The Euro’s Growing Pains Antonio de Lecea European Union Delegation to the United States of America ________________________________________________________________________ The Streit Council for a Union of Democracies SAIS May 4, 2010

 A Greek accumulation of policy mistakes…  …an incomplete Euro Area enforcement and crisis resolution  …both now being tackled…  …for the benefit of the Euro Area and the global economy. Outline

The euro: It can’t happen, It’s a bad idea, It won’t last. US economists on the EMU, by Lars Jonung and Eoin Drea Economic Papers No. 395 / December 2009 Death throes?

1. An accumulation of policy mistakes in Greece  Poor fiscal policies and governance  Declining competitiveness  Poor statistics led to miss many opportunities from entry in the Euro Area

 Bloated public employment  Poor procurement rules  Poor revenue performance  Serious expenditure slippage in 2009  Poor fiscal accounting Poor fiscal policies

Deteriorating competitiveness

 Fiscal surveillance initially focused on nominal deficits  Reviewed in 2005 to bring more economic rationale  And expanded in 2009 to take account of structural aspects  Though assessed on the basis of statistics not sufficiently surveilled  Crisis resolution mechanisms available for non-Euro Area members (and third countries) but not for Euro area countries. 2. Incomplete Euro Area governance

Greek spreads on 10 year benchmark bonds to German Bund Markets did not price risk properly for a long while

3. Now being tackled by Greece …  On 15 January commitment to reduce deficit by 4% in 2010 (both revenue and expenditure).  On 3 March additional 2% deficit reducing measures for 2010

3. Now being tackled by Greece … Additional fiscal consolidation measures announced on 3 March 2010 million EUR % GDP (as announced by Greece) REVENUE Increase in VAT rates (from 4,5%, 9% and 19% to 5%, 10% and 21% respectively)13000,5% Increases in excise taxes (additional to those previously voted in Parliament)11000,5% EXPENDITURE Reductions in public sector nominal wages and pensions (additional to the wage cutbacks already announced) of which: 17000,7% Reductions in current and capital expenditures in the public sector7000,3% TOTAL48002,0%

3. Now being tackled by Greece …  On 15 January commitment to reduce deficit by 4% in 2010 (both revenue and expenditure).  On 3 March additional 2% deficit reducing measures for 2010  Ambitious tax reform launched in March  Statistical data reviewed in April  On 2 May Greek Government approves extraordinary adjustment programme (negotiated with the EC, ECB, and IMF) for , with further consolidation for 2010 and specification of fiscal measures and structural reforms for

3. …and by the EU  On 16 February package of enforcement measures (fiscal, structural, statistical) addressed to Greece  Euro Area Leaders and Finance Ministers commitment to support stability of the Euro Area with financial support alongside the IMF.  Proposals for enhanced economic policy coordination (May 12)  Enhanced EC (fiscal, structural) surveillance in close cooperation with ECB, IMF  Proposal for a more permanent crisis resolution mechanism for the Euro Area  And an ambitious framework of structural reforms (Europe 2020)

4. for the benefit of the Euro Area and the global economy  Ensure stability in the Euro Area  to enable the EU to focus on crisis recovery,  increasing growth potential,  contributing to a reinvigorated, balanced global growth,  a sound reform of global financial regulation,  and an effective and legitimate global economic governance.

Conclusion Greece and some Euro Area countries are not the only ones with large fiscal and external imbalances

Conclusion  Greece, and other members of the Euro Area family, will still have growing pains.  But they will grow strong.  The euro is not a substitute for sound policies.

Conclusion Also state and local finances are a challenge  Its governance must still be perfected.  But it will certainly outlive us.

Thank you for your attention Antonio de LECEA