1. The EU Response to the Sovereign Crisis
Daniel DACO Head of Unit: Program Design and Support European Commission Economic and Financial Affairs
Athens, 18 April 2011

2. Search for a comprehensive approach
Financial repair
Fiscal consolidation
Growth and competitiveness
Vulnerable countries

3. Outline Outline Short-term Response : Crisis Management
Financial Rescue
Fiscal Consolidation
Assistance to vulnerable countries
Balance of Payments Assistance
EFSM/ EFSF
Systemic Response: Crisis Prevention and Resolution
Strengthened Surveillance and the European Semester
European Stability Mechanism
Pact for the Euro
Financial Repairs and Supervision
III. Concluding remarks

4. I. Short-term Response:
Crisis Management

5. Short-term Response 1. Financial Rescue
European Economic Recovery plan (EERP) in coordination with national fiscal packages (Nov. 2008)
Budgetary impulse of € 200bn
Policy Action: smart investment, car scrapping schemes, employment policies, etc
European Global Adjustment Fund (EGF)
and European Social Fund (ESF) to alleviate the negative social effects of the crisis
Stabilising the banking system through targeted rescues

6. Short-term Response 1. Financial Rescue
Stabilising the banking system through targeted rescues

7. Short-term Response 2. Fiscal consolidation
Heavy legacy of the crisis on public finances
But no-consolidation scenario is unsustainable. Significant efforts needed to restore sustainable public finances
Excessive Deficit Procedure (EDP) in abeyance /fine-tuned with national recovery path
Gross public debt in crises episodes (% of GDP)
Debt path in different scenarios (% of GDP)

8. Total assistance package
Short-term Response 3. Assistance to vulnerable countries: BoP facility
The BoP programmes (with the IMF) are producing good results with implementation of conditionality.
Regained Market confidence
Fiscal consolidation well underway
Enough breathing room for structural reforms
BoP facility
Hungary
Latvia 1/
Romania
Total assistance package € 20 bn
7.5
EU (Art. 143)
6.5
3.1 5
IMF
12.5
1.7
12.95
Other multilaterals 1
0.5 2
Bilaterals …
2.2 bn/1
1/ Contributions by SE, DK, FI, NO, CZ, PL, EE.

9. I. Short-term Response 3. Assistance to vulnerable countries: Greece
No financial support instrument available for EA
Failures in fiscal reporting
Huge fiscal imbalances + banking problems + loss competitiveness
Important financing needs + high market borrowing costs
Risks to financial stability for the EA as a whole
Evolution of spreads:

10. Short-term Response 3. Assistance to vulnerable countries: Greece Pooled loans – general features – Ad hoc instrument
EU legal basis
Conditionality
Beneficiary
Mechanism
Guaranteed by
Duration
Precautionary use
IMF involvement
ECB involvement
Size
Intergovernmental decision (May 2, 2010)
Yes, programme covering
Greece
Bilateral loans from EA MS pooled by COM
Direct loans, MS budget
7.5 years (extension: agreement in principle)
Not applicable
Yes
Payment agent, liaison on program design, review, disbursement, implementation
€ 80bn (€ 38.4 bn disbursed)
+€ 30bn (IMF: € 14.6 bn disbursed)

11. Short-term Response 3. Assistance to vulnerable countries
Creating new financial instruments: EFSM & EFSF
Temporary nature (to be replaced by a permanent mechanism in 2013)
Strict policy conditionality
High access
Lending rates close to those of the IMF to avoid facility shopping
Combined lending capacity € 500 bn
Ireland and Portugal (?)

12. Crisis Prevention and Resolution
II. Systemic Response:
Crisis Prevention and Resolution

13. 1. Strengthened Surveillance and the European Semester
II. Systemic Response
1. Strengthened Surveillance and the European Semester
September 2010, Commission presented six legislative proposals:
preventive and corrective arms SGP,
budgetary frameworks,
prevention and correction of imbalances,
enforcement
15 March: Ecofin Council agreed on “general approach”
+- 20 April: Parliament (Econ Committee) determines its negotiating position. Four proposals in co-decision (not corrective arm and budgetary frameworks)
April – June: trilogues with aim of agreement by end June 2011

14. II. Systemic Response 1. Strengthened Surveillance and the European Semester
A strengthened Stability and Growth Pact
Preventive arm :
Two co-existing criteria for assessing adjustment:
the structural balance as the reference,
and an analysis of expenditure net of discretionary revenue measures.
Corrective arm:
Need for quantitative benchmark for debt reduction.
Operationalisation of the debt criterion of the EDP through a numerical benchmark for sufficiently diminishing debt.

