Vejen mod en økonomisk union Netværkskonference 2012 , Odense Jakob Wegener Friis

1. Vejen mod en økonomisk unionNetværkskonference 2012, OdenseJakob Wegener Friis DG ECFIN, European Commission

2. From a financial crisis…. 2011-2012 – A systemic crisis of the euro? Assistance programmes + EA financialbackstop Stimulus packages + automatic stabilizers Bank recapitalizations + guarantees 2 2

3. ……. to an unprecedented economic crisis 3

4. Heartbeat of the crisis 4

5. Legacy of the crisis: 4 key messages • A lasting impact on growth and job creation: more than ever a need for comprehensive policy action • Recovery in question: uneven and protracted, re-building confidence of paramount importance • Fiscal consolidation a necessary but not sufficient condition for sustainable public finances • The EU response has been comprehensive, albeit incremental. Stronger EMU governance and commitment to euro area cohesion essentiel

6. The crisis as an eye opener • External shock: the crisis has exposed shortcomings in EMU‘s design and governance system • Gaps in original EMU design : monetary and fiscal discipline not enough, no crisis resolution mechanism foreseen • Prediction of closing structural reform gap did not materialise fully • Weaknesses in enforcement of existing rules

7. 7 Focus on debt developments (corrective arm of SGP) More effective preventive arm of SGP Sound fiscal policy • Better • enforcement: • disincentives/ • Sanctions • National • frameworks Prevention and correction of macro imbalances The broad ‘geography’ of EMU reform Crisis resolution Structural reform strategy (Europe 2020) Sound fiscal policy Balanced growth Regulation and supervision of financial systems Macro-prudential supervision

8. Learning the lesson: the EMU of tomorrow Growing again: The pre-crisis need for structural reform is reinforced. Releasing Europe’s growth potential is a pressing priority. A well-functioning EMU will help. A choice to be made: the « safe harbour » of Maastricht or further fiscal integration. More intrusive surveillance and forceful enforcement paired with a credible last-resort financial backstop. Beyond fiscal: Broader surveillance to prevent unsustainable imbalances build up. Strengthened financial regulation and supervision in support of the internal market. Hanging together: Realisation of scope and depth of governance required to protect the benefits of common currency. EU rules interacting with increased attention of financial markets Ever closer Union: Political challenge of wide-reaching financial solidarity and « pooling of powers » within the Community method.

9. Completion of EMU's architecture • Banking Union – closer integration in supervisory structures and practices, in cross-border crisis management/resolution and burden sharing • Fiscal Union – Moving from coordination towards integration in the surveillance of economic and budgetary policies in the euro area • Stability Bonds – Consider joint issuance of euro area debt, once crisis has abated

10. Why do we need a Banking Union? • Necessary for achieving a genuine EMU. • Break the negative feedback loop between sovereigns and banks. • Prevent bank runs and strengthen overall financial stability. • Preserve the single market. • Single supervision is the precondition for the introduction of potential direct recapitalisation of banks by ESM.

11. Higher Government Bond Yields Tighter financial conditions index Default worries Bailout costs Bank solvency concerns Higher debt service More Banking / Financial Strains Higher Government Debt-to-GDP Ratio Lower corporate profits Negative wealth effect Calls for fiscal tightening Lower tax receipts Credit losses Reduced loan supply Lower nominal GDP Deeper Recession Banking crisis triggered dangerous feedback loops Source: Goldman Sachs, Global Economics Weekly 11/38, 30/11/2011

12. Key elements of the Banking Union Single SupervisoryMechanism Single ResolutionMechanism DepositGuarantees Single Rulebook

13. Single Supervisory Mechanism Single SupervisoryMechanism National central banks /supervisors of non-participatingMember States Coordination by EBA ECB send preparation and Board Members execution of tasks central banks / supervisors of participating Member States Single Rulebook

14. A Euro area SSM open to other MS • All Euro-area Member States shall participate. • Non-Euro area countries may join by establishing a close cooperation between their competent authorities and the ECB.

15. The debate about fiscal union Discipline (Austerity) Solidarity (Growth) • 6-Pack • 2-Pack • Fiscal Compact • Veto over national budgetarypolicy • Executive tasksat EA-level (e.g. EA Treasury) • New enforcementtools • Common growthandstabilizationinstruments • Fiscalbackstops • Financial transactionstax • Eurobonds • Socialpillar • ESM

16. Europe’s Prosperity Triangle"Social market economy" GROWTH - single market - catching-up and convergence - investment and innovation FAIRNESS - participation - generational - territorial STABILITY -monetary/financial -fiscal -environmental

17. Political "musts" for long-term solutions • Political will and leadership for a great leap forward • Necessity of Treaty changes  Unanimity • Constitional questions in some MS • Political and economic cohesion among countries • EU27 vs. EU10? • Rules vs. discretion: An accepted authority needed • Building legitimacy of the EU-level executive - preferences of Member States and citizens • Issues: Too little too late? Are we sure about EMU.2? Credible incentives and mutual trust?

18. Four Presidents' Report Integrated frameworks for: • Financial sector: • SSM, DGS, RRS, burden sharing? • Budgetary policy: • EA fiscal capacity? Debt mutualisation? • Economic policy: • more binding CSRs? Positive financial incentives for reform implementation? Partnership contracts? Ensuring democratic legitimacy and accountability: EA-level accountability structure?

19. Questions?