1. Issues Regarding Implications for EMU-Integration of Europe‘s Policy Response to the Fiscal Crisis
Prof. Dr. Wagner

2. Outline Implications for EMU-Integration (3.)of
Europe‘s Policy Response (2.)
to the
Fiscal Crisis (1.)
(in Greece and other countries)

3. Content Fiscal Crisis Europe‘s Policy Response
A Portait of the Fiscal Crisis
General Causes: The Financial Crisis
Specific Causes: EU-Focus
Europe‘s Policy Response
Options
Actions: A Timeline of the Greek Fiscal Crisis
Implications for EMU-Integration
Short-Term Implications
Mid-Long-Term Implications

4. 1.
1. The Fiscal Crisis

5. Debt and Deficits in the EZ
EMU debt and deficit (% of GDP). Data source: ECB.

6. Debt and Deficits in the EZ: PIIGS
EMU debt and deficit (% of GDP). Data source: ECB.

7. 1.a)
Debt Forecast
PIIGS and DE debt forecast (% of GDP). Data source: WEO Database Apr2010.

8. Gov. Bond Yield Spreads since 2007
PIIGS (monthly) 10year government bond yield spead vis-a-vis Germany. Data source: ECB.

9. 1.a)
Real GDP Growth
PIIGS, DE and EA16 (annual) real GDP growth rate. Data source: Eurostat.

10. General Causes The Financial Crisis 2007-2009
1.b)
General Causes
The Financial Crisis
for more details see e.g. my presentation Dec2009 (EUSI)

11. EU-specific Causes “early” EMU-enlargement
institutional “backwardness” in accession countries (at the time of accession)
for more details see e.g. my presentation Dec2009 (EUSI)

12. EU-specific Causes “non-biting” SGP
underestimation of country-specific risks / anticipated bailout

13. Long-Term Interest Rates
1.c)
Long-Term Interest Rates
PIIGS and DE (monthly) 10 year government bond yields. Data source: ECB.

14. Government Bond Yield Spreads
1.c)
Government Bond Yield Spreads
PIIGS (monthly) 10 year govovernment bond yield spead vis-a-vis Germany. Data source: ECB.

15. 1.c)
Real GDP Growth
PIIGS, DE and EA16 (annual) real GDP growth rate. Data source: Eurostat.

16. 1.c)
Inflation
PIIGS and DE (annual) average consumer prices (% change). Data source: WEO Database Apr2010.

17. Current Account Balance
PIIGS and DE (annual) current account balance (% of GDP). Data source: WEO Database Apr2010.

18. 1.c)
Government Deficit
PIIGS (annual) net lending/borrowing under the Excessive Deficit Procedure (% of GDP). Data source: Eurostat.

19. Household Debt and Housing Bubble
1.c)
Household Debt and Housing Bubble
Housing boom in Spain and Ireland
WEO Oct2010
IMF WP/10/57 “Asset Booms and Structural Fiscal Positions: The Case of Ireland”

20. Greece: Labor Market Indices
IMF Sept2010: “Greece: First Review Under the Stand-By Arrangement“

21. Greece: Public and Private Debt
IMF Sept2010: “Greece: First Review Under the Stand-By Arrangement“

22. 2. Europe‘s Policy Response
Starting Point: Greece’s govt. debt crisis

23. Options Discussed for Greece
2.a)
Options Discussed for Greece
default, leave or make Greece leave the EZ and devalue (different nuances discussed)
prevent default and/or exit by any means
immediate budget cuts, tax increases, etc.
reduce market pressure
call the IMF
discipline via external authority (or “scapegoat”)
bailout: bilateral loans, EMF, etc.
German and French banks hold lots of Greek debt
prevent contagion, break-up of EZ, etc.

24. Greece: Crisis Timeline (1)
2.b)
Greece: Crisis Timeline (1)
Oct2009 rising doubts about Greek debt and deficit statistics
Oct-Dec2009 various downgrades by rating agencies
Dec2009 insufficient response by Greece to EDP recommendations
11.Feb2010 EA MS “will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support.“
14.Feb2010 “enhanced surveillance” for Greece
25.Mar2010 agreement to provide bilateral loans (supported by IMF), decision would require unanimity subject to strong conditionality, based on assessment by EC and ECB; financing at non-concessional interest rates; Barrosso: "We have solved this in the European family“
11.Apr210 EC, ECB, IMF start to work on joint 3 year programme: 1st year up to €30bn (+ €15bn by IMF) at non-concessional interest rates

25. Greece: Crisis Timeline (2)
2.b)
Greece: Crisis Timeline (2)
22.Apr2010 Eurostat: Greek deficit 13.6% and debt 115.1% of GDP
23.Apr2010 Greece request to activate the financial support mechanism
02.May2010 rescue funds increased to €110bn (€80bn + €30bn by IMF)
03.May2010 ECB suspends application of minimum credit rating threshold for Greek government debt instruments
07.May2010 implementation of €110bn support package: 1st disimbursement due before 19.May
09.May2010 after hard talks EFSM agreement, based on §122.2TFEU: €750bn = €60bn EU + €440bn via SPV + €250bn by IMF Greece gains immediate breathing space of €20bn
10.May2010 ECB announces further unconventional measures

26. Greece: The Rescue IMF projections for Greece: (bn Euros) 2010 2011
2012
2013
2014
2015
total public financing gap
38.0
40.0
24.0
8.0
# EU (8/11 of the gap)
27.6
29.1
17.5
5.8
# IMF (3/11 of the gap)
10.4
10.9
6.5
2.2
total public debt with
# EU
56.7
74.2
75.5
54.7
26.4
# IMF
21.3
27.8
28.3
20.5
9.9
IMF Sept2010: “Greece: First Review Under the Stand-By Arrangement“

27. 3. Implications for EMU-Integration

28. Short-term Implications3.
Short-term Implications

29. 3. Implications for EMU-Integration

30. 3. Implications for EMU-Integration
The worst case scenario did not manifest
However:
Spreads have not come down significantly

31. Short-Term: Markets “calming down”?
PIIGS (monthly) 10yr gov. bond yield spead vis-a-vis Germany. Latest data: Sept2010. Data source: ECB.

32. Short-Term: Markets “calming down”?
Yields on 10 year government bonds (%). Monthly averages, daily data for Oct2010. Data source: bankofgreece.gr.

33. Mid-Long-Term Implications
3.b)
Mid-Long-Term Implications
need for fiscal consolidation
cost of consolidation
cost of non-consolidation
need for monetary consolidation
cost of early exit: double dip, deflation
cost of late exit: inflation
...??
need for institutional reform (EU, finance, ...)?

34. Conclusions Role of institutional-political framework
(need for refoms; implementability is uncertain) A B C D

35. Thank you for your
attention !!