1 The European sovereign debt crisis and the future of the euro Peter Bekx European Commission Reykjavik, 19 February 2013.

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The European sovereign debt crisis The European sovereign debt crisis and the future of the euroand the future of the euro

Peter BekxPeter Bekx

European CommissionEuropean Commission

Reykjavik, 19 February 2013Reykjavik, 19 February 2013

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FINANCIAL STABILITY

SOVEREIGN DEBT

ECONOMIC GROWTH

BANKS

SOVEREIGN DEBT

ECONOMIC GROWTH

A Vicious circle

Bailout costs

Value loss of public bonds

Slow growthUS Contagion

Deleveraging

Fiscalconsolidation

Lower tax receiptsHigher expenditure

BANKS

SOVEREIGN DEBT

ECONOMIC GROWTH

Breakingthe negative

feedback loop

Structural reforms

Fiscal discipline

Differentiated fiscal consolidation & quality of public finances

Bank funding

Bankrecaps

Firewalls

Compact for Growth and Jobs

ESM: fully operational since October

Single Supervisory Mechanism Up to EUR

100 bn to cover financing needs of the Spanish banking sector

Programmes in vulnerable countries

OMT

Overarching: Completing EMU Architecture

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FINANCIAL STABILITY

SOVEREIGN DEBT

ECONOMIC GROWTH

Bank funding

BankrecapsBANKS

SOVEREIGN DEBT

ECONOMIC GROWTH

Banking Union

Bankrecaps

Breaking the negative feedback loop

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Reinforcing the banking sectorReinforcing the banking sector

Restore confidenceRestore confidence

9% capital ratio9% capital ratio

submit plans to deal with shortfallsubmit plans to deal with shortfall ECB measuresECB measures

easing of collateral requirementseasing of collateral requirements

reduce reserve requirementsreduce reserve requirements

LTRO with 3-y maturitiesLTRO with 3-y maturities SSMSSM

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Recent Summit DecisionsRecent Summit Decisions

Single banking supervisorSingle banking supervisor Direct recapitalisation of euro area banksDirect recapitalisation of euro area banks No preferred creditor status to EFSF/ESM No preferred creditor status to EFSF/ESM

support for Spainsupport for Spain Use of the EFSF /ESM in a flexible way to Use of the EFSF /ESM in a flexible way to

stabilise marketsstabilise markets

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SSM: legislative proposalsSSM: legislative proposals

Supervisory tasks shifted to European Supervisory tasks shifted to European level by 1 July 2013level by 1 July 2013

Defining the role of the EBADefining the role of the EBA

Next step: proposal for a Single Resolution Next step: proposal for a Single Resolution MechanismMechanism

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FINANCIAL STABILITY

SOVEREIGN DEBT

ECONOMIC GROWTH

Fiscal discipline

Firewalls

BANKS

SOVEREIGN DEBT

ECONOMIC GROWTH

Programmes invulnerablecountries

Breaking the negative feedback loop

Firewalls

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GreeceGreece

Early 2010: confidence lostEarly 2010: confidence lost May 2010: € 110 bn packageMay 2010: € 110 bn package Mid-2011: new € 130 bn package, easier Mid-2011: new € 130 bn package, easier

conditions for existing loanconditions for existing loan End-2011: upward revisions deficit, slower End-2011: upward revisions deficit, slower

growth growth Has achieved much more than is often Has achieved much more than is often

recognised in terms of fiscal consolidation recognised in terms of fiscal consolidation and structural reformsand structural reforms

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Action on vulnerable Member StatesAction on vulnerable Member States

Ireland: good programme implementation Ireland: good programme implementation market confidence is returningmarket confidence is returning

Portugal: structural reforms aim at switch from Portugal: structural reforms aim at switch from consumption to exportsconsumption to exports

Italy: government adopted package to address Italy: government adopted package to address twin challengestwin challenges

Spain: government adopted structural reform Spain: government adopted structural reform packages and package for fiscal reform at all packages and package for fiscal reform at all levels of government. Banking sector is in levels of government. Banking sector is in difficultiesdifficulties

EFSMEUR 60bn

EFSFEUR 200bn

EFSMEUR 60bn

ESM, EUR500bn

EFSF(committed)EUR 200bn

Further developing firewallsFurther developing firewalls

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Situation May 2010 Capacity as of October 2012

ESM the main instrument to finance new programmes as of October 2012:ESM the main instrument to finance new programmes as of October 2012: The maximum lending volume will be EUR 500bnThe maximum lending volume will be EUR 500bn The EFSF will remain active in financing programmes before and during a The EFSF will remain active in financing programmes before and during a

transitional periodtransitional period The ceiling for combined ESM/EFSF lending will be EUR 700bnThe ceiling for combined ESM/EFSF lending will be EUR 700bn

