EMU AFTER THE EU ELECTION CYCLE THE WAY FORWARD

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1 EMU AFTER THE EU ELECTION CYCLE THE WAY FORWARD Marco Buti DG Economic and Financial affairs, European Commission Harvard University, 31 October 2017

2 OUTLINE : the years of all dangers 2. An economic recovery with crisis legacies 3. Moving forward by completing EMU 4. Embedding EMU into new European public goods 2

3 ELECTION CYCLE 2017: A WINDOW OF OPPORTUNITY Last year this time: economic recovery hampered by huge political uncertainty Populism in check? NL, AU, FR, and yes DE From depression to euphoria and back: wrong perception A more inward-looking Germany? Not necessarily so The Eastern European conundrum Populists have one thing in common: they are against Europe 3

4 CITIZENS BELIEVE IN THE EURO Tangible benefits for citizens, firms and governments The symbol of European integration While the crisis shook confidence, popular support for the euro has been consistently high Source: European Commission and Eurobarometer

5 OUTLINE : the years of all dangers 2. An economic recovery with crisis legacies 3. Moving forward by completing EMU 4. Embedding EMU into new European public goods 5

6 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2012 I 2012 II 2012 III 2012 IV 2013 I 2013 II 2013 III 2013 IV 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2015 IV 2016 I 2016 II 2016 III 2016 IV 2017 I 2017 II EURO AREA RECOVERY 'TWO YEARS BEHIND US' AND INCREASINGLY BROAD-BASED Comparison of economic recoveries, US vs EA (real GDP) 12 8 Dispersion of EA yoy growth rates (percentiles) forecast Q1 09Q1 10Q1 11Q1 12Q1 13Q1 14Q1 15Q1 16Q1 17Q1 18Q1 19Q1-12 US EA 40-60% 30-70% 20-80% 10-90% max-min 6

7 STRONG RECOVERY, HOWEVER CONDITIONS FOR SUSTAINABLE AND INCLUSIVE GROWTH ARE NOT YET THERE 7

8 CONDITIONS IN PLACE TO DEAL WITH FISCAL AND FINANCIAL FRAGILITIES Public debt Fiscal space Deleveraging needs Budget deficit NPLs DE EA IT FR snowball risk Bank profitability space LT Interest rates 8

9 NEED OF A MORE SYMMETRIC REBALANCING IN THE EURO AREA 9

10 OUTLINE : the years of all dangers 2. An economic recovery with crisis legacies 3. Moving forward by completing EMU 4. Embedding EMU into new European public goods 10

11 "Back-to-Maastricht" Stronger enforcement of EU fiscal rules to rein debt and deficits MIP focused on competitiveness of lagging countries Banking Union does not need common deposit insurance End to the risk-free status for sovereign debt and establish sovereign debt restructuring mechanism More market discipline TWO COMPETING MODELS FOR EMU 11 Fast forward to federalist EMU Distribution of fiscal efforts to achieve an appropriate aggregate fiscal stance Symmetric adjustment to help weak countries and reduce Euro area current account surplus Full Banking Union to ensure financial stability and private risk sharing Fiscal capacity for public risk sharing and eventually sovereign debt mutualisation Euro area Treasury

12 A NEW POLITICAL SYNTHESIS IS NEEDED Risk Sharing and risk reduction Financial Union Reforms and incentives Economic Union Fiscal Union Sound budgets and fiscal capacity 12

13 FINANCIAL UNION: THE MOST URGENT PRIORITY FOR EMU Advancing on risk reduction and risk sharing and providing more diversified financing options for firms Short-term measures Further reducing risks and building on banks' better capitalisation Completing the three pillars of the Banking Union (BU) Delivering on the Capital Markets Union (CMU) Possible instruments beyond BU and CMU: Sovereign bond-backed securities Post-2019: possible additional successive measures European Safe Asset Regulatory treatment of sovereign bonds 13

14 FINANCIAL UNION: INTERNATIONAL COMPARISON Source: IMF 14

15 FISCAL UNION Rationale behind a fiscal Union (Reflection paper on the deepening of the EMU): i) sound public finances and fiscal buffers indispensable for a monetary Union; ii) common stabilisation tools at the level of the euro area; iii) combination of market discipline and common simple rules 15

