EC/DNB conference Riga, 24 November 2011 From emergency support to enhanced governance: EU response to the economic crisis Gabriele Giudice Head of Unit, DG ECFIN Mission Chief for EU BoP Assistance to LV European Commission

24 November 2011EC/DNB conference Riga2 The macroeconomic context The recovery which started in 2009 has stalled. A negative feedback loop of sovereign debt distress, financial market distress and faltering growth. Several countries in the EU under financial assistance Strong action is needed to restore macro- financial stability and to rekindle growth Lack of fiscal space => structural reforms a priority to enhance growth

24 November 2011EC/DNB conference Riga3 3 EU Policy response so far Co-ordinated EU and IMF lending to Hungary, Latvia, Romania, Greece, Ireland, Portugal Creation of new European Financial Stability Facility (EFSF) and European Financial Stability Mechanism (ESM) Lending accompanied by strict conditions on deficit reduction and economic reform Recent European Council decision to leverage EFSF and negotiate debt reduction for Greece Six-pack of governance in force in mid-December

24 November 2011EC/DNB conference Riga4 Significant steps Strengthening of Stability and Growth Pact with more automaticity of sanctions and fines, focus on debt as well as deficit, stronger institutions Excessive Imbalances Procedure to guard against non-fiscal imbalances European Systemic Risk Board to monitor stability risks New system to enhance the quality and consistency of EU financial regulation and supervision

24 November 2011EC/DNB conference Riga5 New efforts are needed for economic renewal Further strengthen euro area governance, Safeguard future financial stability Boost growth and employment. New package on 23/11 contains four elements: The 2012 Annual Growth Survey setting out the economic priorities for the coming year; Two Regulations to tighten economic and budgetary surveillance in the euro area; A Green Paper on Stability Bonds.

24 November 2011EC/DNB conference Riga6 The Annual Growth Survey 2012 Calls for the EU and Member States to focus on five priorities: –pursuing differentiated, growth-friendly fiscal consolidation; –restoring normal lending to the economy; –promoting growth and competitiveness; –tackling unemployment and the social consequences of the crisis; –modernising public administration.

24 November 2011EC/DNB conference Riga7 Two Regulations on strengthened surveillance for the euro area Common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area Explicit rules for enhanced surveillance for those euro area Member States facing severe difficulties with regard to their financial stability, those in receipt of financial assistance on either a precautionary basis or as part of a full-scale assistance programme, and those in the process of exiting such assistance.

24 November 2011EC/DNB conference Riga8 Monitoring and assessing draft budgetary plans Introduction of a common budgetary timeline and common budgetary rules EA Member States will be required to submit in the autumn their draft budgetary plans for the following year to the Commission and the Council. The Commission will examine them and will address an opinion to a Member State if these plans do not appear to be in line ( with the Stability and Growth Pact and the recommendations from the European semester ) Independent macroeconomic forecasts and fiscal councils monitoring the implementation of national rules.

24 November 2011EC/DNB conference Riga9 Enhanced surveillance for EA MS facing severe difficulties The Commission would be able to decide whether a Member State should be subject to enhanced surveillance The Council will be able to issue a recommendation to such Member States to request financial assistance. tighter monitoring by the Commission will go further than the requirements for EDP Member States. Assessments to be made about the content and direction of fiscal policy at any point while a Member State is in an EDP.

24 November 2011EC/DNB conference Riga10 Green Paper on Stability Bonds The Commission puts forward three options: 1.Full substitution of national bonds with joint-and- several guarantee 2.Partial substitution of national bonds, joint-and- several guarantee (“middle” option) 3.Partial substitution of national bonds, but only several guarantee and credit enhancements Provides a detailed analysis of their financial and legal implications, Formal contribution to this debate, as well as setting out a clear timeline for the next steps

24 November 2011EC/DNB conference Riga11 Stability Bonds: clear benefits associated with challenges Benefits: financial stability reduced funding costs for MS (liquidity, credit risk) lower volatility more complete financial integration in Europe Challenges: fiscal stability/discipline Incentive implications (“moral hazard”); If weaker market discipline => stronger governance Potentially requires changes in the Treaty Risk sharing -> Art 125 (“no bail-out”) Stronger governance Many important technical/implementation issues ( Issuing body; relationship with ESM; Legal, market convention, accounting issues )

24 November 2011EC/DNB conference Riga12 Latvia’s experience with crisis: what lessons for Europe? Can be overcome if there is, first and foremost, national commitment and incisive action to ensure solvency Adjustment does not need a devaluation nor a sustained deflation, and leads to lower interest rates (both good for debt dynamics)! Growth can return faster, esp. if adjustment based on reforms Liquidity problems must not lead to insolvency : important that EU provides ample support and shelter Ultimately much less money needed : LV only €4.3bn out of 7.5, the EU banking sector also used a fraction. Political paradox : PM re-elected after massive consolidation and reform (the same in Estonia). However, realism is necessary, more needs to be done, including to avoid the pitfalls of the next boom

EC/DNB conference Riga, 24 November 2011 Thank you for your attention! Gabriele Giudice Head of Unit, DG ECFIN Mission Chief for EU BoP Assistance to LV European Commission

24 November 2011EC/DNB conference Riga14 AGS 2012: growth-friendly consolidation Consolidation should continue with a differentiated speed of fiscal adjustment Expenditure-based adjustments should be favoured, while protecting growth-enhancing expenditure. Quality of expenditure important. Tax structures to be made more growth-friendly Reforms in pension systems should ensure their financial sustainability while preserving an adequate level of pensions

24 November 2011EC/DNB conference Riga15 AGS 2012: financial sector Sever the link between the sovereign crisis and the financial sector to facilitate that the financial sector can provide the necessary financing to the real economy. The capacity of the EFSF and of the ESM should be maximised Mechanisms to support Member States in their efforts to strengthen financial sectors Rapid adoption: the capital requirements legislation, EU crisis resolution for financial institutions

24 November 2011EC/DNB conference Riga16 AGS 2012: structural reform Structural reforms to lift growth quickly without large budgetary costs => focus on productivity Labour market reforms, in particular wage setting mechanisms => boost job creation Reforms of the tax and benefit systems and employment protection legislation => reduce unemployment Improve the efficiency of public institutions => support fiscal consolidation and competitiveness Facilitate resource reallocation and structural change towards dynamic sectors and high-productivity activities: labour mobility, human capital, competition policy

24 November 2011EC/DNB conference Riga17 Stability Bonds: background Discussion in 1990s: common bonds by EA => financial market integration + lower borrowing costs from high liquidity Recent discussion: 1.Short-term: way out of sovereign debt crisis? 2.Long-term: Fiscal and monetary union? European Parliament request: COM should investigate “future system of Eurobonds” by the end of this year