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
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
The Great Recession 2009 and its collateral damages 2009 ---> 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
170 160 150 World trade volume 2000=100 The tracks of the Great Recession 2009 in the world economy 140 130 120 2005M M1 2006M M1 2007M M1 2008M M1 2009M M1 2010M M1 2011M M1 2012M M1 130 World industrial production (trade weighted) 2000=100 125 120 115 110 Source: CPB Netherlands Bureau for Economic Policy Analysis World Trade Monitor, February 2012 105 2005M1 2006M1 2007M1 2008M1 2009M1 2010M1 4 2011M1 2012M1
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. 2012 5
Footprints of austerity policy in the PIIGS (GDP, real, %) GDP, real % 1999-2007 Portugal 1.77 Ireland 6.04 Italy 1.55 Greece 4.07 Spain 3.74 EUR-17 2.27 6 Sources.: European Commission, Autumn Forecast 2011 and EU interim forecast February 2012; Oxford Economics, Feb. 2012
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
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
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 2012 9
10 yrs government bond yields 10 Source: ECB
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
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 2012 12 Source.: http://www.efsf.europa.eu/
Operating room: Rescue the Euro 13 Source: Der Standard, 7 March 2012, p. 36
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* 130 85 78 Eurozone 80 30 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 5.0 35 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 2012 73 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
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
Greece: Is debt sustainable in the medium-run? 178 168 159 129 120,5* 2020 16 Source: Greece: Preliminary Debt Sustainability Analysis, Troika Report, 15 February.2012 *) Greece Rescue Package-II as of 21 February 2012
25 20 Intra euro area cost competitiveness 1998-2010 (ULC total economy relative to EUR16, Index 1998=100) Euro are member states Ireland Slovakia Estonia 70 60 15 10 Malta Netherlands Cyprus Spain 50 40 5 Portugal Italy Greece Slovenia 30 0-5 Belgium-Luxembourg Finland France Austria 20-10 10-15 Germany 0-20 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-10 Source: Price and Cost Competitiveness, European Commission (Indicator: areea16)
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 2010 12 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, 14.02.2012 Public Sector Debt Unemployment Rate 18
GDP per capita - enlarged Union (GDP pc, PPS, EU-27=100, 2011) Source.: European Commission, Autumn Forecast 2011 (European Economy 6/2011) 19
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
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
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 (2010-2012) * 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
Euro Crisis Emergence and Solutions Fair weather period of the Euro EMU 1999 2002 Public debt stabilization no spreads ( virtual common Euro sovereign bond market) GFC 2008/09 Sovereign debt crises EFSF-2010-12/ESM-2012 2010 ++ 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 2020 23
Benefit from the GDP growth due to EMU participation, cumulated 1999-2010 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
4 possible szenarios on the future of the Euro Macro-economic impact Source.: McKinsey Germany: The Future of the Euro, 2012, S. 17 25
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