A strengthened governance of Economic and Monetary Union in Europe Frank Moss Director General...

A strengthened governance of Economic and Monetary Union in

EuropeFrank Moss

Director General International and European

Relations, European Central Bank

UN Economic Commission for Africa, 27 July 2012

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Outline

1. Weaknesses in the European EMU construction

2. A fivefold short and medium-term repair agenda

3. Structural reinforcement of the fiscal framework

4. Structural reinforcement of the macroeconomic framework

5. Structural reinforcement of the financial framework

6. Structural reinforcement of the crisis management framework

7. Structural reinforcement of the governance framework

1. Incompatibility between a single financial market with a supranational currency and national banking supervision – Insufficiently harmonised supervisory rulebook– Inadequate macro-prudential supervision

2. Failure to enforce the rules of the fiscal policy framework - – Insufficient internalisation of EU rules at national level– Practice of “non-interference” and weak enforcement by

Commission, Eurogroup/EU Council (sanctions never used)

3. Lack of a competitiveness framework– Lack of surveillance of competitiveness and macro imbalances– Processes of surveillance and coordination of structural policies

were non-binding

4. No crisis resolution mechanism to provide financial support to euro area countries in case of sudden external financing stops

Four key shortcomings in the governance of EMU

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Leading to the vicious cycles operating in the current euro area sovereign debt crisis

Financial sector repair

Growth repair Fiscal repair

Tighter financial conditions

Bailout costs

Calls for fiscal tightening

Lower tax receipt; higher expenditure

Reduced loan supply Credit

losses

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Outline








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Requiring short and medium-term actions

Implementing a 5-pronged strategy in the short and medium term

Mapping out the way towards a genuine Economic and Monetary Union in the longer term

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The fivefold short and medium-term repair agenda

Fiscal repair:- immediate/corrective: IMF/EU adjustment

programmes; ambitious EDPs and structural reforms

- structural/preventive: “6-pack”; “2-pack”; Fiscal Compact

Growth repair:- immediate/corrective: Growth Compact- structural/preventive: MIP in “6-pack”Financial repair:- immediate/corrective: improved bank funding

and capitalisation - structural/preventive: EU supervisory

architectureBetter crisis management:- immediate/corrective: GLF, EFSF and EFSM- structural/preventive: ESMBetter governance: European Semester; decisions

of 26/10/11

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The longer-term preparations for achieving a genuine EMU

First report presented by the 4 Presidents to the European Council on 28-29 June 2012

• Integrated financial framework

• Integrated budgetary framework

• Integrated economic policy framework

• Strengthened democratic legitimacy and accountability

Development of a time-bound road map for the achievement of a genuine EMU

• interim report in October 2012 (taking the current EU Treaty as given)

• final report by end 2012 (sketching out the areas in need of EU Treaty amendment)

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Outline








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Structural reinforcement of the fiscal framework (1)

• The four fiscal elements of the “six-pack” (already in force)

• The “two-pack” (near finalisation)

• The fiscal compact (in the process of ratification)


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• Regulation on the effective enforcement of budgetary surveillance in the euro area (EA) Financial sanctions for euro area MS in case of non-compliance with the fiscal rules (at an earlier stage and gradually increasing), decided quasi-automatically (RQMV)

4 EU legal acts on fiscal matters Macroeconomic

• Regulation on the strengthening of the surveillance of budgetary positions Preventive arm of the SGP: expenditure rule and stronger consideration of debt (1/20 rule)

• Regulation on speeding up and clarifying the implementation of the Excessive Deficit Procedure Corrective arm: equal footing of the government debt criterion

• Directive on requirements for budgetary frameworks of the MS Minimum requirements for national fiscal frameworks

11Source: internal presentation by Koester and Mohl (2011): An illustration of the key elements of the new Stability and Growth Pact

The Treaty on Stability, Coordination and Governance in EMU: Intergovernmental Treaty signed by 25 of the 27 EU Member States in March 2012

Main elements of fiscal reinforcement compared with the “six-pack”: •Mandatory national implementation of the balanced budget rule and the correction mechanism

