European Debt CrisisJosé Luis Escrivá Managing Director – Head of Global Public Finance - Madrid, June 8th 2012

2012 TMA Europe Conference

European Sovereign Debt Crisis / June 8th 2012

Page 2

The euro zone is trapped in a vicious circle compounded by disorderly measures

GR

1Failure of European fiscal rules

3

PT

ITSP

GR

Peripheralcountries Low potential

growth with rigid labour and product markets

IR

22

SP

IRInappropriate responses at national level in the absence of European-wide instruments

4

EMU

Shortcomings in the architecture of the existing monetary union

European Sovereign Debt Crisis / June 8th 2012

Page 3

The euro zone is trapped in a vicious circle intensified by various feedbacks

GR

1

IR

22

SP

IR

3

PT

ITSP

GR

Peripheralcountries

4

EMU

Lower fiscal

revenues

No room for

countercyclic

al policies

Financial

fragmentation

Potential

bank losses

Lower bank

profitabilityCredit crunch

State aid

Public debt purchases

Lack of pan-European policies

Uncertainty

Incr

easin

g

fund

ing

cost

sRisk

of

defa

ults

European Sovereign Debt Crisis / June 8th 2012

Page 4

The euro zone is trapped in a vicious circle

GR

1

3

PT

ITSP

GR

Peripheralcountries

IR

22

SP

IR

4

EMU

European Sovereign Debt Crisis / June 8th 2012

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Actions to try to break this diabolic loop

GR

1

3

PT

ITSP

GR

Peripheralcountries

IR

22

SP

IR

4

EMU

Reinforcement of the SGP (Six-Pack, Fiscal Compact).

European Commission “growth initiative”: long-term structural policies with limited impact in the short term.

The EFSF/ESM solution: inadequate for a monetary union.

Limited progress towards a European resolution and crisis management framework.

INSUFFICIENT

INSUFFICIENT

FURTHER

STEPS

Banking union

FURTHER

STEPSFiscal union

Eurobonds

European Sovereign Debt Crisis / June 8th 2012

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How to break this diabolic loop?Three major requirements for a well-functioning EMU

Framework for individual

countries’ discipline

Enhanced fiscal rulesStrict conditionality in exchange of financial support

SUBSTANTIAL PROGRESS

Is Europe ready to move ahead?

Burden sharing

mechanisms

Transfer of sovereignty to the center

Necessary but not

sufficient

Sharing of banking risks

Debt mutualization

Banking union

Fiscal union

STILL PENDING

European Sovereign Debt Crisis / June 8th 2012

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Is Europe ready to move ahead?

This will depend on the political leadership to convince citizens…

In peripheral countries

…that sacrifices are unavoidable and that they need to adjust economic

behaviours and comply with stringent rules to belong

to/remain in EMU.

In core countries

…that a sustainable EMU requires renouncing

national sovereignty in some fields and burden sharing of certain costs.

European Debt CrisisJosé Luis Escrivá Managing Director – Head of Global Public Finance - Madrid, June 8th 2012

2012 TMA Europe Conference