“From monetary to economic, social and political union: a ... · Better fiscal consolidation and...
Transcript of “From monetary to economic, social and political union: a ... · Better fiscal consolidation and...
“From monetary to economic, social and political union: a
European vision”
Rolf Strauch, Member of the Management Board,Brussels, 19 February 2013
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Eight reasons for sovereign debt crisis
1 Member States did not fully accept the political constraints of being in EMU
2 Transition to permanent lower interest rates
3 Economic surveillance too narrow
4 Methodological problems with calculating structural fiscal balances
5 Insufficient control of data by Eurostat
6 Financial market supervision still mainly national
7 No crisis resolution mechanism
8 Biggest financial crisis in 80 years
Europe reacts to crisis at national and EU level
1) Significant fiscal consolidation and structural reforms at national level
2) Improved economic governance at euro area level
3) EU is reinforcing the banking system
4) Financial backstops (EFSF and ESM)
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The strategy is delivering results - competitiveness
■ Divergences within EMU are declining
■ Competitiveness is improving in all Southern European countries
Current Account Balance (as % of GDP)
Source: Eurostat, EC European Economic Forecast - Autumn 2012
Nominal unit labour costs, whole economy (2000=100)
Germany Ireland Greece
Portugal Spain Italy3
The strategy is delivering results - fiscal
Source: European Commission, European Economic Forecast – Autumn 2012
Fiscal balance, Euro area vs USA and Japan (as % of GDP)
Fiscal balance, euro area Member States (as % of GDP)
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* Actual figure for Ireland 2010 -30.9% 4
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juil..11 août.11 sept..11 oct..11 nov..11 déc..11 janv..12 févr..12 mars.12 avr..12 mai.12 juin.12 juil..12 août.12 sept..12 oct..12 nov..12
Germany Ireland Portugal
Source: Bloomberg - 10-year government bond yield, 9-year bond yield for Ireland
The strategy is convincing the market
Long term government bond yields
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Better fiscal consolidation and a new model of econ omic governance
■ Reinforcing the Stability and Growth Pact■ Automatic consequences if 3% deficit ceiling is breached■ More emphasis given to debt criterion■ “Reversed” voting in Council eliminates possibility for political interference
■ New “Fiscal Compact”■ Annual structural public deficit shall not exceed 0.5% of nominal GDP■ Balanced budget rule to be introduced in national legal systems■ Reinforced surveillance and coordination of economic policies■ European Court of Justice monitors implementation
■ New ”Macroeconomic Imbalance Procedure”■ Based on scoreboard of indicators■ Internal imbalances: e.g. arising from public and private indebtedness■ If excessive imbalance: Corrective Action Plan from MS and recommendation from Commission
■ “European Semester”: yearly cycle of economic and fiscal policy coordination■ Country-specific recommendations; priorities include growth-friendly fiscal consolidation■ New focus: avoid “spill-overs”
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Reinforcing the banking system
■ Europe is pushing ahead with financial market reforms■ “Basel III” is supposed to be progressively implemented in 2013
■ EU establishes three new European supervisory authorities – EBA, EIOPA and ESMA
■ The new ESRB early warning system for recognizing macro-pru dential risks iscreated
■ EBA decided higher capital requirements for banks – core tie r 1 capital ration israised to 9%
■ Banks have increased their capital base by over €200 billion■ ¾ through fresh capital■ ¼ through decreasing assets
■ Programmes for Ireland, Greece and Portugal contain aid for bank recapitalisation,€39.5 billion have been transferred to Spain to support the b anking sector
■ Problem: renationalization of the capital market in the euro area
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EFSF and ESM: mission and scope of activity
Mission : to safeguard financial stability in Europe by providing financial assistance to euro area Member States
Instruments
LoansPrimary Market
PurchasesSecondary Market
PurchasesPrecautionary Programme
Bank recapitalisations through loans to governments*
* Including in non programme countries
All assistance is linked to appropriate conditional ity
EFSF and ESM finance their activity by issuing bonds or other debt instruments
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EFSF & ESM: differences
Legal Structure
Duration
Private company under Luxembourg law
MaximumLending capacity
Claims to loans Pari passu
Temporary (June 2010-June 2013)
€440 billion
Inter-governmental institution under international law
Permanent institution
€500 billion
Preferred creditor status *
* For the financial assistance for recapitalisation of the Spanish banking sector, pari passu will apply
Capital structureBacked by guarantees of euro area
Member States
Subscribed capital of €700 billion€80 billion in paid-in capital
€620 in committed callable capital
■ The EFSF provides support to three countries through fully- fledged adjustment programmes
■ Portugal
■ Greece
■ Ireland
■ In June Spain requested financial assistance for the recapi talisation of financial institutions� Support from of up to €100 bn, transferred to the ESM
� On 11 December, ESM provided €39.5bn in bills and bonds to the FROB
■ Request from Cyprus for financial assistance is being consi dered
■ Potential concerted EFSF/ESM – ECB intervention (OMT)� EFSF/ESM would conduct primary market intervention� The ECB could engage in secondary market purchases.
