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The Future of the Eurozone: Right and Wrong Turns On the Way Ahead Gabriel Glöckler Deputy Head of the EU Institutions Division European Central Bank Central European University, Budapest, 24 March 2011 Outline What future for the Eurozone? • The Untenable Status Quo – Succession of crises – Market and policy failure • The Right Turns – Make fiscal consolidation a priority – Be serious about reinforcing governance • The Wrong Turns – Default/restructuring are not the easy options they may seem – What to do instead • The Way Ahead 2 Outline • The Untenable Status Quo • The Right Turns • The Wrong Turns • The Way Ahead 3 The crisis unfolds 4 Dramatic impact on growth and employment Source: Eurostat, European Commission Autumn 2010 forecast 5 Public interventions in the banking sector 6 Situation is difficult worldwide General government deficit General government gross debt (as a percentage of GDP) (as a percentage of GDP) 250 14 2007 2009 2007 12 2015 200 10 150 8 6 100 4 50 2 0 0 Euro area United States Source: IMF WEO October 2010 Japan United Kingdom Euro area United States Japan United Kingdom Source: IMF WEO October 2010 7 …though the crisis is only partially responsible… 8 May 2010: the sovereign debt crisis escalates 9 Non-linear market reactions & contagion effects Spread over 10-year German government bond yield, in basis points 10 … a sudden stop in certain bond markets… Trading volumes in Greek government bonds (1 Jan - 23 Aug 2010; EUR mil, daily data) 3000 2500 2000 1500 1000 500 0 Jan '10 Feb '10 Mar '10 Apr '10 May '10 Jun '10 Jul '10 Aug '10 Sources: Bank of Greece. Notes: Volumes traded on Secondary Market Platform run by the Bank of Greece (HDAT). 11 … leading to widespread market dysfunction Daily changes in bond prices, in percentages 12 Systemic risk at all time high Percentages, probability of default Notes: Probability of simultaneous default of two euro area LCGBs, Source: Bloomberg, ECB calculations 13 Problematic feedback loops of politics markets Government bond spreads against German Bund in basis points – based on Carmassi & Micossi (2010) on voxeu.org 15 Greece Ireland Portugal Spain 12 11 16 9 17 21 13 14 27 Jun 23 Jun 19 Jun 15 Jun 11 Jun 07 Jun 03 Jun 30 May 26 May 22 May 14 May 10 May 06 May 02 May 18 May 18 28 Apr 24 Apr 20 Apr 20 19 10 16 Apr 1000 900 800 700 600 500 400 300 200 100 0 1000 900 800 700 600 500 400 300 200 100 0 9. April 22: Moody’s downgrades Greece for 2nd time in 2010. German MP Schaeffler says Greece should be prepared to leave the euro if it can’t push through enough austerity measures. 10. April 23: Greece requests activation of euro area/IMF support – EU says terms of aid may be agreed in a matter of days, Merkel says Greeks must satisfy stringent conditions. 11. April 26-27: Merkel says no agreement to support until Greece shows credible plan for a sustainable deficit reduction - “Germany will help when the correspondent conditions are fulfilled”. Standard & Poor’s downgrades Greece’s long-term credit rating to junk. 12. April 29-30: Loan programme for Greece announced to be concluded within days. Greece adopts €24 billion austerity package; Merkel confident it will keep the euro stable. 13. May 1: Merkel says EU should be able to temporarily revoke voting rights from member states who violate deficit rules. 14. May 2-3: €110 billion euro area-IMF support package for Greece adopted. ECB relaxes collateral policy for Greek sovereign debt. 15. May 7: German Parliament approves law to release funds (€22.4 billion) to Greece. 16. May 10: EU stabilisation mechanism adopted (€500 billion from euro area and EU; €250 from the IMF). ECB adopts Securities Markets Programme and reactivates US dollar swap lines with the Federal Reserve. German Constitutional Court refuses to block support package for Greece. 