DG ECFIN

Vejen mod en økonomisk union

Netværkskonference 2012, Odense

Jakob Wegener Friis

DG ECFIN, European Commission

DG ECFIN

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Stimulus packages + automatic stabilizers

From a financial crisis ….

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2011-2012 – A systemic crisis of the euro?

Assistance programmes +EA financial backstop

Bank recapitalizations + guarantees

DG ECFIN

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……. to an unprecedented economic crisis

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Heartbeat of the crisis

DG ECFINLegacy of the crisis: 4 key messages

1. A lasting impact on growth and job creation: more than ever a need for comprehensive policy action

2. Recovery in question: uneven and protracted, re-building confidence of paramount importance

3. Fiscal consolidation a necessary but not sufficient condition for sustainable public finances

4. The EU response has been comprehensive, albeit incremental. Stronger EMU governance and commitment to euro area cohesion essentiel

DG ECFIN The crisis as an eye opener

1. External shock: the crisis has exposed

shortcomings in EMU‘s design and governance

system

2. Gaps in original EMU design : monetary and fiscal

discipline not enough, no crisis resolution

mechanism foreseen

3. Prediction of closing structural reform gap did not

materialise fully

4. Weaknesses in enforcement of existing rules

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Sound fiscal policy

Prevention and correction of macro

imbalances

• Better enforcement: disincentives/ Sanctions• National frameworks

More effective preventive arm of

SGP

Focus on debt developments

(corrective arm of SGP)

Sound fiscal policy

Balanced growth

Structural reform strategy (Europe

2020)

Macro-prudential supervision

Regulation and supervision of

financial systems

Crisis resolution

The broad ‘geography’ of EMU reform

DG ECFINLearning the lesson: the EMU of tomorrow

1. 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.

2. 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.

3. Beyond fiscal: Broader surveillance to prevent unsustainable imbalances build up. Strengthened financial regulation and supervision in support of the internal market.

4. 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

5. Ever closer Union: Political challenge of wide-reaching financial solidarity and « pooling of powers » within the Community method.

DG ECFIN

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

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DG ECFIN

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.

DG ECFIN

Higher Government Bond

Yields

Deeper Recession

Higher Government Debt-

to-GDP Ratio

More Banking / Financial Strains

Bank solvency concerns

Tighter financial conditions index

Bailout costs

Higher debt service

Default worries

Calls for fiscal tightening

Lower tax receipts

Lower nominal GDP

Credit losses

Lower corporate

profits

Reduced loan supply

Negative wealth effect

Source: Goldman Sachs, Global Economics Weekly 11/38, 30/11/2011

Banking crisis triggered dangerous feedback loops

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DG ECFINKey elements of the Banking Union

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Single RulebookSingle Rulebook

Single Supervisory Mechanism

Single Resolution Mechanism

Deposit Guarantees

DG ECFIN

Single RulebookSingle Rulebook

Single Supervisory Mechanism

National central banks /

supervisors of non-participating

Member Statescentral banks / supervisors of participating Member States

ECB send preparation and

Board Members execution of tasks

Single Supervisory Mechanism

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A Euro area SSM open to other MS

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• 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.

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Discipline(Austerity) Solidarity

(Growth)

Common growth and stabilization instrumentsFiscal backstopsFinancial transactions taxEurobondsSocial pillar

6-Pack 2-Pack Fiscal Compact Veto over national

budgetary policy Executive tasks at EA-

level (e.g. EA Treasury) New enforcement tools

The debate about fiscal union

ESM

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Europe’s Prosperity Triangle"Social market economy"

FAIRNESS - participation - generational

- territorial

GROWTH - single market

- catching-up and convergence - investment and innovation

STABILITY-monetary/financial

-fiscal-environmental

DG ECFIN

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?

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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?

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DG ECFIN Questions?