The EU’s response to the financial crisis

1. The EU’s response to the financial crisis YS breakfast meeting Oslo, 29 September 2011 János Herman, Head of Delegation

2. Overview • Context; the EU‘s place in the world • Lessons from the crisis • A comprehensive response

3. The EU’s weight and presence in the world • A Union of 27 countries, 500 million people – “Unity in diversity” • Over one fifth of the world economy • Leading trading power, biggest provider of development aid

4. Challenges now and in the years to come • The economic and financial crisis, its political impact; the EU should demonstrate that it is part of the solution by helping to preserve the European welfare model • Tackle democratic deficit by bringing the EU closer to citizens • Enlargement • Immigration, unfavourable demographic and social tendencies • Give new answers to questions concerning globalisation, and the evening up of distribution of wealth and power, continue as a significant force for good in the world

5. Low potential growth without reforms

6. The economic and financial crisis • Not an “EU- or €-crisis”, it has impacted all or most developed economies • Some EU member states have accumulated high (not sustainable) debt • Crisis has highlighted that € needs to be funded upon stronger common economic governance

7. Public debt and financial markets Bank credit to households and firms, euro area Spreads of sovereign bonds (10 years) Source: Reuters and European Commission Source: ECB

8. Debt developments and scenarios of fiscal consolidation % of GDP 120 120 Forecast Actual development Scenarios 110 110 Scenario 1: 100 100 No consolidation Scenario 2: 90 90 consolidation 0.5% of GDP 80 80 Scenario 3: 70 70 consolidation 1% of GDP 60 60 50 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028

9. EU response to the crisis • Efforts to restore confidence • In the countries themselves and at EU level • Measures to ensure that mistakes will not be repeated • Policy coordination, early warning of difficulties, European Stability Mechanism • Initiatives to promote longer-term growth • 20/20/20 programme for jobs and growth • MORE, NOT LESS EU TO COME

10. Elements of a comprehensive response Stability of the financial sector Fiscal consolidation Growth and competitiveness Reinforced economic policy coordination

11. EU/IMF adjustment programmes • ‘Troika‘: Commission, ECB, IMF • In euro area: • Greece (€ 110 bn.; new programme) • Ireland (€ 85 bn.) • Portugal (€ 78 bn.) • Other Member States • Latvia (€ 7.5 bn.) • Romania (€ 5 bn. pre-cautionary programme)

12. Financial stability • Reform of financial sector regulation: capital requirements, crisis resolution mechanism, consumer protection, etc. • European system of financial supervision: European Systemic Risk Board and three European supervisory authorities (banks, insurances, securities) • Stress tests • BoP facility, EFSF, EFSM, ESM

13. From the European Financial Stability Facility to the European Stability Mechanism Capital and structure • Effective capacity: € 500 bn. • Paid-in capital; callable capital; guarantees • AAA rating • Private sector involvement according to debt sustainability assessment; Collective Action Clauses Instruments • Stability support • Primary market support Pricing • Financial costs + risk mark up (similar to IMF) Governance • Decision-making: unanimity on strategic issues; otherwise QMV • Contribution key: based on ECB key

14. The European Semester • integrated approach to surveillance: simultaneous presentation of budget and reform programmes (SCP and NRP) • priorities identified in Annual Growth Survey • ex ante, concrete, country-specific recommendations • followed by a ‘national semester’ of implementation

15. February February January January February March March April April May May June June July July January March April May June July European European Policy guidance Policy guidance Annual Annual including possible including possible Growth Growth Commission Commission Survey Survey recommendations recommendations Autumn: Autumn: Peer review Peer review Finalisation Finalisation at EU level at EU level Council of Council of Debate & Debate & & adoption & adoption Ministers Ministers orientations orientations of guidance of guidance Debate & Debate & European European orientations orientations Parliament Parliament European European Spring EU Spring EU Endorsement of guidance Council Council summit summit Adoption of National Adoption of National Autumn: Autumn: Reform Reform Programmes Programmes Member Member Decisions Decisions ( ( NRPs NRPs ) & Stability ) & Stability States States at national at national and Convergence and Convergence level level Programmes Programmes ( ( SCPs SCPs ) ) The European Semester calendar

16. Strengthening instruments of economic policy coordination Fiscal surveillance (Stability and Growth Pact) Amendments in two Regulations • preventive arm (1466/97): prudent fiscal policy • corrective arm (1467/97): debt criterion New Directive: minimum standards for national fiscal frameworks Macroeconomic surveillance New regulation on prevention and correction of macroeconomic imbalances - alert mechanism - excessive imbalances procedure (‘EIP’) Enforcement New regulation on effective enforcement of budgetary surveillance Stronger incentives & sanctions Enforcement New regulation on effective enforcement of macroeconomic surveillance Sanctions for continued lack of or insufficient action

17. The Euro Plus Pact • 17 euro MS + 6 non- euro MS • Measures in four areas: • Competitiveness: wage setting mechanisms, liberalisation of protected sectors, education and R&D, business environment • Employment: Flexicurity, life-long learning, taxation • Sustainability of public finances: pensions, fiscal rules • Financial stability: national laws for bank consolidation, stress tests • Pragmatic coordination of tax policies • Under the political guidance of Heads of State or Government • Integrated into the European Semester • Commission monitors implementation

18. EA summit decisions of 21 July • A new Greek EU/IMF programme, including • voluntary debt rollovers and debt buy-back • reduction of interest rates, extension of maturities • Increased EFSF/ESM flexibility and effectiveness • precautionary programmes • recapitalisation of financial institutions through loans to governments • interventions in secondary markets • Proposals for euro area economic governance reform by mid-October

19. The situation today/The way forward • Markets • Member States • EU Institutions • Give time