17. May 15-16: Merkel: “if euro fails, more fails”. Germany calls for more stringent euro area fiscal framework based on German model. 18. May 18: Germany adopts ban on short-selling. 19. June 7: Euro area ministers establish the €440 billion SPV (the European Financial Stability Facility) envisaged in the May 10 package. 20. June 14: Moody’s downgrades Greek sovereign debt to junk. 21. June 17: EU leaders decide that detailed results of stress tests on the health of 25 big European banks be made public. 14 New monetary policy decisions (€ billions, daily data) 1000 900 800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 Sep 09 1000 900 800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 Oct 09 Nov 09 Dec 09 Ja n 10 Feb 10 Ma r 10 Apr 10 Ma y 10 Jun 10 Jul 10 MRO + 6-da y FTO 1-MP STROs 3-month LTROs 6-month LTROs 1-yea r LTRO CBPP a nd SMP Recours e to DF FTO Abs orbi ng Li qui di ty needs Latest observations: 25 July 2010. Source: ECB. 15 European financial assistance for Greece 16 A financial stability safety net in Europe ECOFIN/Eurogroup decisions of 9 May 2010 European Financial Stabilisation Mechanism (EFSM – € 60bn) European Financial Stability Facility (EFSF - €440bn.) Complementary IMF financing (2:1 basis) 17 The EU economic crisis – what went wrong? 1. Failure of market discipline – Presumption of rational behaviour – Expectation of enforcement of rules in a rule-based system – Solidarity vs. ‘no bail-out’ clause 2. Failure of fiscal policy framework – Principle of “non-interference” – Reluctance to give warnings and follow-up on recommendations – Weak enforcement by Commission, Eurogroup and EU Council 3. Lack of a competitiveness framework – Lisbon Strategy did not deal with divergences – Eurogroup processes informal – Lack of overall coherence 18 Poor compliance with SGP targets Table 1: Compliance with the preventive arm of the Stability and Growth Pact (as a percentage of GDP) indicates budgetary position close to balance or in surplus prior to 2005 and compliance with medium-term objective thereafter indicates compliance with minimum benchmark only indicates non-compliance with minimum benchmark Belgium Germany Ireland Greece Spain France Italy Cyprus Luxembourg Malta Netherlands Austria Portugal Slovenia Finland Euro area MB MTO -1.3 -1.6 -1.5 -1.4 -1.2 -1.6 -1.4 -1.8 -1.0 -1.7 -1.1 -1.6 -1.5 -1.6 -1.2 0.5 BB CTBOIS BB BB BB BB BB -0.8 BB -1 to -0.5 BB -0.5 -1.0 2.0 General government structural net lending (+)/borrowing (-) 1998 -0.6 -1.9 2.0 -3.3 -3.1 -2.4 -2.5 -3.7 4.3 -10.3 -1.3 -2.5 -3.8 -2.5 0.6 -2.1 1999 -0.8 -1.3 1.5 -2.6 -1.7 -2.1 -1.6 -4.5 3.0 -8.5 -0.8 -2.8 -3.5 -2.4 0.6 -1.6 2000 -0.9 -1.9 3.0 -3.3 -1.9 -2.6 -2.9 -3.1 4.0 -7.8 -0.4 -3.0 -4.5 -4.1 5.2 -2.0 2001 0.1 -3.4 -0.2 -4.9 -1.4 -2.5 -4.1 -3.4 5.3 -6.5 -1.3 -0.3 -5.4 -4.5 4.0 -2.6 2002 -0.1 -3.6 -1.7 -4.7 -0.9 -3.5 -3.4 -5.1 1.6 -5.8 -1.9 -0.3 -3.4 -2.2 4.1 -2.7 2003 -1.1 -3.3 -0.1 -5.9 -0.3 -4.0 -5.1 -8.1 1.2 -6.5 -2.0 -0.6 -4.7 -1.9 3.3 -3.1 2004 -0.9 -3.0 2.1 -8.0 -0.2 -3.8 -4.7 -5.2 -0.9 -4.2 -1.1 -3.1 -4.9 -1.6 2.9 -2.9 2005 -0.2 -2.4 1.3 -5.7 1.2 -3.6 -4.5 -2.8 0.4 -4.1 0.8 -0.8 -5.2 -0.9 3.7 -2.2 2006 -0.6 -1.4 2.9 -3.7 2.0 -2.7 -2.8 -0.7 1.4 -2.9 1.1 -1.4 -3.2 -1.3 4.2 -1.2 2007 -0.3 -0.3 0.2 -3.5 2.4 -2.7 -1.5 3.5 2.8 -2.4 0.3 -1.0 -2.2 -0.7 4.9 -0.7 19 Slow correction of excessive deficits Table 2: Compliance with the corrective arm ofnominal the Stability and Growth Pact Unit labour costs in selected euro area countries, (as a percentage of(index GDP)2000Q4 = 100, relative to Germany, based on sa data) Germany France Italy Spain indicates a deficit ratio below the 3% reference value (a debt ratio below the 60% reference value) Netherlands Belgium Austria