Pasquale Tridico Jean Monnet Chair in European integration Studies Professor of Labour Economics Department of Economics University Roma Tre [email protected] European Governance and Crisis Responses
Pasquale Tridico
Jean Monnet Chair in European integration Studies
Professor of Labour Economics
Department of Economics
University Roma Tre
European Governance and Crisis
Responses
Crisis timeline
2007 - Subprime crisis
2008 – Financial crisis
2009 – Economic crisis
2010 – Sovereign debt crisis
2011 – 2012 systemic crisis of the euro?
Excess Credit + prolonged upswing + expectations
Defaults cause bank losses, distrust rises
Credit crunch; high risk aversion hits trade & investment
Recession hits tax revenues; welfare spending rises; GDP denominator falls
Contagion spreads crisis through financial and economic links; speculation on exit & breakup
Unemployment rates, 1996-2012
0
2
4
6
8
10
12
14
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Germany France Italy EU27
The return of mass unemployment
2,9
8,1
3,1
-5,6
-8
-6
-4
-2
0
2
4
6
8
10
EU27 Germany France Italy
Cumulative GDP growth 2007-13, %
Italy Great depression
The crisis …
• Building up of a dangerous leverage/debt cycle in
the (global) financial system
• &
• Emerging macro-economic imbalances in the euro
area in the years preceding the financial crisis
• &
• Flaws in the systemic design of EMU
• Legacy problem: Accumulated imbalances larger within the euro area due to convergence processes under a single monetary policy and exchange rate
• Adjustment problem: correcting imbalances more onerous due to the lack of country-specific monetary policy, limited fiscal space and ingrained structural challenges
Complicating factors for the EA
EMU's original design – imbalance between the two pillars….
Economic Monetary
European Central Bank
Member States; coordinated by Commission
• No formal lender of last resort or other quasi-fiscal capacity to deal with sovereign liquidity and solvency crises
• Missing an integrated financial framework for banking supervision and resolution, esp. of cross-border banking giants
• No surveillance and coordination tools apart from SGP and (non-binding) Broad Economic Policy Guidelines (BEPGs).
…and an incomplete architecture
Crisis timeline: the policy response
2007 - Subprime crisis
2008 – Financial crisis
2009 – Economic crisis
2010 – Sovereign debt crisis
Stimulus packages + automatic stabilizers
2011 – 2012 systemic threat to EMU?
Assistance programmes + Firewalls + consolidation + structural reforms
Bank recapitalizations + guarantees
Governance reforms, ESM, ECB action + Banking Union
Fiscal stimulus in US and EU 2007-10
Germany UK Netherlands Italy Franc
e Spain Tot
EU US
Bn.
euro 82 31 8.5 9 26 40 200
(apx) 775
Arra
USbn$
+ 700
USbn$
Tarpa
%
GDP 3.3 2.2 1.4 0.6 1.3 3.7 1.5%
(apx)
2.7%
+
2.3%
Government rescuing banks US and EU 07-08
US (bailing out, saving plans or
govmt shares for firms and financial
institutions)
700 US $ bln TARPA
EU
Apprx 100 US $ bln
AIG
Fannie Mae
Freddie Mac
Merril Lynch
Goldman Sachs
Morgan Stanley
Washington Mutual
Bank of America
Maiden Lane
Citigroup
Govmt shares
ING (Netherlands)
BNP Paribas (France)
Unicredit (Italy)
Swedebank (Sweden)
Alpha (Greece)
Lloyds and RBS (UK)
Commerzbank (Germany)
Nationalisation
Fortis (Belgium)
Anglo Irish (Ireland)
Northern Rock (UK)
Hypo Real Estate (Germany)
Financial Regulation in US and EU
• US regulation (the “Frank-Dodd Act”) new supervisory architecture system, major role of Fed in
oversight large firms and involvement of the Treasury. A Council of Regulators is set up to coordinate supervision with Fed.
• EU regulation and responses The De Larosière Report (2009) was absorbed by EU
directives and regulations, declaration of support of the EU Commission (2009), the European Council (2009). However, the EU regulation is weakened by the fragmentation among the EU member states and their different national “operative” regulations in the financial markets.
