The economic crisis and the move towards new economic governance of the EU

Transcription

1 The economic crisis and the move towards new economic governance of the EU Fritz Breuss JSPS EU-Japan Joint Seminar wiiw Rethinking Regional Integration in the Light of the Current Crisis: East Asia and Europe Vienna, March 9, 2012

2 Outline The Great Recession 2009 and its collateral damages: International impact * World trade, world production * Forecasts ---> 2016 Euro Sovereign Debt Crisis * Rescue Actions Greece, Ireland, Portugal * Bail-out instruments: EFSF/ESM ECB? Construction flaws of EMU Restart of Economic Governance in EMU + Sixpack + Euro Plus Pact + With the Fiscal Compact (TSCG) to a Fiscal Union? + EU Economic Government 2

3 The Great Recession 2009 and its collateral damages > deepest post-world War II recession ( Great Recession) after The Great Depression 1929 Keynes reloaded ---> large fiscal packages to stabilize the economy and mitigate unemployment risks Consequences: Government debts jumped up in nearly all EU member states Indebtedness ----> Sovereign debt crisis in Euro zone periphery (PIIGS) ---> Euro crisis 3

4 World trade volume 2000=100 The tracks of the Great Recession 2009 in the world economy M M1 2006M M1 2007M M1 2008M M1 2009M M1 2010M M1 2011M M1 2012M M1 130 World industrial production (trade weighted) 2000= Source: CPB Netherlands Bureau for Economic Policy Analysis World Trade Monitor, February M1 2006M1 2007M1 2008M1 2009M1 2010M M1 2012M1

5 After the Great Recession 2009 the next setback 2012 (GDP, real, %) Sources.: European Commission, Autumn Forecast 2011 and EU interim forecast February 2012; Oxford Economics, Feb

6 Footprints of austerity policy in the PIIGS (GDP, real, %) GDP, real % Portugal 1.77 Ireland 6.04 Italy 1.55 Greece 4.07 Spain 3.74 EUR Sources.: European Commission, Autumn Forecast 2011 and EU interim forecast February 2012; Oxford Economics, Feb. 2012

7 Euro Sovereign Debt Crisis 1) Two causes: Competitiveness drifts apart in Euro zone ---> competitive Nord vs non-competitive South Indebtedness ----> PIIGS (Portugal, Ireland, Italy, Greece and Spain) 2) Remedies: Rescue umbrella 3 countries: GR, IR, PT EFSF/ESM ECB non-standard monetary policy stance EU economic government? Fiscal union 7

8 Gross Debt, General Government PIIGS, USA, Japan (in % of GDP) 8 Sources: European Commission, Autumn Forecast 2011; Oxford Economics, February 2012; Troika Report on Greece, 15 February 2012

9 Gross Debt, General Government Euro zone, USA, Japan (in % of GDP) Sources: European Commission, Autumn Forecast 2011; Oxford Economics, February 2012; Troika Report on Greece, 15 February

10 10 yrs government bond yields 10 Source: ECB

11 17 Euro zone MS Standard & Poor s Ratings S&P Austria and France lose Triple A First class Strong capacity to pay Good capacity to pay Weakened capacity to pay Highly vulnerable 13 January 2012 by one notch Finland by two notches Ireland Estonia Netherlands Belgium Germany USA: AA+ 10yr 1.97% Japan: AA- 10yr 0.99% Luxembourg France Portugal Spain Austria Italy Slovenia Slovakia Greece Source: APA PictureDesk Malta Cyprus 11

12 Lending capacity 440 bn *) AA+ BB+ AA+ BBB+ A- BB A A+ A *) S&P downgrades as of 10 January 2012; S&P downgrades also EFSF from AAA to AA+ as of 16 January Source.:

13 Operating room: Rescue the Euro 13 Source: Der Standard, 7 March 2012, p. 36

14 Rescue measures for 3 Eurozone countries Greece Ireland Portugal Rescue measures so far - decisions Package I May 2010 Package II Feb 2012 November 2010 May 2011 Credit volume in billion 110* Eurozone of which are guarantees to Ireland 17.5 EFSM 26 IMF 30 to cover risks of EFSM 22.5 EFSF 26 (bilat. credits) private creditors (banks) IMF 22.5 IMF 26 *) Austria1.6 EFSM, EFSF, IMF EFSF 17.5 UK/DK/SW remains in "pot" private creditors (transfered to (Banks, insurances) Package II: 53.5%-74% (107 bn) Total 165 bn) remaining bonds changed for new long-term bonds 30 yrs) at interest rate < 3.65% Status Spring payed, "haircut" of 36 payed 37 payed EFSM European Financial Stabilisation Mechanism, administered by the European Commission is part of EU budget, total 60 billion EFSF European Financial Stability Facility, total volumen 780 billion; EFSF = company, Lux. Law; in Luxembourg (Austria's guarantee 21.6 billion), lending capacity 440 billion; ends mid 2013 ESM European Stability Mechanism, 80 billion payed in capital (Austria: 2.2) and guarantees of 620 billion (Austria: 17.3); lending capacity 500 billion; 14 into force 1 July 2012; ESM = international treaty; seat: Luxembourg

15 Lending capacity: 500 billion Augmented firewall 750 billion!! (ESM + rest EFSF) ESM --> forerunner of European Monetary Fund (EMF)? Similar construction as IMF CAC (Collective Action Clauses) ESM = preferred creditor status ESM is legally protected by amending Article 136 TFEU. ESM = international treaty must be ratified in national parliaments (in Austria by 2/3 majority of votes) ESM Euro Rescue Fund European Stability Mechanism (ESM) total subscribed capital 700 billion starting in July 2012 Germany France Italy Spain Netherlands Belgium Greece Austria Portugal Finland Ireland Slovakia Slovenia Luxembourg Cyprus Estonia Malta Total Contribution Paid-in Guarantees key capital 700 bn Source: Treaty Establishing the European Stability Mechanism (ESM Treaty), 1 February 2012 Article 1: By this Treaty the Contracting Parties establish among themselves an international financial institution, to be named ESM. 15

