FIVE  THESES  ON  THE  EUROPEAN  MONETARY  AND  FISCAL  UNION    

INSTITUTIONAL  FRAMEWORK                    

Ramon  Marimon  European  University  Institute  and  UPF  –  Barcelona  GSE,    

April 25 , 2014

June 28, 2014

June 28, 2014

June 28, 1914

�Five Theses: �  

Thesis #1:��The  European  Union            as  a  commitment                  to  Growth  and  Peace  

 

Grecia  

Portugal  

Irlanda  España  Italia  

Francia  Alemania  

Fuente: Thomson Reuters

Interest  rates  on  10-­‐year  government  debt  

The  European  Exchange  Rate  

Mechanism  (ERM)    1979  -­‐1999  

Thesis #2:��The  ERM  lesson:  EMU  to  solve      the  monetary  commitment  problem.  

 

but  debts  were  not  the  same…  

Grecia  

Portugal  

Irlanda  España  Italia  

Francia  Alemania  

Fuente: Thomson Reuters

Interest  rates  on  10-­‐year  government  debt  

The  European  Exchange  Rate  

Mechanism  (ERM)    1979  -­‐1999  

Thesis #3:��The  euro  crisis  lesson:      a    European  Fiscal  Union  to  solve          the  fiscal  commitment  problem.  

�  

a  feasible  European  Fiscal  Union?  •  Risk  and  fiscal  burden  sharing,                                                              with  limited  (no?)  Union  taxes  &                    with  limited  redistribuQon.  

 •  Draw  the  lines  (between  Union  &  States  &…)  and,  accordingly,      limit  sovereign  debt,      account  for  social  liabiliQes,  and      avoid  private  debt  turning  into  public  debt.      

October 8, 2012

The   European   Stability   Mechanism   starts   operating   as   a  permanent   crisis   resolution  mechanism   for   the   countries   of  the  euro  area  

December 5, 2012

The  Van  Rompuy  Report:    

 “The  euro  area  needs  stronger  mechanisms  to  ensure  sound  naQonal  policies  so  that  Member  States  can  reap  the  full  benefits  of  the  EMU.  This   is  essenQal   to  ensure   trust   in   the  effecQveness  of  European  and  naQonal  policies,  to  fulfill  vital  public  funcQons,  such  as  stabilisaQon  of  economies  and  banking  systems,  to  protect  ciQzens  from  the  effects  of  unsound   economic   and   fiscal   policies,   and   to   ensure   high   level   of  growth  and  social  welfare.”  

 

January 1, 2013

The   Treaty   on   Stability,   Coordination   and   Governance   in   the  Economic   and  Monetary   Union   –   better   known   as   the   "Aiscal  compact"   –   enters   into   force   (with   the   recent   pledge   of   the  Czech   Republic’s   new   prime  minister   to   ratify   it,   the   treaty  ‘will  bind’  all  EU  member  states,  but  UK).  

November 4, 2013

The   Single   Supervisor   Mechanism   (SSM)   of   the   Euro   area  banking  system  starts   its  preparatory  work  and   it  should  be  fully   operational   in   November   2014,   an   important  enlargement  of  the  European  Central  Bank  activities.    

 “The  clean  exits  of  Spain  and  Ireland  from  their  Uinancial  assistance  programmes   show   that   the   crisis   resolution   strategy   in   the   euro  area   is   working   (…)   Ireland   was   the   Uirst   EFSF   programme   and  Spain   was   the   Uirst   European   Stability   Mechanism   (ESM)  programme.”  (EFSF-­‐ESM  Newsletter  Dec.,  2013)  

March 20, 2014

The  European  Parliament  and  the  Council  reached  a  political  agreement  on  the  Single  Resolution  Mechanism  (SRM)  for  the  Euro  area  banking  system.        

 

Key  elements  of  the  Banking  Union  

25/04/14   23

   

Single  Rulebook  EU28  

Single  Supervisory  Mechanism  

EU18+    

Single  ResoluQon  Board  EU18+  

Funding  Arrangements  EU  

18+  

CRR/CRD  IV              BRRD  

What  has  been  done:        3+1  important  pieces  on  the  table  

1.  Fiscal  Compact  –  LimiQng  redistribuQon  with  fiscal  restraint?  

2.  European  StabilizaQon  Mechanism  (ESM)  –  As  a  risk  sharing  mechanism  with  condiQonality?  

3.  European  Banking  Union  (EBU)  –   To  break  the  link  private–sovereign  debt?  

+  European  Central  Bank  (ECB)  – Providing  ‘firing  power’  to  ESM  &  control  to  EBU?  

�    We  have  the  guns!    

��  

1.  Fiscal  Compact  –  LimiQng  redistribuQon  with  fiscal  restraint?  

2.  European  StabilizaQon  Mechanism  (ESM)  –  As  a  risk  sharing  mechanism  with  condiQonality?  

3.  European  Banking  Union  (EBU)  –   To  break  the  link  private–sovereign  debt?  

+  European  Central  Bank  (ECB)  – Providing  ‘firing  power’  to  ESM  &  control  to  EBU?  

1.  Fiscal  Compact  –  For  most  the  ‘fiscal  compact’  sQll  remains  ‘an  imposed  objecQve’  more  than  an  assumed  ‘integrated  budgetary  framework’  for  naQonal  fiscal  policies.  

 2.  European  StabilizaQon  Mechanism  (ESM)  

–  A  crisis  resoluQon,  not  a  risk  sharing  mechanism.    

3.  European  Banking  Union  (EBU)  –   SRM:  where  is  the  independence  to  break  the  lines?  “A  Single  ResoluQon  Board,  consisQng  of  representaQves  from  the  ECB,  the  European  Commission  and  the  relevant  naQonal  authoriQes”    

+  European  Central  Bank  (ECB)  –   SSM:  too  much  responsibility  for  the  ECB?  

�  We  have  the  guns,                do  we  have  the  guts?  

��  

Thesis #4:��Intergovernmental  guns                  do  not  always  fire.  

��  

Euro  debt  overhang  

sovereign  risk  in  the  euro  area    

…  and  5  European  non-­‐EA  +  3  euro  area  (5+2)  countries  are  in  the  top  8  least  risky  sovereigns  

3  euro  area  countries  are  in  the  top  9    (4  top  8)  most  risky  sovereign  credits…  

1.  Argentina (3) 2.  Venezuela (5) 3.  Cyprus (2) 4.  Ukraine (6) 5.  Pakistan (4) 6.  Egypt (10) 7.  Greece (1) 8.  El Salvador 9.  Portugal (7) 10. Serbia

1.  Norway (1) 2.  Sweden (2) 3.  Finland (5) 4.  Denmark (7) 5.  Germany (8) 6.  UK (6) 7.  USA (3) 8.  Switzerland (4) 9.  Netherlads 10. Japan

Source:  S&P,  CMA  Global  Sovereign  Credit  Risk  Report  –  4th  Quarter,  2013    (3rd  Quarter  2012)      

Thesis #5:��We  need  proper  guns  and  trust          to  solve                the  Eurozone  divide.