The Euro’s Growing Pains Antonio de Lecea European Union Delegation to the United States of America ________________________________________________________________________.

The Euro’s Growing Pains

Antonio de LeceaEuropean Union Delegation to the United States of

America ________________________________________________________________________

The Streit Council for a Union of DemocraciesSAIS

May 4, 2010

1.A Greek accumulation of policy mistakes…

2.…an incomplete Euro Area enforcement and crisis resolution

3.…both now being tackled…4.…for the benefit of the Euro

Area and the global economy.

Outline

The euro: It can’t happen, It’s a bad idea, It won’t last.

US economists on the EMU, 1989-2002

by Lars Jonung and Eoin Drea Economic Papers No. 395 / December 2009

Death throes?

1. An accumulation of policy mistakes in Greece

Poor fiscal policies and governance

Declining competitivenessPoor statisticsled to miss many opportunities

from entry in the Euro Area

Bloated public employment

Poor procurement rules Poor revenue

performance Serious expenditure

slippage in 2009 Poor fiscal accounting

Poor fiscal policies

Deteriorating competitiveness

1. Fiscal surveillance initially focused on nominal deficits

2. Reviewed in 2005 to bring more economic rationale

3. And expanded in 2009 to take account of structural aspects

4. Though assessed on the basis of statistics not sufficiently surveilled

5. Crisis resolution mechanisms available for non-Euro Area members (and third countries) but not for Euro area countries.

2. Incomplete Euro Area governance

0

100

200

300

01/01/99 01/01/00 01/01/01 01/01/02 01/01/03 01/01/04 01/01/05 01/01/06 01/01/07 01/01/08 01/01/09

Greek spreads on 10 year benchmark bonds to German Bund

Markets did not price risk properly for a long whileMarkets did not price risk properly for a long while

3. Now being tackled by Greece …

On 15 January commitment to reduce deficit by 4% in 2010 (both revenue and expenditure).

On 3 March additional 2% deficit reducing measures for 2010

3. Now being tackled by Greece …

Additional fiscal consolidation measures announced on 3 March 2010

  million EUR

% GDP

  (as announced by Greece)

REVENUE    

Increase in VAT rates (from 4,5%, 9% and 19% to 5%, 10% and 21% respectively) 1300 0,5%

Increases in excise taxes (additional to those previously voted in Parliament) 1100 0,5%

EXPENDITURE    

Reductions in public sector nominal wages and pensions (additional to the wage cutbacks already announced) of which:

1700 0,7%

Reductions in current and capital expenditures in the public sector 700 0,3%

TOTAL 4800 2,0%

3. Now being tackled by Greece …

On 15 January commitment to reduce deficit by 4% in 2010 (both revenue and expenditure).

On 3 March additional 2% deficit reducing measures for 2010

Ambitious tax reform launched in March Statistical data reviewed in April On 2 May Greek Government approves

extraordinary adjustment programme (negotiated with the EC, ECB, and IMF) for 2010-2014, with further consolidation for 2010 and specification of fiscal measures and structural reforms for 2010- 2012

3. …and by the EU

On 16 February package of enforcement measures (fiscal, structural, statistical) addressed to Greece

Euro Area Leaders and Finance Ministers commitment to support stability of the Euro Area with financial support alongside the IMF.

Proposals for enhanced economic policy coordination (May 12)

Enhanced EC (fiscal, structural) surveillance in close cooperation with ECB, IMF

Proposal for a more permanent crisis resolution mechanism for the Euro Area

And an ambitious framework of structural reforms (Europe 2020)

4. for the benefit of the Euro Area and the global economy

Ensure stability in the Euro Area to enable the EU to focus on crisis

recovery, increasing growth potential,contributing to a reinvigorated, balanced

global growth,a sound reform of global financial

regulation,and an effective and legitimate global

economic governance.

Conclusion

Greece and some Euro Area countries are not the only ones with large fiscal and external imbalances

Conclusion

Greece, and other members of the Euro Area family, will still have growing pains.

But they will grow strong.The euro is not a substitute for sound

policies.

Conclusion

Also state and local finances are a challenge

Its governance must still be perfected.

But it will certainly outlive us.

Thank you for your attention

Antonio de LECEA