis

DG ECFIN
Vejen mod en økonomisk union
Netværkskonference 2012, Odense
DG ECFIN, European Commission
Jakob Wegener Friis
DG ECFIN
From a financial crisis ….
2011-2012 –
A systemic crisis
of the euro?
2007 Subprime
crisis
2008 –
Financial
crisis
2009 –
Economic
crisis
2010 –
Sovereign
debt crises
Assistance programmes +
EA financial backstop
Stimulus packages +
automatic stabilizers
Bank recapitalizations + guarantees
2
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……. to an unprecedented economic crisis
Unemployment
GDP growth (%)
(% of the civilian labour force)
4
12
3
10
2
8
1
6
0
-1
2005 06
07
08
09
10
11
12
4
-2
2
-3
0
-4
2005 06
07
08
09
10
11
12
-5
Government deficit
Government gross debt
(% GDP)
12%
120%
10%
100%
8%
80%
6%
60%
4%
40%
2%
20%
0%
2005 06
0%
2005 06
07
08
(% GDP)
09
10
11
12
07
08
09
10
11
12
3
DG ECFIN
Heartbeat of the crisis
4
Legacy of the crisis: 4 key messages
DG ECFIN
1.
A lasting impact on growth and job creation: more
than ever a need for comprehensive policy action
2.
Recovery in question: uneven and protracted, rebuilding confidence of paramount importance
3.
Fiscal consolidation a necessary but not sufficient
condition for sustainable public finances
4.
The EU response has been comprehensive, albeit
incremental. Stronger EMU governance and
commitment to euro area cohesion essentiel
The crisis as an eye opener
DG ECFIN
1. External shock: the crisis has exposed
shortcomings in EMU‘s design and governance
system
2. Gaps in original EMU design : monetary and fiscal
discipline not enough, no crisis resolution
mechanism foreseen
3. Prediction of closing structural reform gap did not
materialise fully
4. Weaknesses in enforcement of existing rules
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The broad ‘geography’ of EMU reform
DG ECFIN
More effective
preventive arm of
SGP
Focus on debt
developments
(corrective arm of
SGP)
Crisis
resolution
Sound fiscal
policy
• Better
enforcement:
disincentives/
Sanctions
• National
frameworks
Prevention and
correction of macro
imbalances
Structural reform
strategy (Europe
2020)
Sound
Balanced
fiscal
growth
policy
Macro-prudential
supervision
Regulation and
supervision of
financial systems
Learning the lesson: the EMU of tomorrow
DG ECFIN
1.
Growing again: The pre-crisis need for structural reform is
reinforced. Releasing Europe’s growth potential is a pressing
priority. A well-functioning EMU will help.
2.
A choice to be made: the « safe harbour » of Maastricht or further
fiscal integration. More intrusive surveillance and forceful
enforcement paired with a credible last-resort financial backstop.
3.
Beyond fiscal: Broader surveillance to prevent unsustainable
imbalances build up. Strengthened financial regulation and
supervision in support of the internal market.
4.
Hanging together: Realisation of scope and depth of governance
required to protect the benefits of common currency. EU rules
interacting with increased attention of financial markets
5.
Ever closer Union: Political challenge of wide-reaching financial
solidarity and « pooling of powers » within the Community method.
DG ECFIN
Completion of EMU's architecture
 Banking Union – closer integration in supervisory
structures and practices, in cross-border crisis
management/resolution and burden sharing
 Fiscal Union – Moving from coordination towards
integration in the surveillance of economic and
budgetary policies in the euro area
 Stability Bonds – Consider joint issuance of euro area
debt, once crisis has abated
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Why do we need a Banking Union?
• Necessary for achieving a genuine EMU.
• Break the negative feedback loop between
sovereigns and banks.
• Prevent bank runs and strengthen overall
financial stability.
• Preserve the single market.
• Single supervision is the precondition for the
introduction of potential direct recapitalisation of
banks by ESM.
DG ECFIN
Banking crisis triggered dangerous feedback loops
Higher
Government Bond
Yields
Tighter financial
conditions index
Default
worries
Bailout costs
Bank solvency
concerns
Higher debt
service
More Banking /
Financial Strains
Negative wealth
effect
Higher
Government Debtto-GDP Ratio
Lower
corporate
profits
Calls for fiscal
tightening
Lower tax
receipts
Credit losses
Reduced loan
supply
Lower nominal
GDP
Deeper
Recession
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Source: Goldman Sachs, Global Economics Weekly 11/38, 30/11/2011
DG ECFIN
Key elements of the Banking Union
Single
Supervisory
Mechanism
Single
Resolution
Mechanism
Deposit
Guarantees
Single Rulebook
01/04/2016
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Single Supervisory Mechanism
ECB
send
Board Members
preparation and
execution of tasks
central banks / supervisors of
participating Member States
Coordination by EBA
Single Supervisory Mechanism
National central
banks /
supervisors of nonparticipating
Member States
Single Rulebook
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A Euro area SSM open to other MS
• All Euro-area Member States shall
participate.
• Non-Euro area countries may join by
establishing a close cooperation between
their competent authorities and the ECB.
01/04/2016
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DG ECFIN
The debate about fiscal union
Discipline
(Austerity)




6-Pack
2-Pack
 ESM
Fiscal Compact
Veto over national
budgetary policy
 Executive tasks at EAlevel (e.g. EA Treasury)
 New enforcement tools
Solidarity
(Growth)
 Common growth and
stabilization instruments
 Fiscal backstops
 Financial transactions tax
 Eurobonds
 Social pillar
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Europe’s Prosperity Triangle
"Social market economy"
GROWTH
FAIRNESS
- single market
- catching-up and convergence
- investment and innovation
- participation
- generational
- territorial
STABILITY
-monetary/financial
-fiscal
-environmental
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Political "musts" for long-term solutions
• Political will and leadership for a great leap forward
• Necessity of Treaty changes  Unanimity
• Constitional questions in some MS
• Political and economic cohesion among countries
• EU27 vs. EU10?
• Rules vs. discretion: An accepted authority needed
• Building legitimacy of the EU-level executive - preferences of Member
States and citizens
• Issues: Too little too late? Are we sure about EMU.2? Credible
incentives and mutual trust?
DG ECFIN
Four Presidents' Report
Integrated frameworks for:
• Financial sector:
– SSM, DGS, RRS, burden sharing?
• Budgetary policy:
– EA fiscal capacity? Debt mutualisation?
• Economic policy:
– more binding CSRs? Positive financial incentives for
reform implementation? Partnership contracts?
Ensuring democratic legitimacy and accountability: EAlevel accountability structure?
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DG ECFIN
Questions?