16 Greece: Is debt sustainable in the medium-run? ,5* Source: Greece: Preliminary Debt Sustainability Analysis, Troika Report, 15 February.2012 *) Greece Rescue Package-II as of 21 February 2012

17 25 20 Intra euro area cost competitiveness (ULC total economy relative to EUR16, Index 1998=100) Euro are member states Ireland Slovakia Estonia Malta Netherlands Cyprus Spain Portugal Italy Greece Slovenia Belgium-Luxembourg Finland France Austria Germany Source: Price and Cost Competitiveness, European Commission (Indicator: areea16)

18 Criterion missed Criterion fulfilled Belgium Bulgaria Czech Rep. Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden United Kingdom The MIP Scoreboard MS on Watch list (except: EL, IE, PT, RO) External imbalances/competitiveness Internal imbalances Current Account Balance Net Int. Investment Position Real effect. Exchange Rate Export Market Share Nominal ULC Deflated House Prices Private Sector Credit Flow Private Sector Debt Q.: European Commission: 1st Alert Mechanism Report on macroeconomic imbalances in Member States, Brussels, Public Sector Debt Unemployment Rate 18

19 GDP per capita - enlarged Union (GDP pc, PPS, EU-27=100, 2011) Source.: European Commission, Autumn Forecast 2011 (European Economy 6/2011) 19

20 Construction flaws of the EMU (I) 1) EMU s founded on the wrong principle -----> One market, one money Normally, monetary unions function on the principle One country, one money. 2) The European Union (EU) is - according to the judgement of the German Federal Constitutional Court (Bundesverfassungsgerichtshof) - only a Union of States (Staatenverbund) -----> Therefore the Euro zone with its 17 member states works on the basis of an asymmetric economic policy architecture. 20

21 Construction flaws of the EMU (II) 1) Asymmetric economic policy architecture -----> centralized monetary policy + decentralized economic (fiscal) policy), coordinated ---> new EMU economic governance. EMU consists only of the M monetary, but not yet of E, an economic union. Final goal: Political Union and lastly the United States of Europe (USE)!? 1) Single Market for government bonds? The governments of its member states issue bonds (for which they should guarantee alone) in effect in a foreign currency, the Euro (which is issued by the ECB) ----> spreads since GFC 2008/09 21

22 New Governance of EMU Economic Policy ( EU Economic Government ) Target: Improved economic policy coordination or governance Macro-Policies Micro-/Structural-/Growth Policies European Semester Bail-out/Financial Market Sixpack SGP-III (EDP) 3 RE, 1 DR Macroimbalances (EIP) 2 RE 2 new RE (Budget monitoring) Euro Plus Pact targets: * Competitiveness ( European Business Cycle ) * Employment * Sustainability of Public Finance * Financial market stability -> Additional benefit? (to Europe 2020, GWP, SGP, etc.) Fiscal Union 2012 ( Fiscal Compact )*) Europe 2020 * smart * sustainable * inclusive growth substitutes the Lisbon strategy (failed!) OMC? Single Market Act? Rescue Measures (Greece, Ireland, Portugal) * EFSF ( ) * Permanent ESM (2012+ Amendment Article136(3) TFEU + CAC ( haircut clauses ) Financial Supervision System ESFS ESRB - ECB 3 agencies: * EBA London * EIOPA Frankfurt * ESMA Paris CM IG CM IG CM IG = intergovernmental; CM = Community Method; RE = regulation; DR = directive; EDP = excessive deficit procedure; EIP = excessive imbalance procedure; OMC = Open method of coordination; EFSF = European Financial Stability Facility; ESM = European Stability Mechanism; ESFS = European System of Financial Supervisors; ESRB = European Systemic Risk Board; EBA = European Banking Authority; EIOPA = European Insurance and Occupational Pensions Authority; ESMA = European Securities and Markets Authority; TFEU = Treaty on the Functioning of the European Union;; CAC = Collective Action Clauses; *) Fiscal Compact = Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG ) signed by 25 EU MS on 1-2 March 2012; TSCG enters into force on 1 January 2013 (if at least 12 Euro area MS have ratified this treaty) 22

23 Euro Crisis Emergence and Solutions Fair weather period of the Euro EMU Public debt stabilization no spreads ( virtual common Euro sovereign bond market) GFC 2008/09 Sovereign debt crises EFSF /ESM Spreads Competitiveness drifts apart in Euro zone SGP-III bail-out Euro Bonds ECB ( LLR ) bail-out Euro Bonds + Fiscal union EIP Euro + Pact Europe

24 Benefit from the GDP growth due to EMU participation, cumulated Country GDP increase in bn in % of GDP Austria Finland Germany Netherlands Italy Portugal Spain France Greece Other 8 -MS Euro zone total 332 3,6 24 Source: McKinsey Germany; quoted in Welt-Online, 10 January 2012

25 4 possible szenarios on the future of the Euro Macro-economic impact Source.: McKinsey Germany: The Future of the Euro, 2012, S

26 Flexible Integration or Europe à la carte in EU-27 How many Europes? Single Market (27) IE, CY Euro area17) UK,BG,RO SE DK AT,FI, MT EL, ES,PT SI,SK EE LT,LV, PL,CZ,HU BE, DE,FR, IT,LU, NL Founding members (6) the "core" Schengen (22) NATO (21) 26