Requires request from potential beneficiary country for EFSF/ESM support and conditionality in MoU
EFSF and ESM : lending and assistance
Total EFSF commitments:
€192 bn …
… of which
€138.4 bn has been
disbursed
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On 13 December, the Council reached an agreement on the Single Supervisory (SSM)
■ SSM will be composed of the ECB and national competent authorities
■ Responsible for the overall functioning of the SSM
■ Direct oversight of euro area banks with assets of over €30 billion
■ Supervisory tasks within SSM will start on 1 March 2014 (or 12 months after entry into force of regulation)
National supervisors will remain responsible for consumer protection, money laundering and branches of third country banks
■ On 14 December, European Council set deadline for agreement on Recovery and Resolution Directive and for a Deposit Guarantee Scheme Directive before June 2013
Going forward : banking union
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President of European Council Van Rompuy presented plan to advance with four unions:
� Banking union■ Common supervision for euro area banks – Single Supervisory Mechanism (SSM)
■ Bank resolution regime
■ EU deposit guarantee fund
� Fiscal union■ Pooling of decision making and risks
� Stronger economic union■ Advanced economic policy coordination and further integration of markets
� Stronger political union■ Enhanced democratic legitimacy and accountability
Going forward
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Europe’s reaction to the crisis – at national and Eu ropean level
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1) Budgetary consolidation and structural reforms■ Significant progress has been achieved■ Reforms have to be continued
2) Closer economic policy coordination in the currency unio n■ Rules and regulations have been significantly improved■ Rules must now be applied
3) Enhancement of the banking system■ Currently the banking sector is Europe‘s biggest problem■ Steps towards a banking union are an absolute must
4) Rescue mechanisms (EFSF and ESM) against the crisis
■ They are important to accompany the reforms
Measures to boost growth in EU
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■ Strategic framework: Europe 2020 strategy
■ Delivering growth by focusing on job creation, innovation, education, energy sustainability
■ Compact on Growth and Jobs■ Agreed at European Council in June 2012
■ All MS fully committed to taking immediate action required at national level to achieve theobjectives of the Europe 2020 Strategy
■ Single Market Act■ Proposed by European Commission in April 2011
■ Set of 12 key actions to improve growth and competitiveness (to be implemented via EUlegislation)
■ Includes actions designed to enhance access to finance for SMEs, worker mobility in SingleMarket
■ Annual Growth Survey issued by Eur. Commission each year in J anuary■ Starting point for European Semester
■ Sets out EU priorities for the coming year to boost growth and job creation
■ Priorities for 2013 include: pursuing growth-friendly fiscal consolidation, restoring lending to theeconomy, tackling unemployment and social consequences of the crisis
Measures to boost growth in EU (2)
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■ European Investment Bank
■ 90% of its funding is directed towards promoting sustainable growth and job creation in MS
■ In January 2013 EIB shareholders approved a €10 bn capital increase, which will raise lendingcapacity by €60 bn
■ EU-EIB Project Bond Initiative (launched in Nov. 2012): an innovative means of unlocking privateinvestment in infrastructure
■ Country-specific recommendations prepared by Eur. Commis sion and endorsedby European Council■ Supports MS in delivering growth and jobs
■ Growth-enhancing structural reforms■ Agreed in MoUs with EFSF programme countries
■ Examples of national measures aimed at stimulating growth■ France: proposal for reduction in labour and business costs; overhaul of corporate tax; creation of
a state investment bank in early 2013
■ Italy: fundamental reform of pension system; action to address youth unemployment, pursuingthe fight against tax evasion; combating the shadow economy
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ESM issuance
ESM Funding Strategy
ESM funding
Short term funding• Regular bill programme• Unsecured money market
Long term funding• Highly liquid benchmark bonds
• 3 year – 30 year• Taps possible• Via syndications, auctions • Private placements• Non euro currencies allowed
Fund pool• Funds are not attributed to one
country but pooled• One unique rate for all countries
For investors� Provides highly liquid investment opportunities� Offers a regular issuance programme (short-term
and long-term)� Provides coverage across the whole yield curve
For beneficiary countriesOffering funding at best conditions with priority given to�Mitigating ESM liquidity and interest rate risk�Proposing the best balance between costs and maturities
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The combined capacity of ESM and EFSF: €700 billion
2 Up to July 2013 the EFSF may engage in new programmes if necessary to ensure a full fresh lending capacity of €500 billion. €500 bn lending capacity can also be reached through accelerated capital payments, if needed.