– introduced by MS at constitutional or equivalent level – European Court of Justice to verify national transposition– National correction mechanisms based on principles

adopted by the EU Council in July 2012•More automaticity for euro area members in EDP

– Decisions on existence of excessive deficit by reversed qualified majority (does not apply to procedures related to debt criterion)

•Stronger commitment by MS to rapid convergence towards the MTO

Also includes aspects related to economic policy coordination and convergence as well as to governance

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“Two-pack”, part 1 - Strengthening of budgetary surveillance and correction of excessive deficits in euro area countries

• harmonised time line for adoption of national budgets

• national balanced budget rules and independent fiscal councils

• prior discussion of draft national budgets in the Eurogroup

• close monitoring of in-year budgetary implementation for MS in EDP - further recommendations in case of non-compliance possible

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“Two-pack”, part II - Strengthening of economic and budgetary surveillance of euro area Member States experiencing or threatened with financial instability

• Enhanced surveillance (quarterly) of MS experiencing

financial market tensions or receiving financial assistance

• ECB involvement in formulating corrective measures/adjustment programmes and assessing debt sustainability

• Analysis of financial institutions by EBA (with COM and ECB), further stress tests and assessment of national supervisors possible

• Post-programme surveillance (until 75% of assistance is repaid)

• MS must consult with EU Council, COM and ECB prior to approaching international lenders for financial assistance 14

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Outline








• Regulation on enforcement measures to correct excessive macro-economic imbalances Financial sanctions for euro area member states possible (decided quasi-automatically)

• Regulation on the prevention and correction of macro-economic imbalances Early warning “score-board”, country-specific qualitative analyses Excessive imbalance procedure (EIP)

Structural reinforcement of macroeconomic framework (1)

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Fiscal 2 EU legal acts on macroeconomic

16Source: internal presentation by Koester and Mohl (2011): An illustration of the key elements of the new Stability and Growth Pact

Scoreboard – outcome for 2011

Current account balance

Net International Investment

Position

Export market shares

Real Effective

Exchange Rate, HICP

deflated

Nominal unit labour cost

Private sector credit

flow

Private sector debt

General government

debt

House prices, consumption

deflated

Unemploy- ment rate

(% of GDP,

3 years

average)

(% of GDP)(5 years %

change)(3 years %

change)(3 years %

change)(% of GDP) (% of GDP) (% of GDP) (y-o-y % change)

(3 years average)

Threshold +6/-4% -35% -6% +/-5% +9% +15% 160% 60% +6% +10%Belgium -0.6 63.8 -15.4 -0.5 7.2 16.4 233.9 96.2 0.4 7.7Germany 5.5 34.3 -8.3 -4.1 6.4 3.8 136.4 83.2 -0.9 7.1Estonia 2.7 -58.7 -0.9 2.0 -1.3 -3.7 165.0 6.7 -2.1 14.1Ireland -1.0 -95.7 -12.8 -8.7 -8.0 -2.5 288.3 94.9 -10.4 12.7Greece -10.9 -92.0 -20.0 3.0 6.6 -3.2 126.8 144.9 -6.8 11.3Spain -5.0 -96.0 -11.6 -1.3 -1.8 -2.5 220.1 61.0 -4.3 19.2

France -1.8 -10.7 -19.4 -3.4 6.2 7.4 160.6 82.3 5.1 9.6Italy -3.1 -26.6 -19.0 -2.3 5.0 4.5 134.7 118.4 -1.4 7.9

Cyprus -12.1 -62.3 -19.4 -0.7 8.1 27.9 316.2 61.5 -6.5 5.9Luxembourg 6.4 103.9 3.2 0.8 16.8 -4.9 259.9 19.1 2.9 4.8

Malta -3.4 9.2 6.9 -3.6 6.3 - 210.0 69.0 -1.5 6.8Netherlands 5.7 34.2 -8.1 -2.0 5.5 3.1 218.7 62.9 -3.0 4.1

Austria 2.8 -10.5 -14.8 -1.5 6.4 5.8 160.6 71.8 -1.4 4.4Portugal -10.0 -103.0 -8.6 -2.7 2.0 3.6 247.6 93.3 0.1 10.3Slovenia -1.5 -37.3 -5.9 -0.4 11.4 1.0 128.3 38.8 0.7 6.7

Slovak Republic -2.8 -65.2 32.6 6.5 6.8 4.9 74.2 41.0 -5.0 12.9Finland 1.4 14.8 -18.7 -0.9 9.6 2.3 172.9 48.3 6.8 8.1


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• First Alert Mechanism Report published by the European Commission on 14 February 2012.

