The European Union and The Interlocking Economic Crises

1. The European Union and The Interlocking Economic Crises Prof. Angel Saz-Carranza Director, ESADEgeo 1

2. Beyond the Headlines

3. Lesson Road Map • Current events discussion • The history of a united EU • Key institutions in the EU • Strengthening the political and fiscal union of the Eurozone countries: “Our Manifesto for Europe” • Europe’s sovereign debt crisis: actors, interests and outcomes • The EMU today • Summary of today’s learning and conclusion

4. Current events

5. The History of a United EU

6. Key Institutions in the EU European Commission Council of the EU European Parliament

7. Strengthening the political and fiscal union of the Eurozone countries: “Our Manifesto for Europe” Proposals: • Set a common floor for corporate income tax • Establish a parliamentary chamber for the eurozone • Pool public debt

8. Case Study

9. Main Actors European Commission European Central Bank France Germany

10. 1) February-April 2010 – Greece • The European Commission calls for intervention by the Euro group and wants to avoid IMF involvement • France wants to avoid IMF involvement • The ECB wants the capacity to buy bonds and access to a bigger budget • Germany wants to avoid EU involvement

11. Results • May 2, 2010—Euro zone countries and the IMF agree on a €110 billion (€80 billion from the Eurozone, €30 billion from the IMF) three-year bailout package for Greece. • May 9, 2010—Council creates the European Financial Stability Mechanism (EFSM) to preserve financial stability in Europe. • Commission is allowed to contract borrowings up to €60 billion on the capital markets on behalf of the EU. • Mechanism includes the European Financial Stability (EFSF), which is authorized to led up to €440 billion.

12. European Financial Stabilization Mechanism& European Financial Stability Facility Source: http://www.efsf.europa.eu/about/index.htm

13. 2) May 2011 – Portugal and Ireland Get Bailout • The European Commission and ECB call for a larger EFSF • France calls for further integration • Germany wants to avoid larger EFSF and calls for a competitiveness pact

14. Results • March 25, 2011—European Council agrees on the details of the permanent European Stability Mechanism (ESM): • maximum lending capacity increased to €500 million. • designed to take over the EFSF and EFSM after they expire. • May 3, 2011—Portugal reaches a bailout deal worth €78 billion with the EU and IMF (3rd European nation to be bailed out of a sovereign debt crisis).

15. European Stability Mechanism Source: Slideshare

16. 3) October 2011 – Italian Bond Yields Rise and Greece Debt • France is against a private sector haircut and wants ECB funding for the EFSF • The ECB is against a private sector haircut and buys Spanish and Italian bonds • Germany wants a private sector haircut and is against ECB funding and expansion of the EFSF

17. Results • The October Summit held in Brussels results in an agreement on a “three-pronged approach”: to stabilize Greece, revive confidence in the markets, and strengthen the banking system. • The EFSF bailout fund is to be boosted to €1 trillion from the €250 million left in the fund.

18. 4) December 2011 – Greek Referendum Announced after Greek bailout agreement • European Commission pushes for Eurobonds • France is against the Commission’s review of national budgets • The ECB reduces interest rates • Germany is against the ECB becoming the lender of last resort and reaffirms its stance on the necessity for incentives to reform and for more fiscal discipline

19. Results • December 9, 2011—European leaders announce that 26 out of the 27 EU member states have committed to a tax and budget agreement: the so-called “fiscal compact”. • The UK, led by Prime Minister David Cameron, opts not to join. • Compact comprised of: a cap of 0.5% of GDP on countries’ annual deficits, automatic penalties for nations whose public deficits exceed 3% of GDP, and formalization of these more stringent rules in each country’s respective constitution. • Starting date of the ESM advanced one year, to July 2012, and its lending capacity of €500 billion is to be reassessed. • Euro zone and EU countries pledge €200 billion to the IMF.

20. Epilogue • June 28, 2012—Council Summit decide on three-in-one approach to tackle the crisis: emergency measures for France and Spain, a growth agenda, and the prospect of banking, economic and political union. • European sovereign debt crisis revealed clearly that the EU must become more than an economic union in order to survive and provide a prosperous environment for its members. • Corrective actions of the main players were often made with a shortsighted approach lacking in European scope and inspiration. The national approaches generated a serious threat to the EU. • For the EU to move forward, economic integration must go hand in hand with fiscal integration and organizational-instrumental reform.

21. Economic Monetary Union (Five Presidents’ Report) Towards an economic union of convergence, growth, and jobs Towards financial union Towards fiscal union Strengthening democratic accountability, legitimacy, and institutions: from rules to institutions The social dimension of EMU

22. Three-minute Paper Please write for 3 minutes about what you have learned in today’s session and why the information is important for EU businesses.

23. Conclusion Questions? This powerpoint presentation and the matching teaching plan were developed as a part of the Jean Monnet project MEKBiz (Mainstreaming EU Knowledge in Business Studies and Strategy), hosted by ESADEgeo – Center for Global Economy and Geopolitics and partially funded by the European Commission. “The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”