Total firewall more than EUR 800bn - combining ESM/EFSF, EFSM and Total firewall more than EUR 800bn - combining ESM/EFSF, EFSM and bilateral loansbilateral loans

European firewalls acting in conjunction with IMF supportEuropean firewalls acting in conjunction with IMF support

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Reform of the SGPReform of the SGP

More focus on public debtMore focus on public debt More focus on structural deficitsMore focus on structural deficits Strengthening EnforcementStrengthening Enforcement

Wider range of sanctionsWider range of sanctions Triggered at an earlier stageTriggered at an earlier stage More automaticityMore automaticity

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Fiscal CompactFiscal Compact

Legally binding balanced budget rule Legally binding balanced budget rule Automatic correction mechanismAutomatic correction mechanism Ex-ante coordination of debt issuanceEx-ante coordination of debt issuance Ex-ante coordination of major economic Ex-ante coordination of major economic

policy reformspolicy reforms Euro Summit meetingsEuro Summit meetings

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FINANCIAL STABILITY

SOVEREIGN DEBT

ECONOMIC GROWTH

ImprovedGovernance

Structuralreforms

Differentiated fiscal consolidation & quality

of public finances

BANKS

SOVEREIGN DEBT

ECONOMIC GROWTH

Structuralreforms

Differentiated fiscal consolidation & quality

of public finances

Breaking the negative feedback loop

Compact for Growth and Jobs

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Governance ReformGovernance Reform Strengthening the SGPStrengthening the SGP

Fiscal compactFiscal compact

Preventing and correcting macroeconomic Preventing and correcting macroeconomic imbalances through reinforced economic imbalances through reinforced economic surveillancesurveillance

Towards a genuine EMUTowards a genuine EMU

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Macroeconomic Macroeconomic SurveillanceSurveillance

Preventive arm:Preventive arm: Alert mechanism – scoreboardAlert mechanism – scoreboard In-depth country analysisIn-depth country analysis Recommendation on how to tackle Recommendation on how to tackle

imbalancesimbalances

Corrective arm:Corrective arm: Excessive imbalances positionExcessive imbalances position

stricter surveillancestricter surveillance

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Europe 2020Europe 2020

Structural reforms to raise potential growthStructural reforms to raise potential growth

Smart consolidationSmart consolidation Reforms with low costs for the budgetReforms with low costs for the budget Priority to growth-stimulating reformsPriority to growth-stimulating reforms

Growth vs. AusterityGrowth vs. Austerity

Fiscal consolidation: TINAFiscal consolidation: TINA But SGP is not "stupid"But SGP is not "stupid"

Scope for judgementScope for judgement Structural sustainabilityStructural sustainability Differentiation among Member StatesDifferentiation among Member States

MS with fiscal space: automatic stabilisersMS with fiscal space: automatic stabilisers Focus on structural deficitsFocus on structural deficits

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Compact for Growth and Jobs: Compact for Growth and Jobs: MS ActionMS Action

Re-confirm objectives of Europe 2020Re-confirm objectives of Europe 2020 Re-confirm differentiated growth-friendly Re-confirm differentiated growth-friendly

consolidationconsolidation Complete restructuring of banking sectorComplete restructuring of banking sector Promote growth and competitiveness Promote growth and competitiveness

through structural reformsthrough structural reforms Tackle unemploymentTackle unemployment Modernise public administrationsModernise public administrations

2020

Compact for Growth and Jobs: Compact for Growth and Jobs: Contribution of EU PoliciesContribution of EU Policies

Deepening the Single Market Deepening the Single Market DigitalDigital EnergyEnergy Unitary patentUnitary patent

FinancingFinancing EIB capitalEIB capital Project bonds Project bonds

TaxationTaxation Employment packageEmployment package TradeTrade

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Towards a genuine EMUTowards a genuine EMU Short termShort term

• Progress with banking unionProgress with banking union

• Two-packTwo-pack

Medium termMedium term

• Complete banking unionComplete banking union

• Develop fiscal capacityDevelop fiscal capacity

BANKS

SOVEREIGN DEBT

ECONOMIC GROWTH

Breakingthe negative

feedback loop

Structural reforms

Fiscal discipline

Differentiated fiscal consolidation & quality of public finances

Bank funding

Bankrecaps

Firewalls

Compact for Growth and Jobs

ESM: fully operational since October

Single Supervisory Mechanism Up to EUR

100 bn to cover financing needs of the Spanish banking sector

Programmes in vulnerable countries

OMT

Overarching: Completing EMU Architecture

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