A strengthened governance of Economic and Monetary Union in Europe Frank Moss Director General International and European Relations, European Central Bank UN Economic Commission for Africa, 27 July 2012

2 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 3

Leading to the vicious cycles operating in the current euro area sovereign debt crisis Financial sector repair Growth repairFiscal repair Tighter financial conditions Bailout costs Calls for fiscal tightening Lower tax receipt; higher expenditure Reduced loan supply Credit losses 4

5 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

6 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

7 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 architecture Better crisis management: -immediate/corrective: GLF, EFSF and EFSM -structural/preventive: ESM Better governance: European Semester; decisions of 26/10/11

8 The longer-term preparations for achieving a genuine EMU First report presented by the 4 Presidents to the European Council on 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)

9 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

10 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)

Structural reinforcement of the fiscal framework (2) Surveillance Enforcement 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 11 Source: 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 12 Structural reinforcement of the fiscal framework (3)

13 Structural reinforcement of the fiscal framework (4) “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 13

14 Structural reinforcement of the fiscal framework (5) “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

15 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

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) Surveillance Enforcement Fiscal2 EU legal acts on macroeconomic 16 Source: internal presentation by Koester and Mohl (2011): An illustration of the key elements of the new Stability and Growth Pact

Scoreboard – outcome for 2011 Structural reinforcement of macroeconomic framework (2) 17

First Alert Mechanism Report published by the European Commission on 14 February 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 Structural reinforcement of macroeconomic framework (3) 18

19 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

20 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

21 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) 21

22 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

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-MAKING Parliamentary approval for changes to instruments More flexibility to make changes by unanimity DURATION PermanentExpires mid-2013 LIABILITIES EFSF debt re-routed to Member States ESM debt not re- routed 23

EFSF (440bn) ESM EFSF (200bn) Structural reinforcement of the crisis management framework (2) Combined EFSF-ESM lending capacity cannot exceed 700bn EFSF will continue to finance commitments before July 2012… IrelandPortugalGreeceTotal 17.7bn26.0bn144.6bn188.3bn … but later EFSF commitments may be taken over by the ESM SpainCyprusTotal ~60-100bn~10-15bn~100bn EFSF capacity remains available if needed until July 2013 to ensure fresh 500bn 24

25 Structural reinforcement of the crisis management framework (3) 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 institutions To be financed by paid-in capital (max EUR 80 bn), always at least 15% of ESM loan issuance Additional callable capital of EUR 620 bn

26 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

27 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. 28