Economic and Financial Affairs Committee. The EMU: challenges and the way forward

Transcription

1 Economic and Financial Affairs Committee The EMU: challenges and the way forward May

2 1 Background (1) U.S. sub-prime crisis: excessive risk-taking including opaque securitization & housing market collapse regulatory failure Crisis spreads to European banks (Northern Rock, RBS, Hypo, etc.) 2009 euro area sovereign debt crisis: triggered by Greece and worsened by the world recession and contraction in world trade Central bank intervention: policy rates reduced provision of liquidity to banking system Government intervention: expansionary fiscal policy further increasing deficits

3 2 Background (2) Asset bubbles (Spain and Ireland) and structural weaknesses (Italy, Spain and Greece) Banks solvency problems burdened public finances even further Bail-outs for Greece, Ireland, Portugal and Cyprus Fears of contagion triggered by the announcement of private sector involvement - market became sensitive and volatile; bail-in Record unemployment rates and prolonged recession in various economies

4 Economic growth GDP index (2008=100) Euro area Germany Ireland Italy Luxembourg Malta United Kingdom United States Source: Eurostat 1 3

5 The problem of unemployment 4

6 Government debt in developed countries: a historical perspective, HSBC 5

7 The euro and bond yields 6

8 Implications of the single currency Common monetary policy Since exchange rate is fixed, competitiveness becomes key National fiscal policies The need to adhere to Stability & Growth Pact: Fiscal stability Growth enhancing economic policies 7

9 Euro area crisis EMU Lower interest rates Insufficient bank supervision & underestimation of country specific risk Surge in private debt Speculation Fiscal indiscipline (Greece) Surge in sovereign debt Asset bubbles (Ireland & Spain) Financial (Cyprus) Banks balance sheets damaged (soft regulation and inadequate supervision) Economic slowdown 8

10 Monetary policy standard measures 9

11 ECB response: non-standard measures Long-term refinancing operations Fixed rate and full allotment Looser collateral rules Covered bond buying Securities Market Programme Outright Monetary Transactions 10

12 Bond yields ECB re-starts SMP, buying Spanish and Italian bonds ECB announces 3yr LTROs ECB announces OMT 11

13 Strengthening the EMU architecture Requirements of EMU Proposed solutions Fiscal Discipline Budgetary rules (6-pack) Effective financial regulation Management of macroeconomic imbalances Banking union Competitiveness, structural reforms 12

14 Pan-European financial reform Banking Union Bank supervision (SSM) Bank resolution Bank deposit insurance Endowing ECB with responsibility of supervising all banks Burden sharing of closing down nonviable banks Preventing bank-runs by protecting depositors Addressing the interconnection between sovereign debt & bank debt 13

15 Malta: the Joint Financial Stability Board Set up in January 2013 by CBM & MFSA with the aim to establish greater coordination to protect and enhance the financial stability in Malta by: strengthening the resilience of the Maltese financial system addressing the build-up of systemic risks addressing macro and micro-prudential policy issues ensuring sustainable contribution of the financial sector to economic growth JFSB is in line with the ESRB recommendation regarding the macro-prudential mandate of national authorities. 14

16 The fiscal challenge: the need for deficit and debt rules Large deficits aggravate debt, leaving no room for fiscal maneuver Large deficits increase the risk of unsustainable debt dynamics The immediate challenge is the restoration of economic growth in the context of fiscal consolidation Euro area fiscal deficit ratio already reduced from 6.2% (2010) to 4.1% (2011) and to 3.7% (2012) 15

17 Addressing macro-economic imbalances Current account imbalances Unsustainable external indebtedness Asset price bubbles High private sector debt Loss of competitiveness The origins of the Italian debt problem go back in time well before the euro existed. Management of macro imbalances is necessary to ensure the conditions for prosperity within a monetary union and thereby prevent countries from becoming a burden on others. 16

18 Low interest rates fuelled house price bubbles 120 House price index (annual average index, 2007 = 100) The origins of the Italian debt problem go back in time well before the euro existed Source: Eurostat Euro area Ireland Spain Luxembourg Malta Netherlands 20 17

19 Concluding remarks: strengthening governance Vigilant financial system oversight regulatory governance Euro area Banking Union ESRB Malta JFSB Sustainable public finances fiscal governance Higher spending is sustainable only if revenues rise on the back of a growing economy Fiscal targets must not be compromised Higher productivity economic governance Allows sustainably higher wages and living standards Quality of human capital has to evolve to meet the changing needs of both domestic and export markets Upgrading of current investment and a stream of new investment are necessary for structural change to higher value added activities 18

20 THANK YOU 20