Greece indicates a deficit ratio above the 3% reference value which was not recognised as excessive in the following year (usually Ireland Finland Euro area Portugal because the deficit was revised upwards ex post) 135 135 indicates a deficit ratio above 3% of GDP which was recognised as excessive in the following year (a debt ratio above 60%) 130 130 General government: 125 120 Belgium Germany Ireland Greece Spain France Italy Cyprus Luxembourg Malta Netherlands Austria Portugal Slovenia Finland Euro area 125 Net lending (+)/borrowing (-) 120 Gross debt 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998 117.1 -0.9 -0.5 0.1 0.4 0.0 0.0 0.0 -2.3 0.3 -0.2 115 115 60.3 -2.2 -1.5 -1.1 -2.8 -3.7 -4.0 -3.8 -3.4 -1.6 0.0 2.4 2.7 4.7 0.9 -0.6 0.4 1.4 1.6 3.0 0.3 110 110 54.0 105.8 -3.9 -3.1 -3.7 -5.0 -4.7 -5.6 -7.4 -5.1 -2.6 -2.8 105 -3.2 -1.4 -1.1 -0.6 -0.5 -0.2 -0.3 1.0 1.8 2.2 105 64.1 59.4 -2.6 -1.8 -1.5 -1.6 -3.2 -4.1 -3.6 -2.9 -2.4 -2.7 100 -2.8 -1.7 -2.0 -3.1 -2.9 -3.5 -3.5 -4.2 -3.4 -1.9 100 114.9 58.4 -4.1 -4.3 -2.3 -2.2 -4.4 -6.5 -4.4 -2.4 -1.2 3.3 95 95 7.4 3.4 3.4 6.0 6.1 2.1 0.5 -1.2 -0.1 1.3 2.9 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 53.4 -9.9 -7.7 -6.2 -6.4 -5.5 -9.8 -4.6 -3.2 -2.5 -1.8 65.7 -0.9 0.4 1.3 -0.2 -2.1 -3.1 -1.7 -0.3 0.5 0.4 Source: Eurostat. Quarterly data up to 2010 Q1 for EA, GR, IT, ES, FI, BE, FR; 2009Q4 for NL and AT; 2009Q3 for IE; PT is based on 64.3 -2.3 -2.2 -2.1 0.0 -0.6 -1.4 -3.7 -1.5 -1.5 -0.5 annual data-3.4 (up to 2009). 52.1 -2.8 -3.2 -4.3 -2.9 -2.9 -3.4 -6.1 -3.9 -2.6 Note: The -2.4 ULC indices-2.0 are set to 100 in the last quarter before the euro area accession of Greece. 23.1 -3.8 -4.6 -2.5 -2.7 -2.3 -1.5 -1.2 -0.1 The ULC developments presented for Greece and Portugal might differ from the calculations made by the National Central Banks. 48.2 1.7 1.6 6.9 5.0 4.1 2.6 2.4 2.9 4.1 5.3 The quarterly pattern in Greek ULC is affected by substantial volatility in quarterly compensation of employees figures. 72.8. -2.3 -1.4 -1.0 -1.9 -2.5 -3.1 -2.9 -2.5 -1.3 -0.6 2007 84.8 65.0 25.5 94.5 36.2 63.9 104.0 59.8 6.9 62.6 45.4 59.1 63.6 24.1 35.4 66.3. 20 Resulting in an increase in public debt… 160 IE 140 GR 120 ES 100 FI FR 80 DE 60 PT 40 IT 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 20 Public Debt in % of GDP Source: EC and 2010 Stability Programmes targets for Government debt. For IT available up to 2012, for IE up to 2014 and for the remaining countries up to 2013. For GR EC/ECB/IMF programme 21 Diverging competitiveness developments… 22 … and widening economic imbalances Current account balances (in % of GDP) Average 1999-2008 2009 2010 10 5 0 -5 -10 -15 LU NL FI BE DE AT EA FR IT IE SI MT ES SK CY PT GR Source: European Commission, Autumn 2010 Forecast. Note: Countries are ranked in descending order according to the average balance over 1999-2008. 23 Sovereign risk – an alternative explanation 24 Outline • The Untenable Status Quo • The Right Turns • The Wrong Turns • The Way Ahead 25 Finding a way back should be priority… Source: European Commission Autumn Forecast 2009 26 No consolidation is not an option… Source: European Commission Autumn Forecast 2009 27 … carrying a large debt burden… Interest expenditures as % of GDP Source: European Commission, Morgan Stanley 28 … with increasing age-related spending over the next 40-50 years… Projected change in age-related government expenditure, 2007-2060 (percentage points of GDP) 20 16 12 8 Euro area 4 UK Finland Slovakia Slovenia Portugal Austria Netherlands Malta Luxembourg Cyprus Italy France Spain Greece Ireland Estonia Germany Belgium 0 Source: European Commission Ageing Report 2009 29 … raising questions about debt sustainability Sample of 32 high-grade sovereigns. Source: What A Change A Year Makes: Standard & Poor's 