DG ECFIN The EU Response to the Sovereign Crisis Daniel DACO Head of Unit: Program Design and...

DG ECFIN

The EU Response to the The EU Response to the

Sovereign CrisisSovereign Crisis

Daniel DACODaniel DACO

Head of Unit Program Design and SupportHead of Unit Program Design and SupportEuropean CommissionEuropean Commission

Economic and Financial AffairsEconomic and Financial Affairs

Athens 18 April 2011

DG ECFIN

Daniel Daco Daniel Daco European Commission Economic and Financial AffairsEuropean Commission Economic and Financial Affairs

2

Search for a comprehensive approach

Financial repair

Fiscal consolidation Growth and competitiveness

Vulnerable countries

DG ECFIN


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OutlineOutline

OutlineOutline

II Short-term Response Crisis ManagementShort-term Response Crisis Management

11 Financial RescueFinancial Rescue22 Fiscal ConsolidationFiscal Consolidation33 Assistance to vulnerable countriesAssistance to vulnerable countries

11 Balance of Payments AssistanceBalance of Payments Assistance22 EFSM EFSFEFSM EFSF

IIII Systemic Response Crisis Prevention and ResolutionSystemic Response Crisis Prevention and Resolution

11 Strengthened Surveillance and the European SemesterStrengthened Surveillance and the European Semester22 European Stability MechanismEuropean Stability Mechanism

33 Pact for the EuroPact for the Euro44 Financial Repairs and SupervisionFinancial Repairs and Supervision

IIIIII Concluding remarksConcluding remarks

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I Short-term Response I Short-term Response

Crisis ManagementCrisis Management

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I Short-term Response1 Financial Rescue

European Economic Recovery plan (EERP) in coordination with national fiscal packages (Nov 2008) Budgetary impulse of euro 200bn Policy Action smart investment car scrapping schemes

employment policies etc

European Global Adjustment Fund (EGF) and European Social Fund (ESF) to alleviate the negative

social effects of the crisis

Stabilising the banking system through targeted rescues

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I Short-term Response2 Fiscal consolidation

Heavy legacy of the crisis on public finances But no-consolidation scenario is unsustainable Significant efforts

needed to restore sustainable public finances Excessive Deficit Procedure (EDP) in abeyance fine-tuned with

national recovery path

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EU-27EU-15Big 5 industrial country-crisesBig 8 emerging market-crisesTOTALEU 27 Current crisis

Gross public debt in crises episodes ( of GDP) Debt path in different scenarios ( of GDP)

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I Short-term Response3 Assistance to vulnerable countries BoP facility BoP facility

The BoP programmes (with the IMF) are producing good The BoP programmes (with the IMF) are producing good results with implementation of conditionalityresults with implementation of conditionality

Regained Market confidenceRegained Market confidence Fiscal consolidation well underwayFiscal consolidation well underway Enough breathing room for structural reformsEnough breathing room for structural reforms

BoP facility

Hungary Latvia1 Romania

Total assistance package euro20 bn euro75 bn euro20 bn

EU (Art 143) euro65 bn euro31 bn euro5 bn

IMF euro125 bn euro17 bn euro1295 bn

Other multilaterals euro1 bn euro05 bn euro2 bn

Bilaterals hellip euro 22 bn1 hellip

1 Contributions by SE DK FI NO CZ PL EE








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I Short-term Response3 Assistance to vulnerable countries Greece Greece

No financial support instrument available for EANo financial support instrument available for EA Failures in fiscal reportingFailures in fiscal reporting Huge fiscal imbalances + banking problems + loss competitivenessHuge fiscal imbalances + banking problems + loss competitiveness Important financing needs + high market borrowing costsImportant financing needs + high market borrowing costs Risks to financial stability for the EA as a wholeRisks to financial stability for the EA as a whole

Evolution of spreadsEvolution of spreads

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I Short-term Response

3 Assistance to vulnerable countries GreeceGreecePooled loans ndash general features ndash Ad hoc instrumentPooled loans ndash general features ndash Ad hoc instrument EU legal basisEU legal basis

