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TheEuropeanStabilityMechanism-Afirewallfortheeurozoneandfirstline
ofdefenseforglobalfinancialstability
KlausRegling,ESMManagingDirector
WashingtonDC,20April2017
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Ladiesandgentlemen,
Thefinancialcrisisbeganalmost10yearsago,soitseemsan
appropriatetimetotakestockofEurope’spolicyresponse,andto
assesssomeoftheresults.TheEuropeanStabilityMechanism,which
Imanage,originatedinthecrisis.SoIwillfirstbrieflysummarise
whattheESMhasbeendoingoverthelastfewyears.
IwillthentalkabouttheEuropeaneconomy,whichisdoingmuch
betterthanisoftenrecognized.Ithassomeunderlyingstrengthsthat
helpuscontainrisingscepticismtowardsglobalisationand
internationaltradeonourcontinent.
Finally,IwillputtheESM’sroleinaglobalcontext.Wearethecrisis
resolutionmechanismoftheeuroarea,butweworkwithother
regionalfirewallsand,ofcourse,withtheIMF.Theseinstitutionsare
cruciallayersoftheGlobalFinancialSafetyNet,orGFSN.
LetmestartwiththeESM.Itisalenderoflastresortforsovereigns,
afunctionthatdidnotexistinEuropebeforethecrisis.A
predecessor,theEFSF,wassetupin2010asatemporaryinstitution,
andtheESMasapermanentsolutionin2012.Thesetwobodies
sharethesamestaffandbuildinginLuxembourg.
Thetotallendingcapacityofthesetwoinstitutionsis€700billion.
Wehavedisbursed€265billioninloanssofar,andcommitted€320
billion.UnliketheIMF,whichrefinancesitselfthroughcentralbanks,
wefundourselvesinthemarketbyissuingbondsandbills.TheESM
candothisataveryattractiverateofaroundonepercent,because
ofitscapitalof€700billion.Ofthis,ourshareholders-the19euro
areacountries-havepaidin€80billionincash.Ourstrongcredit
ratingisduetotheselargeamountsofoverallandpaid-incapital,
whicharehigherthanatanyotherinternationalorganisation.
Theborrowingcostthatwechargeprogrammecountriesequalsour
fundingcostplusaverysmallfee.Thismeanshugebudgetsavings
fortheprogrammecountries.WehaveestimatedthatGreecesaves
€10billioneachyearbecauseofthis–or6percentofGDP.Thisis
crucialtomakeGreece’sdebtburdensustainableagain.
ESMloansaregrantedonlyagainstthepromiseofstricteconomic
reformpackages.Thisapproachofconditionalityhasbeentriedand
testedbytheIMF.Inshort,theESMisafirewallthatallowsa
countrytogetitshousebackinorderduringaprogramme,usually
threeyears.Andtheapproachworks.Fourofourfiveprogramme
countrieshavesuccessfullycompletedtheirprogrammes:Ireland,
Spain,PortugalandCyprus.Andtheyaredoingwell:theyarereform
champions,accordingtotheOECDandWorldBank.Spainand
IrelandhavethehighestgrowthratesofEuropeandunemployment
isfallingrapidly.Greeceremainsaspecialcase,andIwillsayafew
wordsaboutthatinaminute.
ItistruethatEurope’spolicyresponsetothecrisiscouldhavebeen
swifter.Butthisisunderstandable,becausetheeuroareaconsistsof
19independentcountriesthathavepooledtogetheronlyasmall
partoftheirsovereignty.Ourcrisisresponsehasbeenquite
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comprehensive,andsuccessful.TheESMisn’ttheonlynew
institution.Europealsosetupaseriesofnewbodiesinwhatis
knownasbankingunion:theSingleSupervisoryMechanism,the
SingleResolutionMechanismandtheSingleResolutionFund.Many
ofthesestepswouldhavebeenunthinkableonlyafewyearsago.
TheEuropeaneconomyisdoingwelloverall,anotherfactthatisnot
sufficientlyrecognized.GrowthinEuropeisabovepotential,sothe
outputgapisclosing,andunemploymentiscomingdown.Itistrue
thatpotentialoutputgrowthseemslow.Butinper-capitaterms,
economicgrowthinEuropeissimilaragaintothatintheUS,justlike
itwasfordecadesuntilthecrisishit.Andpercapitagrowthisan
importantindicatorforpolicymaking,becauseitmeasuresthe
averageriseinstandardsofliving,takingoutdifferencesin
populationgrowthandthereforeEurope’spoordemographics.