2007 Global Graying Progress Report 30 Inflating away the debt mountain is no option Inflation expectations are well anchored Five-year forward break even inflation rate five years ahead Euro area 3.50 US UK 3.25 3.00 2.75 2.50 2.25 2.00 1.75 Jan.09 Apr.09 Jul.09 Oct.09 Jan.10 Apr.10 Jul.10 Oct.10 Jan.11 Sources: Reuters, ECB, Federal Reserve Board staff calculations, Bank of England 31 Inflation expectations based on surveys ECB policy and commitment credible Inflation expectations six to ten years ahead (annual percentage changes) 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 1990 1992 1994 1996 Euro area 1998 2000 2002 United Kingdom 2004 2006 2008 2010 United States Source: Consensus Economics. 32 Be serious about stronger governance ECB Opinion on all 6 legislative acts (21 February 2011) 1. Greater automaticity Non-compliance must have predictable consequences; Council to have less room for manoeuvre to halt or suspend procedures 2. Strict deadlines to avoid lengthy procedures; deletion of “escape clauses” 3. Focus – asymmetrically – on problematic countries i.e. those with current account deficits, competitiveness losses, high levels of public and private debt. 33 Be serious about stronger governance (II) 4. Political and reputational incentives Increased reporting obligations; escalation to European Council; Commission/ECB surveillance missions. 5. Earlier and graduated sanctions (in macro-surveillance) interest-bearing deposit after the first instance of non-compliance in EIP, fine after repeated non-compliance 6. Ambitious benchmarks for establishing excessive deficit Reduce scope of “relevant factors” 34 Be serious about stronger governance (III) 7. Ambitious medium-term budgetary objective Improvement of structural balance to be significantly higher than 0.5% of GDP for high debt countries. 8. Quality and independence of economic analysis Body of wise (wo)men to perform ex post assessment of surveillance 9. Strong national fiscal frameworks Swift and uniform implementation of directive 10. Improved statistics 35 Important steps taken … more to come In less than one year: March 2010: financial support to Greece (€10bn) May 2010: creation of EFSF (€440bn) and EFSM (€60bn) September 2010: launch of economic governance reform November 2010: EFSF/EFSM activated for Ireland (€85bn) December 2010: Agreement to change Treaty March 2010: “Pact for the Euro” March 2011: Comprehensive package + ESM 36 Outline • The Untenable Status Quo • The Right Turns • The Wrong Turns • The Way Ahead 37 A challenging environment: Sovereign redemptions and refinancing needs 2011 38 What it takes to stabilise debt 39 What if adjustment is beyond Greece’s & Ireland’s capacity? Greece: primary balance to adjust by 14.6% over 6 years (2009-2015) Ireland: primary balance to adjust by 13.8% over 6 years (2009-2015) 40 Such large adjustments in the primary balance are not unprecedented – e.g. Italy, Canada General Government Primary Balance (as a percentage of GDP) 2000 1999 1998 1997 -6.0 1996 -6.0 1994 -4.0 1993 -4.0 1992 -2.0 1997 -2.0 1996 0.0 1995 0.0 1994 2.0 1993 2.0 1992 4.0 1991 4.0 1990 6.0 1989 6.0 1988 8.0 1987 8.0 1995 Canada Italy Source: OECD 41 Markets have their doubts 5-yr Sovereign CDS Spreads (basis points) 1250 Germany France Italy Spain Greece Ireland Portugal 1000 750 500 250 0 Jan.09 Apr.09 Jul.09 Oct.09 Jan.10 Apr.10 Jul.10 Oct.10 Jan.11 Source: CMA DataVision via Datastream 42 Stop scaring the markets Government bond spreads against German Bund in basis points (10 yr) 23/11/10: Merkel: “We are facing an exceptionally serious situation.” 28/11/10 : ECOFIN approves €85 bn Irish package 12/11/10: G-20 Joint F/D/IT/ES/UK statement “Any new [bail-out] mechanism only after mid-2013; no impact on current arrangements.’’ 