ConditionalityConditionality

BeneficiaryBeneficiary

MechanismMechanism

Guaranteed byGuaranteed by

DurationDuration

Precautionary usePrecautionary use

IMF involvementIMF involvement

ECB involvementECB involvement

SizeSize

Intergovernmental decision (May 2 2010)Intergovernmental decision (May 2 2010)

Yes programme covering 2010-13Yes programme covering 2010-13

GreeceGreece

Bilateral loans from EA MS pooled by COMBilateral loans from EA MS pooled by COM

Direct loans MS budgetDirect loans MS budget

75 years (extension agreement in principle)75 years (extension agreement in principle)

Not applicableNot applicable

YesYes

YesYes

Payment agent liaison on program design review Payment agent liaison on program design review disbursement implementationdisbursement implementation

euro euro 80bn (euro 384 bn disbursed)80bn (euro 384 bn disbursed)

+euro 30bn (IMF euro 146 bn disbursed) +euro 30bn (IMF euro 146 bn disbursed)

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Creating new financial instruments EFSM amp EFSFCreating new financial instruments EFSM amp EFSF

Temporary nature (to be replaced by a permanent mechanism Temporary nature (to be replaced by a permanent mechanism in 2013) in 2013)

Strict policy conditionalityStrict policy conditionality

High accessHigh access

Lending rates close to those of the IMF to avoid facility Lending rates close to those of the IMF to avoid facility shoppingshopping

Combined lending capacity euro 500 bnCombined lending capacity euro 500 bn

Ireland and Portugal ()Ireland and Portugal ()

I Short-term Response3 Assistance to vulnerable countries

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II Systemic Response II Systemic Response

Crisis Prevention and ResolutionCrisis Prevention and Resolution

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September 2010 Commission presented six legislative proposals

preventive and corrective arms SGP budgetary frameworks prevention and correction of imbalances enforcement

15 March Ecofin Council agreed on ldquogeneral approachrdquo

+- 20 April Parliament (Econ Committee) determines its negotiating position Four proposals in co-decision (not corrective arm and budgetary frameworks)

April ndash June trilogues with aim of agreement by end June 2011

II Systemic Response1 Strengthened Surveillance and the European SemesterStrengthened Surveillance and the European Semester

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Preventive arm

Two co-existing criteria for assessing adjustment

the structural balance as the reference

and an analysis of expenditure net of discretionary revenue measures

Corrective arm

Need for quantitative benchmark for debt reduction

Operationalisation of the debt criterion of the EDP through a numerical benchmark for sufficiently diminishing debt

A strengthened Stability and Growth Pact

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National fiscal frameworks basic rationale of minimum requirements

EU rules necessary but not sufficient

Consistency of domestic frameworks rules with EU rules required

Defining minimum standards for domestic budgetary frameworks aims at

- fostering national ownership of the EU budgetary framework

- strengthening national structures to promote budgetary discipline


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Preventive dimension to avoid the build-up of imbalances

bull annual review

bull alert mechanism based on set of indicators (risk thresholds) and

expert analysis

bull in-depth country-specific analysis where warranted

bull country-specific recommendations to tackle imbalances (Art 121(2))

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Corrective dimension with strong enforcement mechanismsbull Member States with serious imbalances are placed in anldquoexcessive imbalances positionrdquo

bull stricter surveillance on basis of more prescriptive recommendation to tackle imbalances

bull deadlines for taking corrective action

bull possible sanctions for euro-area Member States in case of repeated non-compliance (02 GDP channelled though EFSMEFSF)

A new framework to prevent and correct macro-economic imbalances

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Enforcement Key innovation Preventive arm of the SGP interest-bearing deposit in case of failure to

correct significant deviation from MTO or adjustment path towards it

Corrective arm of the SGP

(i) non-interest-bearing deposit when EDP opened (Art 1266 TFEU) in case of lsquoparticularly serious non-compliancersquo

ii) fine in case of no effective action (Art 1268 TFEU)

Reverse QMV voting Commission recommendation for sanctions considered adopted unless Council rejects by QMV within ten days

Distribution of fines fines channelled to EFSFESM (instead of non-EDP countries)


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The European Semester procedures and timelinesThe European Semester procedures and timelines