€192 bn already committed to Ireland, Portugal and Greece1
ESMinauguration8 October
Paid in capital1st and 2nd Tranche€32bn H2 2012
Oct. 2012 January 2013
Paid in capital3rd and 4th Tranche€32bn during 2013
July 2013
EFSF ceases to enter new programmes
January 2014
Paid in capital5thTranche€16bn early 2014
€248bn €400bn 2
EFSF
Lending capacity
ESM
EFSF committed
1 The amount provided to Spain for bank recapitalisation has been transferred to the ESM
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What will happen to EFSF?
■ EFSF will complete existing programmes for Ireland, Portugal and Greece andmanage the rollover of existing debt
■ The financial assistance for the recapitalisation of the Spanish banking sectorwas transferred to ESM
■ Up to mid July 2013, EFSF may engage in new programmes if necessary toensure a maximum full fresh lending capacity
■ Following the conclusion of existing programmes, EFSF will exist in anadministrative capacity until all outstanding debt has been repaid (includingrefinancing operations)
■ Once outstanding debt and loans have been repaid, EFSF will close down
■ EFSF staff has become ESM staff
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Total programme*
Already disbursed (€bn)
Remaining amount
available (€bn)
Max. total of EFSF
assistance (€bn)
Ireland 85 12.0 5.7 17.70
Portugal 78 18.2 7.8 26
Greece 164.4 108.2 35.4 144.6
- PSI participation¹
PSI sweetener 29.7 0² 30
Accrued interest 4.8 0² 5.5
Total 34.5 0 35.5
- 2nd Programme
Bank recapitalisation
41 93 503
Rest of programme
32.7 26.4 59.1
Total 73.7 35.4 109.1
EFSF lending programme
¹ As a temporary operation, EFSF provided the Eurosystem with bonds amounting to €35 billion as collateral during Greece's selective default period due to the PSI operation. These bonds were returned to the EFSF on 25 July 2012 and were cancelled on 3 August 2012.² Residual amounts committed were not used by Greece.3 As the most recent European Commission report specifies that the total needs of the Greek banking sector amount to €48.2 bn, the remaining (max.) total expected to be disbursed by the EFSF is €7.2 bn
* Ireland total programme of €85 bn financed as follows: €17.5bn – Ireland, €22.5bn – IMF, €22.5 bn – EFSM, €17.7bn – EFSF, €4.8 bn –bilateral loans from UK, Sweden and DenmarkPortugal total programme of €78 bn financed as follows: €26bn – IMF, €26bn – EFSM, €26bn – EFSFGreece total programme of €164.4bn broken down as follows: up to €35.5bn – PSI and accrued interest, €19.8bn – IMF, €109.1bn - EFSF
EFSF: a solid and diversified investor base
Geographical breakdown Breakdown by investor type
30%
23%
36%
9%
2%
Central
Banks/Govt /Sov.
wealth fundFund managers
Banks
Pension funds /
Insurance /
CorporatesOthers
Total breakdown includes all EFSF syndicated bond issues at time of issue. Placements by auction are not included. As at 9/11/2012
■ Over 900 investors have participated in EFSF syndicated bond issues
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