• Twelve countries selected for in-depth review (excluding EU countries under IMF/EU programme):

• Euro area: Belgium, Spain, France, Italy, Cyprus, Slovenia, Finland

• Non-euro: Bulgaria, Denmark, Hungary, Sweden, United Kingdom

• In-Depth Reviews for all 12 countries have taken place already.

• No country selected for the corrective arm of the MIP

• Countries under the preventive arm have received recommendations on how to correct their macroeconomic imbalance


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Outline








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Structural reinforcement of the financial framework (1)

Strengthening the area-wide supervision of the banking (and financial) sector in order to reinforce financial integration, mitigate macroeconomic imbalances and improve the smooth conduct of the single monetary policy in the euro area•More integrated micro- and macro-prudential supervision via a new supervisory framework, consisting of 3 financial supervisory authorities (EBA, ESMA, EIOPA) and the European Systemic Risk Board (arrangements to be reviewed after 3 years in 11/2013)•Implementation of Basel III: negotiations ongoing between the EU Council and the European Parliament on the Council compromise proposal for a Capital Requirements Directive IV (since end-May) 20

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Structural reinforcement of the financial framework (2)

Breaking the link between national banking systems and national sovereigns•Commission proposals on the basis of Article 127(6) for a single supervisory mechanism for euro area banks, involving the ECB, for consideration by the Council by end-2012 (thereafter the ESM could recapitalize banks directly) •Commission proposal for a Directive establishing a framework for bank recovery and resolution (6 June 2012) •Commission proposal for a European system of deposit guarantees (July 2010)

Minimising the risks for taxpayers through adequate contributions by the financial industry (enhanced cooperation (at least 9 countries) to establish a common system of financial transaction tax (agreement aimed for end-2012)

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Outline








Structural reinforcement of the crisis management framework (1)

LEGAL STATUS

EFSF ESM

International institution established by ad hoc Treaty

Private company

CAPITAL STRUCTURE Paid-in & callable capital

Guarantees

DECISION-MAKINGParliamentary approval for changes to instruments

More flexibility to make changes by unanimity

DURATION PermanentExpires mid-2013

LIABILITIESEFSF debt re-routed to Member States

ESM debt not re-routed

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100

200

300

400

500

600

700

2013 2014 2015

EFSF (440bn)

ESM

EFSF (200bn)


Combined EFSF-ESM lending capacity cannot exceed 700bn

EFSF will continue to finance commitments before July 2012…Ireland Portuga

lGreece Total

17.7bn 26.0bn 144.6bn

188.3bn

… but later EFSF commitments may be taken over by the ESMSpain Cyprus Total

~60-100bn

~10-15bn

~100bn

EFSF capacity remains available if needed until July 2013 to ensure fresh 500bn

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Currently five financial instruments for lending to member countries:

-Loans

-Precautionary assistance

-Primary market bond purchases

-Secondary market bond purchases

-Loans for recapitalisation of financial institutionsTo be financed by paid-in capital (max EUR 80 bn), always at least 15% of ESM loan issuanceAdditional callable capital of EUR 620 bn

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Structural reinforcement of the governance framework

Stronger preparatory structure for the Eurogroup (full-time EWG Chairman based in Brussels)

ECFIN Commissioner upgraded to Vice-President and ‘Commissioner for the Euro’ with more independence within COM

Regular Euro summits (at least bi-annually) under a designated President

At least monthly meetings of Presidents of Euro summit, Eurogroup, ECB and Euro Commissioner (plus EFSF/ESM CEO and ESA Chairs ad-hoc)

More consistency in communication on EMU issues

Thank you for your attention.Frank. [email protected]

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A strengthened governance of Economic and Monetary Union in Europe Frank Moss Director General...

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