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The significance of the eurozone banking union on the road to stability
Jorge Sicilia, Chief Economist BBVA
www.bbvaresearch.com
April 2013
Palm Beach Strategic Forum
Página 2
US and Eurozone: Two “areas” with a single currency
22.4%
US 23.5%
EZ
Share in world GDP
Share in world population
6.1%
4.6%
Public deficit (% GDP)
7.3%
3%
Public debt (% GDP)
105%
89.6%
GDP p.c. (bn $)
48 328
34764
Palm Beach Strategic Forum
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Before 2008, the euro area was living under the spell of a “feel good” factor
There was a single monetary policy working throughout the euro area
National fiscal policy was (apparently) kept in check
Current account imbalances (apparently) didn't matter
No asymmetries in State´s (country's) growth rates
Palm Beach Strategic Forum
Página 4
The euro area had a fast and united reaction to the 2008 crisis
Monetary policy
*Using ex-post inflation for the Great Depression. Inflation expectations for Japan, Europe, UK, USA.
Time to zero real interest rates*, months
Great Depression (Oct29) Japan (Jun91) Europe (Aug07) UK (Aug07) USA (Aug07)
Time to first fiscal package, months
Great Depression (Oct29) Japan (Jun91) Europe (Aug07) UK (Aug07) USA (Aug07)
Time to first injection of public capital, months Great Depression (Oct29) Japan (Jun91) UK (Aug07) Europe (Aug07) USA (Aug07)
6 15 19
73 30
6 13 15
59 42
13 6 13
59 36
Fiscal policy
Financial stabilization
POLICY
Palm Beach Strategic Forum
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… but in 2010 everything changed
One-fits-all fiscal policy (and market´s missreading of the “no bail out” clause)
The financial integration reversal among euro area countries
The negative feedback loop between bank and sovereign risk (and the related current account crisis)
Structural differences (flexibility in product and labor markets) On the radar problems that came back to haunt the euro area
Off the radar problems that compounded the picture
Palm Beach Strategic Forum
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Interest rates closely related to the zip code
Ireland
Portugal
ItalySpain
Belgium France
AustriaFinlandGermany
Netherlands
-‐200
-‐100
0
100
200
300
400
500
600
700
-‐80
-‐60
-‐40
-‐20 0 20 40 60 80 100
Corporate Loans
10 yr spreads vs. Germ
an
Change in interest rates on new bank loans and Change in 10yr spreads vs. Germany, (Basis points, dec-10 a jul-12) Source: IMF, Bloomberg and BBVA Research
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National central banks taking the place of the interbank market
-‐1200
-‐1000
-‐800
-‐600
-‐400
-‐200
0
200
400
600
800
1000
1200
Jan-‐07
May
-‐07
Sep-‐07
Jan-‐08
May
-‐08
Sep-‐08
Jan-‐09
May
-‐09
Sep-‐09
Jan-‐10
May
-‐10
Sep-‐10
Jan-‐11
May
-‐11
Sep-‐11
Jan-‐12
May
-‐12
Sep-‐12
Jan-‐13
c ore countries Per ipheral countries
TARGET2 position vs the Eurosystem (+) creditor position / (-) debtor position), bn € Source: National central Banks and BBVA Research
Palm Beach Strategic Forum
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The euro area crisis has the potential to destabilize the rest of the world economy
Financial stress index Source: Bloomberg and BBVA Research
-1,50
-1,00
-0,50
0,00
0,50
1,00
1,50
2,00
2,50
3,00
des-
05
abr-
06
set-0
6
feb-
07
jul-0
7
des-
07
mai
-08
set-0
8
feb-
09
jul-0
9
des-
09
mai
-10
oct-1
0
feb-
11
jul-1
1
des-
11
mai
-12
oct-1
2
mar
-13
US
Eurozone
US driven Euro driven
Palm Beach Strategic Forum
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The tale of two small economies: Nevada vs Ireland
4.5
Nevada 2.7
Ireland
Population GDP (bn $)
120
200
Unemploy-ment
13.5%
14.5%
No. banks bust
11
2?
Loss absorber
FDIC
Irish sovg.
Financial crisis
No
Yes
Source: Daniel Gross, CEPS, 2013
Palm Beach Strategic Forum
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The road to a solution: The strategy is focused now on the ECB backstop + Banking union
Fiscal treaty
Instruments to reduce private and public imbalances
Liquidity provision
Completing monetary union
EFSF-ESM
ECB backstop
Fiscal union
Banking union
Surveillance of imbalances
Palm Beach Strategic Forum
Página 11
2013 2013-14 2015-2018? ?
Banking Union: An ambitious project
Single Rulebook (EU 27)
Single Supervisory Mechanism (EZ)
Single Resolution Mechanism and European Resolution Fund (EZ)
Single DGS (EZ)
Página 11
Fiscal union
Palm Beach Strategic Forum
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The benefits of a banking union
A single resolution scheme with participation of the private sector increases incentives for core countries (Germany) to mutualize (part of) the resolution funds
Banking union helps breaking the loop between banking and sovereign risk
Convergence of financing costs and evolution towards trans-european banks and recovery of the financial integration that is key to the survival of the euro area
Single supervision reduces banking fragmentation and restores interbank market
The significance of the eurozone banking union on the road to stability
Jorge Sicilia, Chief Economist BBVA
www.bbvaresearch.com
April 2013