16-17/12/10 : European Council confirms private creditors’ involvement in the ESM 28-29/10/10 : European Council endorses the Van Rompuy report but divided on sanctions. 10/01/11: After China, Japan announces bond buys to boost confidence in EFSF. 18/10/10: Deauville Summit declaration: private creditors to be involved in the crisis resolution mechanism 25/01/11: EFSF first bond issue. 43 Allegedly easy options are not easy (I) • Inconceivable expulsion from the euro area – not compatible with political foundations of the euro – inconsistent with crisis response so far – economic and political “suicide” for countries concerned 44 Allegedly easy options are not easy (II) • Default or sovereign debt restructuring – No recent precedents in advanced economies – not really a significant relief – Costly and traumatic economic and social experience – “Orderly” restructuring in monetary union a myth – contagion effects in monetary union 45 Past experience with defaults/restructuring Experience so far only from emerging markets Reputational/penalty costs • Loss of market access • Higher future borrowing costs • Trade sanctions by creditor countries Broader costs to the domestic economy • Output losses 46 Past experience with defaults/restructuring Over the last 20 years, 19 countries out of 120 IMF programmes had debt restructuring: • • • • • • • • • 1998 Ukraine, Russia, Pakistan,Venezuela 1999 Gabon, Indonesia, Pakistan, Ecuador 2000 Ukraine, Peru 2001 Argentina, Cote d'Ivoire 2002 Moldova, Seychelles, Gabon 2003 Dominican Republic, Paraguay, Uruguay 2004 Grenada 2005 Dominican Republic 2006 Belize 47 Defaults/restructuring nearly always associated with sharp output losses - but worse in case of default Evolution of GDP growth around crisis episodes (in percent) Pre-emptive restructuring cases 15 Dom. Republic (t=2003) Moldova (t=1998) Uruguay (t=2002) Default cases 15 Ukraine (t=1998) Pakistan (t=1998) Ecuador (t=1999) Argentina (t=2002) 10 10 5 5 0 0 -5 -5 -10 -10 -15 Russia (t=1998) -15 t-3 t-2 Source: IMF WEO. t-1 t t+1 t+2 t+3 t-3 t-2 t-1 t t+1 t+2 t+3 48 Default/restructuring associated with higher borrowing cost and contagion Evolution of the EMBIG spreads around crisis episodes (in basis points) Argentine crisis (2001-02) 8000 3000 Argentina Uruguay (rhs) Brazil (rhs) 7000 2500 6000 2000 5000 4000 1500 3000 1000 2000 500 1000 Source: Haver Analytics. 0 2001 0 2002 2003 2004 49 … although some solutions tend to be less costly • Extensive prior consultations with investors • Inclusion of collective action clauses (CACs) • Accompanying IMF programmes with strong conditionality 50 Restructuring would have major impact on domestic financial wealth… Euro area: holdings of government debt by residents and non-residents (end 2009) (share of total debt) 1 0.9 0.8 0.7 0.6 Debt held by non-residents of the Member State 0.5 0.4 Debt held by residents of the same Member States 0.3 0.2 0.1 0 Source: ECB 51 … and the banking system Strong correlation between sovereign and banks’ CDS Banks 1250 Sovereigns Deutsche Unicredito Nat. Bk of Gr. Banco Com. Port. BNP Paribas Santander Bk. Of Ireland ING Germany Italy Greece Portugal 1250 1000 1000 750 750 500 500 250 250 0 0 Jan.09 Jul.09 Jan.10 Jul.10 Jan.11 France Spain Ireland Netherlands Jan.09 Jul.09 Jan.10 Jul.10 Jan.11 Latest observation: 25 Jan. 11. Note: Five-year CDS; basis points. Sources: CMA DataVisiosn via Datastream 52 Industrialised countries differ from emerging markets • Advanced economies have higher debt tolerance • Stronger institutions • More favourable composition of debt • More stable revenue basis • Advanced economies have highly integrated financial markets, especially inside a monetary union • No government of an advanced economy has defaulted/ restructured since World War II 53 