16 Fiscal adjustment (change in the structural balance) BENEFITS OF A CENTRAL STABILISATION CAPACITY 1, ,4 1, ,8 0, ,4 Very bad economic times (2013) (2012) 0,2 0 Normal economic times Amount of unused capacity in the economy (output gap) ,2-0,4-3,1-2,6-2,1-1,6-1,1-0,6-0,1 0,4 COM SF2017

17 ECONOMIC UNION Strengthen economic resilience and avoid divergences Better use of existing tools: Economic policy coordination more dialogue, stronger euro area dimension, multi-annual approach EU budget stronger link between funding and reforms Technical assistance 17

18 THE EURO AREA RESILIENCE SPECTRUM tomorrow ADAPTABILITY Shock Absorption Reallocation Resilience spectrum today Vulnerability 18

19 THERE IS SCOPE FOR INCREASING EMU DEMOCRATIC LEGITIMACY The ESM to progressively graduate into a European Monetary Fund firmly anchored in the European Union A European Minister of Economy and Finance: promotes and supports structural reforms should coordinate all EU financial Streamline existing positions (Commissioner and Eurogroup President) accountable to the European Parliament. 19

20 OUTLINE : the years of all dangers 2. An economic recovery with crisis legacies 3. Moving forward by completing EMU 4. Embedding EMU into new European public goods 20

21 PUBLIC GOOD EXPECTATIONS FROM CITIZENS Two most important issues facing the EU at the moment (%) Terrorism 44 Immigration 38 Economic situation Public finances Unemployment Crime Source: Standard Eurobarometer 87 21

22 NEW EUROPEAN PUBLIC GOODS Further cooperation on terrorism and more broadly on security and defence Establishment of a European Defence Fund as a permanent structured cooperation Cooperation reduces pressure on public budgets Common policy on migration Commission provides affected member states with financial support and technical assistance Migration helps address demographic challenges Boosting investments and deepening market integration European Fund for Stability and Investment (EFSI 2.0): Expanding support of strategic investment beyond 2020 Strengthening SMEs and Europe's industrial base creates jobs 22

23 CONCLUSION Populist pressures should not be underestimated but we have a chance to relaunch Europe A comprehensive package needed to reach an agreement Creating bridges makes sense politically and economically Main goals: complete EMU (BU in primis), foster reforms to lift potential growth Deliver on new European public goods Better economic times and stronger financial stability: defy the "Ultima ratio" 23

24 BACKGROUND 24

EMU ROADMAP: BROAD OVERVIEW By 2019 2020-2025 NPL strategy Common backstop Single Resolution Fund European deposit Insurance scheme

implementation European deposit Insurance scheme(edis): roll-out Possible euro area safe asset Changes to the regulatory treatment

area budget line within the EU budget New Multiannual Financial Framework (MFF) New convergence standards linked to a central

simplification Steps: integrate the Fiscal Compact in EU law Proposal: transform the European stabilisation mechanism (ESM) in a

25 EMU ROADMAP: BROAD OVERVIEW By NPL strategy Common backstop Single Resolution Fund European deposit Insurance scheme (EDIS): agreement Capital Market Union finalisation Work on sovereign bond-backed securities Capital Market Union (CMU): implementation European deposit Insurance scheme(edis): roll-out Possible euro area safe asset Changes to the regulatory treatment of sovereign exposures Preparation of the new Multiannual Financial Framework (MFF) Proposal for the creation of a dedicated euro area budget line within the EU budget New Multiannual Financial Framework (MFF) New convergence standards linked to a central stabilisation function Stabilisation function: reflection Stabilisation function: implementation Stability and Growth Pact (SGP) simplification Steps: integrate the Fiscal Compact in EU law Proposal: transform the European stabilisation mechanism (ESM) in a European Monetary Fund (EMF) Unified external representation Possible permanent European Minister of Economy and Finance and institutional implications 25

Deepening Europe s Economic and Monetary Union. Commission Note ahead of the European Council and the Euro Summit of June 2018

Commission Note ahead of the Council and the Euro Summit of 28-29 June 2018 Deepening Europe s Economic and Monetary Union 2 Contribution from the Commission I want to continue with the reform of our Economic