BoP facility EFSM EFSF (7 June 2010) ESM (October 2012)
Possible
beneficiaries
Non-EA MS All MS Euro area MS Euro area MS
Organisation Community
facility
Community
facility
Private company
guaranteed by EA MS
Treaty-based
intergovernmental
organisation (world's
largest IFI)
Lending capacity € 50bn € 60bn € 440bn € 700bn
Instruments Loans, credit
lines
Loans, credit
lines
Loans, bond purchases in
primary markets, bank
recap, secondary market
interventions , P.FinAss
Loans, bond purchases
in primary &secondary
markets, bank
recapitalisation, P.FinAss
Mechanism EC borrows on
behalf of EU in
capital mkts
(back to back)
EC borrows on
behalf of EU in
capital mkts
(back to back)
EFSF borrows in capital
markets
(diversified funding
strategy)
ESM borrows in capital
markets
(diversified funding
strategy)
IMF involved Preferably yes Yes Yes Wherever possible
Duration Permanent exceptional
circumstances
temporary (until mid-
2013); continues to
service existing
commitments (EL, IE, PT)
Permanent
Firewalls: An overview
« Within our mandate, the ECB is ready to
do whatever it takes to preserve the
euro. And believe me, it will be
enough »
IT FOLLOWS THE OMT
More than anything else:
Draghi speech, London,
26 July 2012
The role of the ECB
OMT (Outright Monetary Transactions)
• announced in Sept 2012, not activated to date
• programme of conditional sovereign bond purchases on secondary
markets without prior limits
• subject to strict conditionality under future ESM programmes, also
available to countries under programmes once they regain market access
Effects
Market Stabilization
Liquidity (MS) and solvency (Debt)
Reduction of i and spread
Guarantee of transmission effects of ECB monetary policy
Overall changes to economic governance
Financial
marketsESRB, ESAs
Fiscal policy
-Stronger SGP (6 pack,
2 pack), fiscal
compact/TSCG Growth and policy
integration
European semester
and 2020 strategy
Competitiveness
Macroeconomic
Imbalances
Procedure (6 pack)
Stronger institutions: Euro summit, Eurogroup governance etc…
Programme
countries and
firewalls
Compact for
Growth and Jobs Banking union
Euro Plus Pact
Ex-ante coordination CC-Instrument
From Maastricht to.. SGP, Euro-Plus, Fiscal
Compact (TSCG), 6Pack, 2Pack: the red line
• four broad strategic goals :
1. fostering competitiveness (abolishing WI, evaluating ULC)
2. fostering employment (flexicurity)
3. reinforcing financial stability (ESRB, ESFS 3ESA, BU, FTT).
4. contributing to the sustainability of public finances (from
Maastricht-SGP to TSCG: from 3% to 1%, 0,5% (if D>60%)
And tax (NO) policy coordination…(?)
28
Mission : to safeguard financial stability in Europe by
providing financial assistance to euro area Member States
Instruments
Loans Primary Market
Purchases
Secondary Market
Purchases
Precautionary
Programme
Bank recapitalisations
through loans to governments
All assistance is linked to appropriate conditionality
EFSF and ESM finance their activity by issuing bonds or other debt instruments
Direct recaps
On going….A Banking union:
• 1. A single supervisor, implementing a single
rulebook
• 2. A single resolution mechanism
29
Why a Banking Union?
- To reduce the vicious loop/circle between the Sovereign
Debt and its banks
• cost of bank resolution can sometimes be excessive for one
country in isolation
• the same goes for bank recapitalization
- To improve supervision:
• no more captures
• no more excessive ring-fencing
Distribution of work between ECB and NSAs
- National supervisors assist ECB with preparation and implementation of its
tasks.
- For less significant banks national supervisors take the daily supervisory
decisions.
o Definition based on size (< 30 Bn assets), importance for national
economy (<20% national GDP; in any case 3 most important banks),
significance of cross-border activities
o ECB in charge of 128 banking groups (some strange choices), +/- 85% of
bank assets
o - ECB framework regulation on practical modalities.
Self-defeating fiscal
consolidation?
Picture: The Atlantic
• composition of measures
• credibility
• impact on confidence
• monetary policy
• synchronisation
• Should we stop, ease,
postpone, delay, stretch
fiscal consolidation?
• Annual Growth Survey
• Pursue growth-friendly,
differentiated consolidation
The short-term fiscal multiplier is Yes, it depends on
higher than in normal times.
Cost competitiveness – It is a recover or just
unemployment and cuts effects??
38
90
100
110
120
130
140
150
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
2000
=100
EL IE ES IT PT
CY SI DE EA17
ULC-based real effective exchange rates
Source: AMECO.
Two tales of crisis
Real GDP per capita
13
14
15
16
17
18
19
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Portugal Greece
Some extra lessons to learn: best-performing countries
are Continental and Scandinavian European
economies
-16
-14
-12
-10
-8
-6
-4
-2
0
continental scandinavian liberal CEEC mediterranean
Performance Index (g+n) - U average 2007-2013
Lesson 1 to be learned – during the crisis
• In the years of the crisis (2007-13): countries that had
better performance are those that managed not to
retrench the welfare state (before, under the process of
globalisation) and therefore reached the eve of the crisis
in 2007 better equipped in terms of the welfare state.
Lessons 2 – welfare dangerous evolution
Continental1990
Scandinavian1990
Liberal1990
Mediterranean1990
Continental2010
Scandinavian2010
Liberal2010 Mediterranean2010
.2
.25
.3
.3
GINI
20 25 30 35 40 SOCIAL_SPENDING