If no restructuring – then what? • Seek new sources of growth • structural reform • regain competitiveness • confidence effects • Identify other measures to reduce debt burden • privatisation • improved tax collection • debt buybacks 54 The Greek government ‘under supervision’ Structural reforms demanded by EU/IMF: – Pension reform – Labour market and welfare system reform – Health system – Public administration reform – Public procurement – Opening up closed professions (transport, energy, retail sectors, pharmacists, notaries, etc.) – Tackling tax evasion and the informal economy – Privatisation (€50bn programme) 55 Need to improve growth prospects via structural reforms in Greece Competition and productivity • • • • Deregulation of transport and energy sectors Opening up of closed professions Implementation of Services Directive Restructuring of state-owned enterprises and bringing in of private management Labour market flexibility and labour supply • • • Reduction of employment protection Facilitating use of part-time work/flexible work arrangements Reform of the arbitration system Pension reform • • • Extensive reform to improving long-run sustainability, simplify system and increase participation New accrual rates with same profile for all workers Increase in retirement age to 65 and contributory period for full pension from 35 to 40 years 56 Greece – good progress but with pains HICP inflation Annual % change HICP Unemployment % of the labour force quarterly series HICP at constant tax rates 6 monthly series Annual average 16 6 15 5 5 4 4 14 13 12 3 3 2 2 1 1 11 10 9 8 Jan-12 Source: Eurostat and ECB. Last observations: December 2010 for HICP and October 2010 for HICP at constant tax rates. Jan-11 2010 Jan-10 2009 Jan-09 2008 Jan-08 2007 Jan-07 2006 Jan-06 2005 Jan-05 6 Jan-04 -1 Jan-03 -1 Jan-02 7 Jan-01 0 Jan-00 0 Source: Greek LFS for monthly, Eurostat for quarterly, green triangles give EC/ECB/IMF projection Last observations: October 2010 for monthly series, 2010 Q3 for quarterly. 57 Initial impact on competitiveness 58 Create a credible financial safety net European Stability Mechanism • Effective lending capacity of €500bn; subscribed capital of €700bn (€ 80bn paid-in capital; €620bn guarantees) • Interest rates: financing costs + 2%; further +1% for longerterm loans • Link to adjustment programme (EU/IMF) – conditionality • Instruments: (1) loans; (2) primary market purchases of government bonds • To be ready by 2013 (Treaty change procedure underway) • Private sector involvement: debt sustainability analysis; collective action clauses, preferred creditor status 59 Outline • The Untenable Status Quo • The Right Turns • The Wrong Turns • The Way Ahead 60 Temporary decrease in market pressure should not lull sense of urgency Government bond spreads against German Bund in basis points (10 yr) 15-Feb-11: Finland to dissolve parliament by 15/03; last chance to agree on comprehensive package is the 11 March summit. 15-Feb-11: Comprehensive package: EU officials announce that extra meetings are needed; Olli Rehn admitted that ‘’there is work still to be done’’. 4-Feb-11: France and Germany introduce a joint proposal for a ‘’’competitiveness pact’’ at the European Council, facing reluctance from the other members. 25-Feb-11: German coalition MPs rule out bond buying by ESM. 61 Way ahead • Commission proposals + • EP ambition • Franco-German Competitiveness Pact • “Comprehensive Package”+ agreement on ESM • Demonstration effect of Spanish reforms Make it work! Markets will not forget & forgive 62 Debt burden not only relevant for euro area Source: OECD, Eurostat, Morgan Stanley (estimates) 63 The euro area is ahead of others 64 Thank you! For further questions or enquiries: Email: [email protected] Or visit: www.ecb.europa.eu 65