15. 1. Strengthened Surveillance and the European Semester
II. Systemic Response
1. Strengthened Surveillance and the European Semester
National fiscal frameworks: basic rationale of minimum requirements
EU rules necessary but not sufficient.
Consistency of domestic frameworks rules with EU rules required.
Defining minimum standards for domestic budgetary frameworks aims at
- fostering national ownership of the EU budgetary framework,
- strengthening national structures to promote budgetary discipline.

16. II. Systemic Response 1. Strengthened Surveillance and the European Semester
A new framework to prevent and correct macro-economic imbalances
Preventive dimension to avoid the build-up of imbalances :
• annual review
• alert mechanism based on set of indicators (risk thresholds) and
expert analysis
• in-depth country-specific analysis where warranted
• country-specific recommendations to tackle imbalances (Art. 121(2)) 􀂾
Corrective dimension with strong enforcement mechanisms:
• Member States with serious imbalances are placed in an
“excessive imbalances position”
• stricter surveillance on basis of more prescriptive recommendation to tackle imbalances
• deadlines for taking corrective action
• possible sanctions for euro-area Member States in case of repeated non-compliance (0.2% GDP channelled though EFSM/EFSF)

17. 1. Strengthened Surveillance and the European Semester
II. Systemic Response
1. Strengthened Surveillance and the European Semester
Enforcement: Key innovation
Preventive arm of the SGP : interest-bearing deposit in case of failure to correct significant deviation from MTO or adjustment path towards it .
Corrective arm of the SGP:
(i) non-interest-bearing deposit when EDP opened (Art TFEU) in case of ‘particularly serious non-compliance’;
ii) fine in case of no effective action (Art TFEU).
Reverse QMV voting: Commission recommendation for sanctions considered adopted unless Council rejects by QMV within ten days.
Distribution of fines : fines channelled to EFSF/ESM (instead of non-EDP countries).

18. 1. Strengthened Surveillance and the European Semester
II. Systemic Response
1. Strengthened Surveillance and the European Semester
The European Semester procedures and timelines:

19. II. Systemic Response 2. Permanent crisis resolution : European Stability Mechanism
Objective: address liquidity crises and safeguard financial stability in the € area
Nature: Treaty-based intergovernmental organisation
Implementation:
Macroeconomic adjustment programme (strict policy conditionality)
Intergovernmental financing instrument
Case-by-case private sector involvement

20. II. Systemic Response 2. Permanent crisis resolution : European Stability Mechanism
Capital size and structure:
Effective lending capacity: € 500 bn
Paid-in capital; callable capital; guarantees;
AAA rating
Instruments:
Loans
Bond purchases on primary market, “as an exception”
Pricing:
Funding costs + risk mark-up , in line with IMF pricing
also taking into account MS debt sustainability
Governance:
Unanimity
Contribution key
ESM + EFSF package submitted to national parliaments before Summer

21. II. Systemic Response 3. Pact for the Euro
Content:
- Competitiveness: wage setting, opening sheltered sectors, improving education, R&D and the business environment
- Employment: flexicurity, life long learning, tax reforms
- Fiscal sustainability: pension reforms, national fiscal rules
- Financial stability: national legislation for banking resolution, stress tests
- Tax policy coordination: structured discussion, proposal for a common corporate tax base
Governance: Political leadership from heads of State, making use of and strengthening existing instruments, integrated into the European Semester.
Role of Commission: “strong central role” in the monitoring of the implementation of commitments

22. II. Systemic Response 4. Financial repair and Supervision
European System of Financial Supervision (ESFS) :
European Systemic Risk Board (ESRB): macro-financial stability (Nov. 2010)
European Supervisory Authorities (ESAs): new financial regulation, capital requirements (Jan. 2011)
Commission will take recommendation of ESRB into account in Economic Imbalances Procedures (EIP) as it complements macro-financial monitoring
Implementation of financial reforms to be continued, including a reinforcement of the regulatory and supervisory framework.

23. II. Systemic Response: Crisis Prevention and Resolution 4
II. Systemic Response: Crisis Prevention and Resolution Financial repair and Supervision
Creation of the European Banking Authority (EBA) in Jan. 2011
Regular stress tests
Latest results:

24. III. Concluding remarks
Adjustment and overcoming the crisis will take time
The adjustment is progressing but has not yet convinced markets due to looming concerns
Comprehensive response implemented should remove these concerns:
Renewed commitments by MS to implement reforms
Improvements in fiscal governance at Member State and EU levels
Fixing banking sector issues (stress tests, address problems)
Credible financial backstops (EFSF, pricing, ESM)

25. Thank you for your attention!
Q&A