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II Systemic Response 2 Permanent crisis resolution European Stability Mechanism 2 Permanent crisis resolution European Stability Mechanism

bull ObjectiveObjective address liquidity crises and safeguard financial stability in the euro area address liquidity crises and safeguard financial stability in the euro area

bull NatureNature Treaty-based intergovernmental organisation Treaty-based intergovernmental organisation

bull ImplementationImplementation

Macroeconomic adjustment programme (strict policy conditionality)Macroeconomic adjustment programme (strict policy conditionality)

Intergovernmental financing instrument Intergovernmental financing instrument

Case-by-case private sector involvementCase-by-case private sector involvement

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Capital size and structure Effective lending capacity euro 500 bn Paid-in capital callable capital guarantees AAA rating

Instruments Loans Bond purchases on primary market ldquoas an exceptionrdquo

Pricing Funding costs + risk mark-up in line with IMF pricing also taking into account MS debt sustainability

Governance Unanimity Contribution key ESM + EFSF package submitted to national parliaments before

Summer


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II Systemic Response 3 3 Pact for the Euro

bull Content

- Competitiveness wage setting opening sheltered sectors improving education RampD and the business environment

- Employment flexicurity life long learning tax reforms

- Fiscal sustainability pension reforms national fiscal rules

- Financial stability national legislation for banking resolution stress tests

- Tax policy coordination structured discussion proposal for a common corporate tax base

bull Governance Political leadership from heads of State making use of and strengthening existing instruments integrated into the European Semester

bull Role of Commission ldquostrong central rolerdquo in the monitoring of the implementation of commitments

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II Systemic Response 4 4 Financial repair and Supervision

European System of Financial Supervision (ESFS) European Systemic Risk Board (ESRB) macro-financial stability

(Nov 2010)

European Supervisory Authorities (ESAs) new financial regulation capital requirements (Jan 2011)

Commission will take recommendation of ESRB into account in Economic Imbalances Procedures (EIP) as it complements macro-financial monitoring

Implementation of financial reforms to be continued including a reinforcement of the regulatory and supervisory framework

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II Systemic Response Crisis Prevention and Resolution 4 4 Financial repair and Supervision

Creation of the European Banking Authority (EBA) in Jan 2011 Regular stress tests Latest results

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III Concluding remarksIII Concluding remarks

Adjustment and overcoming the crisis will take timeAdjustment and overcoming the crisis will take time

The adjustment is progressing but has not yet convinced The adjustment is progressing but has not yet convinced

markets due to looming concernsmarkets due to looming concerns

Comprehensive response implemented should remove these Comprehensive response implemented should remove these

concerns concerns

11 Renewed commitments by MS to implement reformsRenewed commitments by MS to implement reforms

22 Improvements in fiscal governance at Member State and EU levelsImprovements in fiscal governance at Member State and EU levels

33 Fixing banking sector issues (stress tests address problems)Fixing banking sector issues (stress tests address problems)

44 Credible financial backstops (EFSF pricing ESM)Credible financial backstops (EFSF pricing ESM)

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Thank you for your attention

QampA

DG ECFIN


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Search for a comprehensive approach

Financial repair

Fiscal consolidation Growth and competitiveness

Vulnerable countries

DG ECFIN


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OutlineOutline

OutlineOutline








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BoP facility















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MechanismMechanism


DurationDuration




SizeSize



GreeceGreece





YesYes

YesYes




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Preventive arm




Corrective arm




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bull annual review


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BoP facility















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GreeceGreece





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YesYes




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Corrective arm




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BoP facility















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MechanismMechanism


DurationDuration




SizeSize



GreeceGreece





YesYes

YesYes




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Corrective arm




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GreeceGreece





YesYes

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MechanismMechanism


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GreeceGreece





YesYes

YesYes




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SizeSize



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YesYes




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YesYes




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SizeSize



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YesYes

YesYes




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DG ECFIN The EU Response to the Sovereign Crisis Daniel DACO Head of Unit: Program Design and...

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Transcript of DG ECFIN The EU Response to the Sovereign Crisis Daniel DACO Head of Unit: Program Design and...