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DG ECFIN Vejen mod en økonomisk union Netværkskonference 2012, Odense DG ECFIN, European Commission Jakob Wegener Friis DG ECFIN From a financial crisis …. 2011-2012 – A systemic crisis of the euro? 2007 Subprime crisis 2008 – Financial crisis 2009 – Economic crisis 2010 – Sovereign debt crises Assistance programmes + EA financial backstop Stimulus packages + automatic stabilizers Bank recapitalizations + guarantees 2 DG ECFIN ……. to an unprecedented economic crisis Unemployment GDP growth (%) (% of the civilian labour force) 4 12 3 10 2 8 1 6 0 -1 2005 06 07 08 09 10 11 12 4 -2 2 -3 0 -4 2005 06 07 08 09 10 11 12 -5 Government deficit Government gross debt (% GDP) 12% 120% 10% 100% 8% 80% 6% 60% 4% 40% 2% 20% 0% 2005 06 0% 2005 06 07 08 (% GDP) 09 10 11 12 07 08 09 10 11 12 3 DG ECFIN Heartbeat of the crisis 4 Legacy of the crisis: 4 key messages DG ECFIN 1. A lasting impact on growth and job creation: more than ever a need for comprehensive policy action 2. Recovery in question: uneven and protracted, rebuilding confidence of paramount importance 3. Fiscal consolidation a necessary but not sufficient condition for sustainable public finances 4. The EU response has been comprehensive, albeit incremental. Stronger EMU governance and commitment to euro area cohesion essentiel The crisis as an eye opener DG ECFIN 1. External shock: the crisis has exposed shortcomings in EMU‘s design and governance system 2. Gaps in original EMU design : monetary and fiscal discipline not enough, no crisis resolution mechanism foreseen 3. Prediction of closing structural reform gap did not materialise fully 4. Weaknesses in enforcement of existing rules 7 The broad ‘geography’ of EMU reform DG ECFIN More effective preventive arm of SGP Focus on debt developments (corrective arm of SGP) Crisis resolution Sound fiscal policy • Better enforcement: disincentives/ Sanctions • National frameworks Prevention and correction of macro imbalances Structural reform strategy (Europe 2020) Sound Balanced fiscal growth policy Macro-prudential supervision Regulation and supervision of financial systems Learning the lesson: the EMU of tomorrow DG ECFIN 1. Growing again: The pre-crisis need for structural reform is reinforced. Releasing Europe’s growth potential is a pressing priority. A well-functioning EMU will help. 2. A choice to be made: the « safe harbour » of Maastricht or further fiscal integration. More intrusive surveillance and forceful enforcement paired with a credible last-resort financial backstop. 3. Beyond fiscal: Broader surveillance to prevent unsustainable imbalances build up. Strengthened financial regulation and supervision in support of the internal market. 4. Hanging together: Realisation of scope and depth of governance required to protect the benefits of common currency. EU rules interacting with increased attention of financial markets 5. Ever closer Union: Political challenge of wide-reaching financial solidarity and « pooling of powers » within the Community method. DG ECFIN Completion of EMU's architecture Banking Union – closer integration in supervisory structures and practices, in cross-border crisis management/resolution and burden sharing Fiscal Union – Moving from coordination towards integration in the surveillance of economic and budgetary policies in the euro area Stability Bonds – Consider joint issuance of euro area debt, once crisis has abated 9 DG ECFIN Why do we need a Banking Union? • Necessary for achieving a genuine EMU. • Break the negative feedback loop between sovereigns and banks. • Prevent bank runs and strengthen overall financial stability. • Preserve the single market. • Single supervision is the precondition for the introduction of potential direct recapitalisation of banks by ESM. DG ECFIN Banking crisis triggered dangerous feedback loops Higher Government Bond Yields Tighter financial conditions index Default worries Bailout costs Bank solvency concerns Higher debt service More Banking / Financial Strains Negative wealth effect Higher Government Debtto-GDP Ratio Lower corporate profits Calls for fiscal tightening Lower tax receipts Credit losses Reduced loan supply Lower nominal GDP Deeper Recession 11 Source: Goldman Sachs, Global Economics Weekly 11/38, 30/11/2011 DG ECFIN Key elements of the Banking Union Single Supervisory Mechanism Single Resolution Mechanism Deposit Guarantees Single Rulebook 23/05/2017 12 DG ECFIN Single Supervisory Mechanism ECB send Board Members preparation and execution of tasks central banks / supervisors of participating Member States Coordination by EBA Single Supervisory Mechanism National central banks / supervisors of nonparticipating Member States Single Rulebook DG ECFIN A Euro area SSM open to other MS • All Euro-area Member States shall participate. • Non-Euro area countries may join by establishing a close cooperation between their competent authorities and the ECB. 23/05/2017 14 DG ECFIN The debate about fiscal union Discipline (Austerity) 6-Pack 2-Pack ESM Fiscal Compact Veto over national budgetary policy Executive tasks at EAlevel (e.g. EA Treasury) New enforcement tools Solidarity (Growth) Common growth and stabilization instruments Fiscal backstops Financial transactions tax Eurobonds Social pillar 15 DG ECFIN Europe’s Prosperity Triangle "Social market economy" GROWTH FAIRNESS - single market - catching-up and convergence - investment and innovation - participation - generational - territorial STABILITY -monetary/financial -fiscal -environmental 16 DG ECFIN Political "musts" for long-term solutions • Political will and leadership for a great leap forward • Necessity of Treaty changes Unanimity • Constitional questions in some MS • Political and economic cohesion among countries • EU27 vs. EU10? • Rules vs. discretion: An accepted authority needed • Building legitimacy of the EU-level executive - preferences of Member States and citizens • Issues: Too little too late? Are we sure about EMU.2? Credible incentives and mutual trust? DG ECFIN Four Presidents' Report Integrated frameworks for: • Financial sector: – SSM, DGS, RRS, burden sharing? • Budgetary policy: – EA fiscal capacity? Debt mutualisation? • Economic policy: – more binding CSRs? Positive financial incentives for reform implementation? Partnership contracts? Ensuring democratic legitimacy and accountability: EAlevel accountability structure? 18 DG ECFIN Questions?