1 Preliminary assessment of progress in implementing the EERP Alexandr Hobza, Directorate General for Economic and Financial Affairs European Commission Brussels, 17 June 2009

2 Part 1. Economic situation and challenges

3 The deepest and most widespread recession in the post-war era. GDP is forecast to contract by 4% in the EU. all EU Member States share the recession experience, but it plays out differently across Member States The differential impact is strongly linked to weaknesses that pre-date the onset of the crisis. Economic situation

4 The EU forecast – an overview

5 Part 2. EU response to the slowdown

6 Europe’s response to the crisis Around 5% of EU GDP of overall support over : national Recovery plans (1.8%) plus automatic stabilisers (2.7%) plus extra budgetary measures (0.5%) ECB key rate cut by 300 basis points to 1.25% in half a year Bank rescue plans in 19 countries (around €300 bn in recapitalisation operations and €3 tln in bank guarantees)

7 Macro-economic and fiscal policy Coordinated fiscal stimulus based on the principles for effective budgetary impulse – timely, targeted and temporary Flexibility in applying the SGP rules EU sources providing €30 billion, including the EIB support to SMEs and automotive sector Lower interest rates and provision of liquidity by the ECB Balance of payment support – HU, LV, RO

8 Structural policy measures Measures compatible with long-term Lisbon objectives but also relevant in the short term – toolbox of measures in the EERP State aid rules for sectoral aid (e.g. automotive sector) Guidelines for structural measures in the 4 March Communication – ensure functioning of the internal market Guidelines for the design of labour market measures (do’s and don’ts) Monitoring and follow-up to ensure effective coordination

9 Part 3. Policy responses to support the real economy

10 Overview of recovery measures European Commission

11 European Commission

12 Labour market policies have been rather effective at stopping unemployment from shooting up. Large variation in composition of MS responses and large scope for policy learning between them. Few measures that might be difficult to reverse or undesirable in the short run. However, on current trends, policies would need to be intensified to avoid a very sharp rise in unemployment over Policy responses on labour market

13 Most stimulus packages are considering traditional types of physical public investment. Significant packages to stimulate investment and energy efficiency but need to improve the skills of the workforce as an accompanying measure. More emphasis on “smart” investment, incl. high speed internet. Best performing MS are taking the most actions in R&D  Widening of gap between leaders and followers could be expected. Importance of implementing the ERA agenda. Policy responses to support investment and R&D

14 Sectoral support schemes are consistent with internal market and state aid rules; however they could have important impact on the internal market through their differential effects on corporations. Need for more coordination at EU level if MS maintain sectoral support in the future. Design of measures to improve access to finance seems largely appropriate Policy responses to support the business environment and sectors

15 Part 3. Policy conclusions

16 Exit strategies are now needed for fiscal policy (towards sustainable paths), monetary policy (discontinuation of unconventional policy ad anchoring inflation expectations) and structural reforms (temporary working time reductions, sectoral support) Reform priorities have shifted. More focus on financial market regulation. Avoiding hysteresis in labour markets and tackling insider-outside problems. Support for R&D and innovation to tackle the EU’s productivity Background conditions for reforms have worsened – need to undertake difficult fiscal consolidation. Effects of ageing population start to take hold. Political economy of requires a new narrative for a sceptical public. Future policy directions: devising exit strategies European Commission

17 The impact of the crisis on potential growth Different scenarios are possible i.e. a full return to earlier path, a permanent loss in level terms only or a permanent loss on growth rates Critical challenges for the EU are to prevent hysteresis effects on the labour market and to avoid permanent damage to R&D, innovation and risk taking Past crises (e.g. SE and FI) show that policy responses matter European Commission