The Shape of the EU Post Crisis Peter O’Shea Monash European and EU Centre January 2014

The Background Started with US housing crash in 2008 Led to bailouts and loans - US bought bad assets - UK capital injections - EU bailouts funds High levels of global coordination: G8  G20 One outcome was transformation of the FSF to Financial Stability Board as a quasi global regulator Kicked off efforts to address regulatory shortcomings and markets supervision

GFC History: One Crisis to the Next Began as a subprime mortgage crisis in the US when housing market turned sour. US subprime mortgages Financial institutions Sovereign debt Sent major banks under, incl. Lehman Bros in Sept Effects spread to European banks. Govts step in to maintain liquidity and prevent bank insolvency. Coordinated action at international level G20, IMF; transfer of debt to public sector

The EU Response: Three Pillars Regulatory reforms (financial supervision, banking supervision, prudential standards, derivatives, securities etc) Fiscal coordination (notably the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union and the EC’s “six-pack” legislative reforms) – a small step towards fiscal union? Financial Stability and Loan Assistance – now called the ESM based in Luxembourg)

Transformed Banking Sector Banking supervision overhaul A big problem earlier identified with the crisis Regulation of everything from derivatives, directors’ pay, credit ratings agencies, hedge funds, credit default swaps, banking prudential requirements Ring-fencing of banks – commercial and retail separation – the UK cannot believe the EU is so slow Moves to banking union – ECB as supervisor and maybe deposit guarantee scheme

New Shared Economic Governance A logical step if union is to complete The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union …. Closer coordination of state fiscal policies Closer Commission oversight of state budgets Reinforced deficit and debt levels A penalty mechanism Will it work? All based on peer pressure Growth pact and growth targets - Hollande’s re-election?

Financial Stability & Loans -The Greek Loan Facility -The EFSM & EFSF – soon to be ESM – in Luxembourg (which can be seen from Germany!) -Some facts: no member state has given any funds to the facilities – they are all loans - Money is raised via bonds, guaranteed by states, only in default do states pay up - EFSM funds guaranteed by the EU budget, also IMF funds and some bilateral - You can buy bonds on the Luxembourg stock exchange - No different from lending through EIB or IMF

Divergent Growth Patterns

The Culprit: Government Debt

Austerity

Unemployment

Immigration vs. Emigration Dubious relationship with unemployment Also caution urged in drawing causal links

Intra-EU Migration… the UK Most immigrants come from China Nevertheless some net flows to some countries, incl. the UK Spanish migration (27,000 in 12 mths June 13) Low levels of UK emmigration Growth of resistance: UK caps on immigration from outside EU

Anti-EU Sentiment Rise of anti-EU parties Rise in anti-EU sentiment Rise in anti-German sentiment Anti-Globalisation, Anti-elite, Anti-Brussels, Anti-Muslim

Eurozone vs. Non-Eurozone As a result of the fiscal reforms, Nov 2011, which UK refused to join Rise of the Eurogroup in political decision- making… and of the ECB

Conclusion Wide ranging reforms after GFC Led to a closer political EU but greater social and political tensions Is EU integration on hold? Yes socially, but perhaps no politically?