What’smore:participationandemploymentratesinEuropeare
highertodaythanintheyear2000.Thatmeansthatahigher
percentageofthepopulationactuallyhasajobtodaycomparedto
15yearsago,despiteourhighunemploymentrate.IntheUS,the
participationratehasdecreasedduringthesameperiod.
Lastbutnotleast,benefitsfromgrowtharespreadmoreequallyin
EuropethaninAmerica.InEurope,80percentofthepopulationhas
seenrealincomegrowthinthelast15to20years.IntheUS,that
wasthecaseforonly10to20percent.TheGINIcoefficientshows
incomeinequalityhasalwaysbeenworseintheUSthaninEurope–
likeinChina–andhasdeclinedfurtherthelast10years.Income
distributioninEuropeisactuallybetterthananywhereelseinthe
world.Needlesstosay,incomeinequalityisonedrivingforcebehind
thegrowingscepticismtowardsglobalisation,callsforprotectionism
andthesuccessofpopulistpartiesacrosstheWesternworld.
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LetmenowsayafewwordsabouttheGlobalFinancialSafetyNet.
TheIMFandtheso-calledRegionalFinancingArrangementssuchas
theESMareimportantlayersoftheGFSN.Foreignexchange
reservesandcentralbankswapsaretheotherlayers.Lastmonth,
theG20FinanceMinistersandCentralBankGovernorsreiterated
theircommitmenttostrengthentheGFSN,andtoimprove
cooperationbetweentheIMFandtheRFAs.TheESMisthebiggest
amongtheRFAs,whichexistinLatinAmerica,theMiddleEast,East
AsiaandCentralAsia.TheycanusefullycomplementtheIMF,and
thereareparticularadvantagesofhavinganRFAinacurrencyunion.
Firstly,RFAshavein-depthknowledgeofregionaleconomies.
Secondly,theESMcanmobilisefarmoreresourcesthantheIMF,
whichistypicallyneededwhenacountryinacurrencyunionloses
marketaccess.Membersofacurrencyunionaremuchmore
connectedwithpartnercountriesthanothers.Consequently,the
IMFalonecouldsimplynothavemetGreece’sfinancingneeds.
Thirdly,RFAscanprovidespecifictoolstoaddressregionalproblems.
TheIMFcouldforinstancenottakepartinEurope’sloanforSpain,
becauseitwasdesignedonlytorecapitalisethecountry’sbanks.The
IMFcannotdosuchsectorallending.
Fourthly,RFAscanbemoreflexiblewiththeirlendingterms.The
lendingratesoftheESMareonlyaboutathirdofthoseoftheIMF,
andourloansforGreecehaveverylongmaturities–32.5yearson
average.Moreover,therearelonggraceperiodsinwhichGreecewill
notserviceanydebttotheESMatall.Thus,ESMlendinggreatly
contributestoGreeceregainingdebtsustainability.
ThismakestheESMbetterequippedtodealwiththecrisisinEurope
thantheIMF,particularlyonthedebtside,andthisiswhatwehave
beendebatinginthepastfewmonths.TheIMFhasadifferent
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perspectiveonitsassistanceprogrammes:itcanonlystayina
countryforamaximumof10yearsandneedsthird-partyassurances
thatitwillgetitsmoneybackbythatdateatthelatest.ButtheESM
isalong-termpartnerforcountriessuchasGreece.Euroarea
financeministershavealreadypromisedthattheywillgivefurther
debtreliefattheendoftheprogrammeandbeyond,shouldAthens
needit.ButthisishardtoincorporatefortheIMF,atleastwiththeir
currenttoolkit.
Inshort,therelationshipbetweentheIMFandRFAssuchastheESM
isevolving.IbelievetheIMFshouldclearlyremainatthecentreof
theInternationalMonetarySystem.Wealsohopeverymuchthatit
willtakepartinthecurrentthirdprogrammeforGreeceinthe
comingmonths.AndfinallyonGreece,Iamconfidentthecountry
canreturntothemarketandstandonitsownfeetagainbeforethe
programmeendsnextyear.Aslongasitimplementsthereforms
thatithaspromised,itcanbeEurope’snextsuccessstory.
Inowlookforwardtoyourquestions,andthoseoftheaudience.
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