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What are the implications of joining the euro area ? Benjamin Angel - European Commission - 03/02/14 - 4 main effects • (1) A more stringent fiscal framework • (2) A protection by a sovereign insurance scheme (ESM) • (3) The benefits of a worldwide currency • (4) A full participation to banking union 1. A more stringent fiscal framework SGP: preventive arm MTO: a country-specific reference value for individual Member States' medium-term budgetary positions, defined in structural terms (that is, cyclically adjusted and net of one-off and temporary measures). MS must reach their MTOs or be on an appropriate adjustment path towards it, with an annual improvement of their structural balance of 0.5% of GDP as a benchmark (more ids debt >60%). Range: between -1% of GDP and balance or surplus. Under the fiscal compact, MS have further committed to MTOs of at least -0.5% of GDP, unless the debt-to-GDP ratio is significantly below 60% and there are low risks for the sustainability of public finances. What happens when SGP rules are breached in the preventive arm? 5 SGP: corrective arm Opening EDP: if MS Member State has a deficit >3% GDP or a nondiminishing debt >60% GDP (the gap between a country's debt level and the 60% reference needs to be reduced by 1/20th annually on average over three years). Assessment: Countries in EDP have six months (or 3 for a serious breach) to comply. EA MS that have already been sanctioned under the preventive arm or whose breach of the threshold values is especially serious, may also face a stricter sanction in the form of a non-interestbearing deposit of 0.2% of GDP at this point. Once the deadline has passed, Commission and Council assess the action the Member State has taken, with a view to either putting the procedure on hold or stepping it up if the Member State has not done enough. 6 What happens when SGP rules are breached in the corrective arm? 7 The MIP Preventive arm Commission presents a report identifying countries that may be affected by or at risk of being affected by imbalances, based on the economic reading of a scoreboard of indicators Commission prepares in-depth review for the selected countries taking on board a broad range of variables and using analytical tools and country-specific information. Corrective arm The Council recommends corrective action and the Member State concerned submits a Corrective Action Plan Backed up by financial sanctions (euro area only) 8 Autumn Presentation of draft budgetary plan for following year End of Year Budget Law Opinion by the Commission Overall assessment Discussion by Eurogroup European Semester – Spring Presentation of medium-term fiscal and economic policy plans Assessment of compliance with preventive arm of SGP Macroeconomic surveillance Policy guidance and recommendation 9 2. A Sovereign protection A very robust structure The world biggest IFI Lending capacity roughly equivalent to the one of the IMF ESM % Contribution Key, €700 billion total 13 Mission : to safeguard financial stability in Europe by providing financial assistance to euro area Member States Instruments Direct recaps 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 14 The benefits of a worldwide currency A credit enhancing step Easier to attract FDI Access without exchange rate risk to the euro area market and beyond (65% of euro area exports to non-euro area countries are in euro) Lower interest rate Possibility to travel the world with euro notes But no free lunch Like any wedding, joining a monetary union is not a one off commitment: it calls for lasting good behavior No monetary adjustment possible: real adjustment can be painful for countries having misbehaved Lowering of interest rates can favor credit bubbles • A Banking union: • 1. A single supervisor, implementing a single rulebook 1. 2. A single resolution mechanism 17 Why do we need a Banking Union? - To reduce the vicious loop between the Sovereign 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 - SSM composed of ECB & national supervisors. - National supervisors assist implementation of its tasks. ECB with preparation and - 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. Distribution of work between ECB and national supervisors • ECB responsibilities for all banks: • Authorization and withdrawal; assessment of acquisitions. • Defines framework by issuing regulations, guidelines or general instructions "for groups or categories of credit institutions". • Can take over any bank at any time "to ensure consistent application of high supervisory standards". • Oversight, including ex ante notification of "material sup. procedures and draft decisions". • May request information. Resolution Components: • (a) BRRD. 3 components: prevention, early intervention, resolution • (b) SRB: only in a Regulation • (c) SRF: partly in a Regulation, partly in an IGA 21 Prevention Recovery Plans. Drawn up by banks. Outline viable options and realistic timeframes to overcome financial distress and regain long-term viability Resolution Plans. To be drawn up by authorities to split up entities and secure continuity of critical functions. If authorities identify significant impediments to the resolvability of an institution, they can require appropriate measures such as restrictions on business activities and changes to legal or operational structures. • 22 Early Intervention • In case of breach of prudential requirements and deteriorating solvency, the national resolution authorities can require: • • • • an action program (with timetable) a shareholders' meeting, to adopt vital decisions a plan for restructuring of debt with its creditors appoint a temporary special manager 23 Resolution: 4 main tools 1. Sale of business. Total or partial sale to another commercial entity 2. Bridge bank. Transfer all or part of the business to a publicly controlled temporary entity 3. Asset separation/Bad bank. Transfer of liquidation could cause market disruption management vehicle 4. Bail-in 24 assets whose to an asset Single Resolution Board • Who is covered ? • All the banks of the countries that participate to SSM • What is the composition of the SRB ? • 'Executive session': 1 executive director, 4 full time members, ECB and Commission as observers • 'Plenary session': executive session + 1 representative / NRA • What decision making rules ? • Simple majority for the executive session. • Simple majority as well for the plenary session, except when the fund is used (majority of 2/3, representing at least 50% of the contributions). 25 Banking Union' Timing • 1. IGA: agreement at IGC by end February 2014, endorsed in March • 2. SRM: deal in codecision by April 2014 ? • 3. Publication of results of AQR/ST: October 2014 • 3. Start of ECB direct supervision: around November 2014 • 4. Entry into force of BRRD: January 2015 • 5. Entry into force of SRM and bail-in under BRRD: January 2016 What about Lithuania ? State of convergence - ER developments vs. the euro, monthly averages (index numbers, Jan 2007 = 100) 28 State of convergence - HICP inflation 29 State of convergence - Fiscal positions 30 State of convergence – Long-term IRs Reference value currently around 5% 31 Convergence Report 2014 – Key dates • 15 May: cut-off date (publication of the April 2014 HICP data) • 4 June: planned College adoption date • 12-13 June: 2014 Convergence Reports to EFC • 19-20 June: potential Eurogroup recommendation and ECOFIN discussion • 26-27 June: potential European Council discussion • 14-17 July: potential EP Opinion • 22 July: potential decision by the Council • 1 January: €-day ? 32 Thank you for your attention