The European sovereign debt crisis
and the future of the euro
Peter Bekx
European Commission
Reykjavik, 19 February 2013
1
A Vicious circle
FINANCIAL
BANKS
STABILITY
Value loss of
public bonds
Bailout costs
SOVEREIGN
DEBT
Slow growth
US Contagion
Deleveraging
Lower tax receipts
Higher expenditure
ECONOMIC
GROWTH
Fiscal
consolidation
2
Overarching: Completing EMU Architecture
Single Supervisory
Mechanism
Bank
funding
ESM:
fully
operational
since
October
Firewalls
Bank
recaps
BANKS
Breaking
the negative
feedback loop
SOVEREIGN
DEBT
Programmes in
vulnerable countries
OMT
Structural
reforms
ECONOMIC
GROWTH
Fiscal
discipline
Up to EUR
100 bn to
cover
financing
needs of the
Spanish
banking
sector
Differentiated fiscal
consolidation & quality of
public finances
Compact
for
Growth
and Jobs
Breaking the negative feedback loop
Banking
Bank
funding
Union
SOVEREIGN
DEBT
FINANCIAL
BANKS
STABILITY
Bank
recaps
ECONOMIC
GROWTH
4
Reinforcing the banking sector



Restore confidence
 9% capital ratio
 submit plans to deal with shortfall
ECB measures
 easing of collateral requirements
 reduce reserve requirements
 LTRO with 3-y maturities
SSM
5
Recent Summit Decisions
 Single
banking supervisor
 Direct recapitalisation of euro area banks
 No preferred creditor status to EFSF/ESM
support for Spain
 Use of the EFSF /ESM in a flexible way to
stabilise markets
6
SSM: legislative proposals
 Supervisory
tasks shifted to European
level by 1 July 2013
 Defining
the role of the EBA
 Next
step: proposal for a Single Resolution
Mechanism
7
Breaking the negative feedback loop
FINANCIAL
BANKS
STABILITY
Firewalls
SOVEREIGN
DEBT
Firewalls
Programmes in
vulnerable
countries
ECONOMIC
GROWTH
Fiscal discipline
8
Greece
 Early
2010: confidence lost
 May 2010: € 110 bn package
 Mid-2011: new € 130 bn package, easier
conditions for existing loan
 End-2011: upward revisions deficit, slower
growth
 Has achieved much more than is often
recognised in terms of fiscal consolidation
and structural reforms
9
Action on vulnerable Member States
Ireland: good programme implementation 
market confidence is returning
 Portugal: structural reforms aim at switch from
consumption to exports
 Italy: government adopted package to address
twin challenges
 Spain: government adopted structural reform
packages and package for fiscal reform at all
levels of government. Banking sector is in
difficulties

10
Further developing firewalls
EFSM
EUR 60bn
Situation May 2010
EFSM
EUR 60bn
Capacity as of October 2012
EFSF
(committed)
EUR 200bn
EFSF
EUR 200bn
ESM, EUR
500bn

ESM the main instrument to finance new programmes as of October 2012:



The maximum lending volume will be EUR 500bn
The EFSF will remain active in financing programmes before and during a
transitional period
The ceiling for combined ESM/EFSF lending will be EUR 700bn

Total firewall more than EUR 800bn - combining ESM/EFSF, EFSM and
bilateral loans

European firewalls acting in conjunction with IMF support
11
Reform of the SGP
 More
focus on public debt
 More focus on structural deficits
 Strengthening Enforcement



Wider range of sanctions
Triggered at an earlier stage
More automaticity
12
Fiscal Compact
 Legally
binding balanced budget rule
 Automatic correction mechanism
 Ex-ante coordination of debt issuance
 Ex-ante coordination of major economic
policy reforms
 Euro Summit meetings
13
Breaking the negative feedback loop
FINANCIAL
BANKS
STABILITY
Structural
reforms
SOVEREIGN
DEBT
ECONOMIC
GROWTH
Improved
Governance
Compact
for
Growth
and
Jobs
Differentiated fiscal
consolidation & quality
of public finances
14
Governance Reform
 Strengthening
 Fiscal
the SGP
compact
 Preventing
and correcting macroeconomic
imbalances through reinforced economic
surveillance
 Towards
a genuine EMU
15
Macroeconomic
Surveillance
 Preventive



Alert mechanism – scoreboard
In-depth country analysis
Recommendation on how to tackle
imbalances
 Corrective

arm:
arm:
Excessive imbalances position
 stricter surveillance
16
Europe 2020
Structural reforms to raise potential growth



Smart consolidation
Reforms with low costs for the budget
Priority to growth-stimulating reforms
17
Growth vs. Austerity
 Fiscal
consolidation: TINA
 But SGP is not "stupid"



Scope for judgement
Structural sustainability
Differentiation among Member States
 MS
with fiscal space: automatic stabilisers
 Focus on structural deficits
18
Compact for Growth and Jobs:
MS Action
 Re-confirm
objectives of Europe 2020
 Re-confirm differentiated growth-friendly
consolidation
 Complete restructuring of banking sector
 Promote growth and competitiveness
through structural reforms
 Tackle unemployment
 Modernise public administrations
19
Compact for Growth and Jobs:
Contribution of EU Policies
 Deepening the Single Market



Digital
Energy
Unitary patent
 Financing


EIB capital
Project bonds
 Taxation
 Employment
package
 Trade
20
Towards a genuine EMU
 Short
term
•
Progress with banking union
•
Two-pack
 Medium
term
•
Complete banking union
•
Develop fiscal capacity
21
Overarching: Completing EMU Architecture
Single Supervisory
Mechanism
Bank
funding
ESM:
fully
operational
since
October
Firewalls
Bank
recaps
BANKS
Breaking
the negative
feedback loop
SOVEREIGN
DEBT
Programmes in
vulnerable countries
OMT
Structural
reforms
ECONOMIC
GROWTH
Fiscal
discipline
Up to EUR
100 bn to
cover
financing
needs of the
Spanish
banking
sector
Differentiated fiscal
consolidation & quality of
public finances
Compact
for
Growth
and Jobs
23