1. European Debt Crisis José Luis Escrivá Managing Director – Head of Global Public Finance - Madrid, June 8 th 2012 2012 TMA Europe Conference

2. European Sovereign Debt Crisis / June 8 th 2012 Page 2 The euro zone is trapped in a vicious circle compounded by disorderly measures GR 1 Failure of European fiscal rules 3 PT IT SP GR Peripheral countries Low potential growth with rigid labour and product markets IR 22 SP IR Inappropriate responses at national level in the absence of European-wide instruments 4 EMU Shortcomings in the architecture of the existing monetary union

3. European Sovereign Debt Crisis / June 8 th 2012 Page 3 The euro zone is trapped in a vicious circle intensified by various feedbacks GR 1 IR 22 SP IR 3 PT IT SP GR Peripheral countries 4 EMU Lower fiscal revenues No room for countercyclical policies Financial fragmentation Potential bank losses Lower bank profitability Credit crunch State aid Public debt purchases Lack of pan- European policies Uncertainty Increasing funding costs Risk of defaults

4. European Sovereign Debt Crisis / June 8 th 2012 Page 4 The euro zone is trapped in a vicious circle GR 1 3 PT IT SP GR Peripheral countries IR 22 SP IR 4 EMU

5. European Sovereign Debt Crisis / June 8 th 2012 Page 5 Actions to try to break this diabolic loop GR 1 3 PT IT SP GR Peripheral countries IR 22 SP IR 4 EMU Reinforcement of the SGP (Six-Pack, Fiscal Compact). European Commission “growth initiative”: long- term structural policies with limited impact in the short term. The EFSF/ESM solution: inadequate for a monetary union. Limited progress towards a European resolution and crisis management framework. INSUFFICIENT FURTHER STEPS Banking union FURTHER STEPS Fiscal union Eurobonds

6. European Sovereign Debt Crisis / June 8 th 2012 Page 6 How to break this diabolic loop? Three major requirements for a well-functioning EMU Framework for individual countries’ discipline Enhanced fiscal rules Strict conditionality in exchange of financial support SUBSTANTIAL PROGRESS Is Europe ready to move ahead? Burden sharing mechanisms Transfer of sovereignty to the center Necessary but not sufficient Sharing of banking risks Debt mutualization Banking union Fiscal union STILL PENDING

7. European Sovereign Debt Crisis / June 8 th 2012 Page 7 Is Europe ready to move ahead? This will depend on the political leadership to convince citizens… In peripheral countries …that sacrifices are unavoidable and that they need to adjust economic behaviours and comply with stringent rules to belong to/remain in EMU. In core countries …that a sustainable EMU requires renouncing national sovereignty in some fields and burden sharing of certain costs.

8. European Debt Crisis José Luis Escrivá Managing Director – Head of Global Public Finance - Madrid, June 8 th 2012 2012 TMA Europe Conference