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New EU toolbox for economic policy and crisis management

Antra Trenko Bank of Latvia

International Relations and Communication Department 12.03.2015.

2001 - 2006

Period of global illusory welfare

2008 – 2009

Financial crisis in Europe

EU/IMF program for LV

2010 - 2011

- banking crisis turns into a sovereign debt crisis

Financial assistance programs (EL, PT, ES, IE)

2011-2013

Critical stage

Euro area crisis

- Financial markets under acute stress

- Spillover risks high

+ Policy response to restore growth

Crisis emerged after boom of construction and asset bubbles

Sustainability weaknesses in the euro area’s fiscal outlook became apparent

Euro area fiscal outlook was weak…

Source: IMF

...and therefore substantial fiscal consolidation was required

Crisis exposed several shortcomings in the EU economic governance model Focus on budget deficit; none on debt developments

Lack of surveillance

Weak enforcement and slow decision making

No emergency financing

Something needed to be done to get EU out of the pot-hole….

… and fast….

EU “dog days” suddenly had come to an end

Many “emergency doctors” played a role in reanimation of EU governance framework

EUROPEAN COUNCIL

(EU 28 HoS)

EUROPEAN COMMISSION

EURO AREA SUMMIT (EA HoS)

Council

EUROPEAN PARLIAMENT

COREPER Committees

Expert level working groups

EU 28 (ECOFIN Council, ...)

EU 18- Euro group

First, immediate financial assistance (conditional) tools for stressed EU sovereigns were created

European Financial Stability Facility

• EUR 440 billion

• Effective until 01.06.2012.

European Financial Stability Mechanism

• EUR 60 billion

European Stability Mechanism

• EUR 550 billion

• Replaces EFSF as of 01.06.2012 and implies private sector participation in debt restructuring

European Semester ESM

ESRB EBA

ESMA EIOPA

Fiscal Compact

Europa 2020

Two-pack

Sixpack

Euro + Pact

Second, many new EU governance elements were implemented (2010 -2011)

Finally, in the course of 2012.-2013 the elements of “genuine” EMU model were introduced Unified financial sector oversight

Integrated fiscal policy & improved coordination

Integrated economic policy framework

Common banking supervision model for EU

Centralized control over national fiscal developments Strengthend national responsibility over budget planning

Action to restore competitiveness and growth

Coordination of economic policies

Integrated institutional framework Increased legitimacy of European and national parliaments over economic policy decisions

Avots: http://av.r.ftdata.co.uk

Banking union – a result of lengthy discussion on a common framework for financial oversight within EU

The Banking Union has been create with an aim to: • protect depositors • resume confidence in financial sector • secure against banking crisis in future • strengthen cross-border banking supervision framework

1. Single supervisory mechanism (SSM) 4.11.2014.

Banking Union will have several pillars

2. Single Resolution Mechanism (SRM) 1.01.2016.

3. Deposit Guarantee Scheme (DGS) 07.2015.

Deposit guarantee fund (up to 100 000 Eur per customer); Supervised by national competent authorities; Financed by banks

• ~ 120 largest EA banks– ECB (+ national supervisors) • Other banks - national supervisors (+ECB oversight)

Single Resolution Board – for resolution of failing banks; Single Resolution Fund - medium-term funding support in case a credit institution is being restructured

Banks supervised within SSM

Source : European Parliament

2. Macroeconomic

oversight

3. Responsible

budgeting

4. Better enforcement 5.Stepped-up

surveillance in EA

1. Coordination of economic

policies

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Integrated EU fiscal framework to provide oversight and coordination of policies

1. European Semester - a tool for coordination of economic policies

Awareness and ownership by all relevant actors is essential for the European Semester to be successful • The European Semester provides a harmonized framework for:

Coordination and guidance

A clear timeline

Budgetary monitoring

The principle of “Comply or explain”

Step 1 (January) - Macroeconomic oversight toolkit - Alert Mechanism Report and Annual Growth Survey

Alert Mechanism Report

• sets out broad economic policy priorities for individual Member States

• Identifies the Member States that require further analysis

Annual Growth Survey • Sets out EU level – priorities on action to be done for jobs, growth and investment • Takes stock of the economic and social situation in Europe

Both reports are published simultaneously

Annual Growth Survey 2015- more should be done at EU level to help Member States return to higher growth levels

Set of 11 indicators to detect macroeconomic imbalances (risks) 21

Step 2 (March) - Broadened macroeconomic oversight - the Macroeconomic Imbalance Procedure

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In-Depth Reviews in case of risks

Excessive Imbalance Procedure

Fines in case of repeated non compliance of EA

2015 In-depth reviews disclose imbalances in several Member States

Progress in addressing the key issues identified in the 2014-2015 CSRs - obviously insufficient

Step 3 ( February/May) - Proposals for Country Specific Recommendations (CSRs)

• For the first time the 2015 EC economic surveillance package is published so early (prev. in May/June); sets out the analytical basis for the adoption of CSRs in May

• March – another round of bilateral meetings with the Member States organized by the EC to provide an opportunity to discuss the Country Reports

• By mid-April, the Member States are expected to present their NRPs and their SGPs

• May - based on the above sources, the EC will present a new, focused set of CSRs for 2015-2016, targeting the most important priorities to be tackled

France – key findings 2015 IDR

• Excessive macroeconomic imbalances; a new deadline to correct excessive deficit (2017)

• Insufficient implementation of CSR 2014

• RISKS: low growth and inflation, poor profitability of companies; insufficient policy response; high public

debt and increased headline deficit

Next steps:

• By end April 2015 FRA must take effective action and implement adopted measures for 2015 (effort to reach headline deficit to 2.8% of GDP in 2017);

ex-ante evaluation report of key measures every 6 months

May 2015 – EC decision to (possibly) activate the Excessive Imbalance Procedure (fines, suspension of access to EFSI)

Step 4 - Responsible budgeting- better rules to guarantee budgetary discipline

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• A stronger focus on debt

Specific action if debt ratios above 60% of GDP are not being sufficiently reduced

• A new expenditure benchmark

Public spending must not rise faster than medium-term potential GDP growth, unless matched by adequate revenues

• A Fiscal Pact for 25 Member States - medium-term budgetary objectives in national law

• Flexibility during a crisis

If case of unexpected deterioration, Member States may receive extra time to correct budget deficit

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Recent Investment trends in EU

• The EU is on course to meet or come close to its targets on education, climate and energy but not on employment, research and development or on poverty reduction

• Translating these targets at national level has also helped to highlight several uncomfortable trends – a growing gap between the best and least well performing Member States and a widening gap between regions inside and across Member States

Real gross fixed capital formation, EU-28, 2013 prices, EUR billion

Source: European Commission

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An Investment Plan for Europe - EUR 315 billion additional finance for investment at EU level

Source: European Commission

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Overview of Euro area projections – situation still fragile

Source: European Commission

CONCLUSION – VIA CONTINUA……

•Main challenges:

Pursue of structural reforms to restore growth, employment and productivity, financial stability

• Main risks:

Despite some progress, the situation in the EU is still fragile and growth is low

The impact of the decisions taken to recover from crisis (and avoid future ones) strongly depends on domestic motivation to implement them at full!

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Thank you for your attention! for questions: Antra.Trenko@bank.lv