New EU toolbox for economic policy and crisis management
1. 1
New EU toolbox for economic policy and
crisis management
Antra Trenko
Bank of Latvia
International Relations and Communication Department
12.03.2015.
2. 2001 - 2006
Period of global
illusory welfare
2008 – 2009
Financial crisis in
Europe
EU/IMF program
for LV
2010 - 2011
- banking crisis
turns into a
sovereign debt
crisis
Financial assistance
programs (EL, PT, ES,
IE)
2011-2013
Critical stage
Euro area crisis
- Financial markets
under acute stress
- Spillover risks high
+ Policy response to
restore growth
Crisis emerged after boom of construction and asset bubbles
3. Sustainability weaknesses in the euro area’s fiscal outlook
became apparent
Euro area fiscal outlook was weak…
Source: IMF
...and therefore substantial
fiscal consolidation was
required
4. Crisis exposed several shortcomings in the EU
economic governance model
Focus on budget deficit; none on debt
developments
Lack of surveillance
Weak enforcement and slow decision making
No emergency financing
5. Something needed to be done to get EU out of
the pot-hole….
… and fast….
EU “dog days” suddenly had come to an end
6. Many “emergency doctors” played a role in reanimation of
EU governance framework
EUROPEAN
COUNCIL
(EU 28 HoS)
EUROPEAN
COMMISSION
EURO AREA
SUMMIT
(EA HoS)
Council
EUROPEAN
PARLIAMENT
COREPER Committees
Expert level working groups
EU 28 (ECOFIN
Council, ...)
EU 18-
Euro group
7. First, immediate financial assistance (conditional) tools
for stressed EU sovereigns were created
European Financial Stability Facility
• EUR 440 billion
• Effective until 01.06.2012.
European Financial Stability Mechanism
• EUR 60 billion
European Stability Mechanism
• EUR 550 billion
• Replaces EFSF as of 01.06.2012 and implies private sector
participation in debt restructuring
9. Finally, in the course of 2012.-2013 the elements of
“genuine” EMU model were introduced
Unified financial
sector oversight
Integrated fiscal policy &
improved coordination
Integrated economic
policy framework
Common banking
supervision model
for EU
Centralized control over
national fiscal
developments
Strengthend national
responsibility over budget
planning
Action to restore
competitiveness and
growth
Coordination of
economic policies
Integrated institutional framework
Increased legitimacy of European and national parliaments over economic policy decisions
10. Avots: http://av.r.ftdata.co.uk
Banking union – a result of lengthy discussion on a
common framework for financial oversight within
EU
The Banking Union has been create with an aim to:
• protect depositors
• resume confidence in financial sector
• secure against banking crisis in future
• strengthen cross-border banking supervision framework
11. 1. Single supervisory
mechanism (SSM)
4.11.2014.
Banking Union will have several pillars
2. Single Resolution
Mechanism (SRM)
1.01.2016.
3. Deposit Guarantee
Scheme (DGS) 07.2015.
Deposit guarantee fund
(up to 100 000 Eur per
customer); Supervised
by national competent
authorities; Financed by
banks
• ~ 120 largest EA banks–
ECB (+ national
supervisors)
• Other banks - national
supervisors (+ECB
oversight)
Single Resolution Board –
for resolution of failing
banks;
Single Resolution Fund -
medium-term funding
support in case a credit
institution is being
restructured
15. Awareness and ownership by all relevant actors is
essential for the European Semester to be successful
• The European Semester provides a harmonized framework for:
Coordination and guidance
A clear timeline
Budgetary monitoring
The principle of “Comply or explain”
16. Step 1 (January) - Macroeconomic oversight toolkit -
Alert Mechanism Report and Annual Growth Survey
Alert Mechanism Report
• sets out broad economic policy
priorities for individual Member
States
• Identifies the Member States
that require further analysis
Annual Growth Survey
• Sets out EU level – priorities on
action to be done for jobs, growth
and investment
• Takes stock of the economic and
social situation in Europe
Both reports are published simultaneously
17. Annual Growth Survey 2015- more should be done at
EU level to help Member States return to higher growth
levels
18. Set of 11 indicators to detect
macroeconomic imbalances
(risks)
21
Step 2 (March) - Broadened macroeconomic oversight -
the Macroeconomic Imbalance Procedure
21
In-Depth Reviews
in case of risks
Excessive Imbalance
Procedure
Fines in case of
repeated non
compliance of EA
20. Progress in addressing the key issues identified in the
2014-2015 CSRs - obviously insufficient
21. Step 3 ( February/May) - Proposals for Country Specific
Recommendations (CSRs)
• For the first time the 2015 EC economic surveillance package is published so
early (prev. in May/June); sets out the analytical basis for the adoption of CSRs
in May
• March – another round of bilateral meetings with the Member States
organized by the EC to provide an opportunity to discuss the Country Reports
• By mid-April, the Member States are expected to present their NRPs and their
SGPs
• May - based on the above sources, the EC will present a new, focused set of
CSRs for 2015-2016, targeting the most important priorities to be tackled
22. France – key findings 2015 IDR
• Excessive macroeconomic imbalances; a new deadline
to correct excessive deficit (2017)
• Insufficient implementation of CSR 2014
• RISKS: low growth and inflation, poor profitability of
companies; insufficient policy response; high public
debt and increased headline deficit
Next steps:
• By end April 2015 FRA must take effective action and
implement adopted measures for 2015 (effort to reach
headline deficit to 2.8% of GDP in 2017);
ex-ante evaluation report of key measures every 6
months
May 2015 – EC decision to (possibly) activate the Excessive Imbalance Procedure (fines,
suspension of access to EFSI)
23. Step 4 - Responsible budgeting- better rules to guarantee
budgetary discipline
29
• A stronger focus on debt
Specific action if debt ratios above 60% of GDP are not being sufficiently reduced
• A new expenditure benchmark
Public spending must not rise faster than medium-term potential GDP growth,
unless matched by adequate revenues
• A Fiscal Pact for 25 Member States - medium-term budgetary objectives in
national law
• Flexibility during a crisis
If case of unexpected deterioration, Member States may receive extra time to
correct budget deficit
24. 31
Recent Investment trends in EU
• The EU is on course to meet or come close to its targets on
education, climate and energy but not on employment,
research and development or on poverty reduction
• Translating these targets at national level has also helped
to highlight several uncomfortable trends – a growing gap
between the best and least well performing Member States
and a widening gap between regions inside and across
Member States
Real gross fixed capital formation, EU-28, 2013 prices, EUR billion
Source: European Commission
25. 32
An Investment Plan for Europe - EUR 315 billion
additional finance for investment at EU level
Source: European Commission
26. 34
Overview of Euro area projections – situation still fragile
Source: European Commission
27. CONCLUSION – VIA CONTINUA……
•Main challenges:
Pursue of structural reforms to restore growth,
employment and productivity, financial stability
• Main risks:
Despite some progress, the situation in the EU is
still fragile and growth is low
The impact of the decisions taken to recover from
crisis (and avoid future ones) strongly depends on
domestic motivation to implement them at full!
28. 46
Thank you for your attention!
for questions: Antra.Trenko@bank.lv
