Economic and Monetary Union - Unfinished Business Howard Davies Director, LSE Convoco HVB Forum, Munich 10 May 2010

Source: The Economist, 29 April 2010.

1. Fiscal Discipline Six Issues

Greece: notified vs. actual budget balances, % of GDP, 2000 – 2008 Source: Bruegel Policy Brief, March The true Greek fiscal position was worse than reported

Fiscal tightening (% of GDP) needed between 2010 and 2020 to achieve 60% of GDP public debt ratio by 2030 Source: Citigroup Global Markets, Global Economics View, 26 April Solvency gaps are massive Note: Primary balance (assumed to improve gradually during and then maintained constant until 2030) improvement needed to stabilise debt at the end-2011 level. Japan’s target public debt ratio is 80% of GDP.

1.Fiscal Discipline 2.Competitiveness Six Issues

Real exchange rate* and relative export performance, cumulative change between 1999 and 2008 Source: Bruegel Policy Brief, March There has been a remarkable divergence in competitiveness *Real exchange rates are based on unit labour costs.

Greece is the frontrunner as the most vulnerable country of the euro area Source: CEPS Policy Brief, No. 202, February Vulnerability index

1.Fiscal Discipline 2.Competitiveness 3.European Monetary Fund Six Issues

-Established under Enhanced Co- operation provisions of the Lisbon Treaty -Subscriptions in proportion to Euro Area countries’ equity stake in ECB -€ 2 trillion subscription, of which € 200 billion paid in -Board: Euro Area member states, EC, ECB European Monetary Fund (Buiter)

Relative shares in the ECB’s capital in euro area, % of EA share Germany would finance more than a quarter of the EMF Source: Citigroup Global Markets, Global Economics View, 26 April 2010.

1.Fiscal Discipline 2.Competitiveness 3.European Monetary Fund 4.Financial Regulation Six Issues

Macro- prudential supervision Micro-prudential supervision Source: De Larosière Report, February Members of ECB/ESCB General Council (with alternates where necessary) European Systemic Risk Council (ESRC) (Chaired by President ECB) Chairs of EBA, EIA & ESA European Commission European System of Financial Supervision (ESFS) European Banking Authority (EBA) European Insurance Authority (EIA) European Securities Authority (ESA) National Banking Supervisors National Insurance Supervisors National Securities Supervisors ++ Information on micro-prudential developments Early risk warning The de Larosière framework

1.Fiscal Discipline 2.Competitiveness 3.European Monetary Fund 4.Financial Regulation 5.Fiscal Transfers Six Issues

1.Fiscal Discipline 2.Competitiveness 3.European Monetary Fund 4.Financial Regulation 5.Fiscal Transfers 6.Euro System Reform Six Issues

The ECB is the most independent, and least accountable central bank Source: CEPR Discussion Paper No. 5470, January 2006 Accountability vs. Independence, adapted from Sousa (2002)

GDP and voting weights are very different Source: H Berger (2006), Optimal central bank design: Benchmarks for the ECB. Distribution of voting rights and economic size in EMU Note: Relative size based on GDP. Current situationHypothetical EMU 24

Source: Heinemann and Huefner (2004). Is the view from the Eurotower purely European? Central/ Regional voting in the Federal Reserve and the ECB Ratio of regional to central votes 2.5 – – – 1.0

Economic and Monetary Union - Unfinished Business Howard Davies Director, LSE Convoco HVB Forum, Munich 10 May 2010