history of the euro, current challenges and the road...

History of the euro, current History of the euro, current challenges and the road aheadchallenges and the road ahead

Peter Bekx Peter Bekx –– Moreno Bertoldi Moreno Bertoldi -- Annika MelanderAnnika Melander

Chinese University of Hong Kong Graduate Law Centre6 December 2011

European Commission, DG for Economic and Financial AffairsDelegation of the European Union to China

European Commission, Economic and Financial Affairs European Commission, Economic and Financial Affairs Delegation of the European Union to ChinaDelegation of the European Union to China

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Outline of presentationOutline of presentation

1. Historical perspective on the euro 1. Historical perspective on the euro ––background and first ten years background and first ten years

2. 2. The crisis explained and the current The crisis explained and the current economic outlook economic outlook

3. Responses to the crisis3. Responses to the crisis


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Part 1 Part 1

Historical perspective on the euro Historical perspective on the euro ––background and first ten years background and first ten years


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Rebuilding Europe after WW IIRebuilding Europe after WW II


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European Union (EU) todayEuropean Union (EU) today

27 countries

500 million people

~ 20% of world GDP


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Euro Area (EA) todayEuro Area (EA) today

17 member 17 member countries: countries: Belgium, Germany, Estonia, Belgium, Germany, Estonia, Ireland, Greece, Spain, Ireland, Greece, Spain, France, Italy, Cyprus, France, Italy, Cyprus, Luxembourg, Malta, Luxembourg, Malta, Netherlands, Austria, Netherlands, Austria, Portugal, Slovenia, Slovakia Portugal, Slovenia, Slovakia & Finland& Finland

2 opt2 opt--outs: outs: Denmark Denmark and the United Kingdomand the United Kingdom

8 derogations: 8 derogations: countries not yet fulfilling countries not yet fulfilling the membership criteriathe membership criteria


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Comparative dataComparative data

2010(11) EU 27 Euro Area USA China

Population (millions)

502 332 312 1340

GDP p.c.(thousands of

EUR in PPS)

24 27 38 5

Share of world GDP (%)

20.7 14.8 19.5 13.6

Exports, G&S

(% of GDP)15.5 22.7 12.5 26.4

Imports, G&S

(% of GDP)15.9 22.0 15.9 21.8

Share of world trade (%)

16.4 15.7 13.8 12.3


1010101010101010


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Why create the euro area?Why create the euro area?

�� Economic and monetary union (EMU) as Economic and monetary union (EMU) as an important stage in the process of an important stage in the process of economic integration economic integration

Customs union (1968)

Single market (1993)

Economic and Monetary Union (1999)

Full economic integration


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Expected benefits of EMUExpected benefits of EMU

�� Elimination of exchange costs and Elimination of exchange costs and currency fluctuationscurrency fluctuations

�� Price transparency and comparabilityPrice transparency and comparability

�� Price stability and low interest ratesPrice stability and low interest rates

�� Major international currencyMajor international currency


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Expected costs of EMUExpected costs of EMU

�� Loss of exchange rate and interest Loss of exchange rate and interest rate as policy toolsrate as policy tools

�� Loss of national sovereignty over Loss of national sovereignty over monetary policymonetary policy

�� Costs of changeover to new currency Costs of changeover to new currency –– the eurothe euro


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Successes in the first decadeSuccesses in the first decade

�� Price stabilityPrice stability

�� JobJob--rich growth rich growth

�� Increased financial market integrationIncreased financial market integration

�� Sound public financesSound public finances

�� Role of the euro as an international Role of the euro as an international currencycurrency


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Inflation convergenceInflation convergence

Euro-area inflation(annual average per decade)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1960 1970 1980 1990 2000


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Financial market integrationFinancial market integration

10-year yield spreads against the German bund

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1990

Q1

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

ppsBelgium

Ireland

Greece

Spain

France

Italy

Netherlands

Austria

Portugal

Finland


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Despite the successesDespite the successes……

� GDP growth remained slow in some countries, due to unsatisfactory productivity performance

� Rising divergences in competitiveness and large current account imbalances

� Evidence of internal imbalances in some countries� Banking and financial markets remained

predominately nationally organized and supervised


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Large variation, but overall modest Large variation, but overall modest

growth in the EA ahead of the crisisgrowth in the EA ahead of the crisis

-6

-4

-2

0

2

4

6

8

10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

EA max-EA min-EA


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Diverging competitiveness trends Diverging competitiveness trends

in EA countriesin EA countries (REER(REER--ULC ULC vsvs RoEARoEA))

80

85

90

95

100

105

110

115

120

125

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Index 1999 = 100 Belgium-Lux

Germany

Greece

Spain

France

Ireland

Italy

Netherlands

Austria

Portugal

Finland

Malta

Cyprus

Slovenia


2020202020202020

EA current account in balance, but EA current account in balance, but

sizeable differences across countriessizeable differences across countries

-20

-15

-10

-5

0

5

10

BE DE IE EL ES FR IT CY LU MT NL AT PT SI SK FI

% of GDP

1999 2008


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Part 2 Part 2

The crisis explained and The crisis explained and the current economic outlook the current economic outlook


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Understanding the crisis:Understanding the crisis:

Triggers of the sovereignTriggers of the sovereign--debt crisisdebt crisis

The crisis originated in the US. The financial, banking and economic crisis resulted in:

Banking and financial sector problems, incl.:

• Financial market volatility • Risk aversion, capital flight• Rating downgrades• High borrowing costs• Contagion - domino effect- herd behaviour• Need for recapitalisation

Weaker growth prospects

Increasing fiscal imbalances

Risk reassessments and changing risk perception


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Specific EA problems fuelling the crisisSpecific EA problems fuelling the crisis

� EA internal institutional and governance weaknesses– Incomplete EMU – Insufficient firewalls– Surveillance and enforcement– Structural flaws in the financial sector

� EA internal imbalances – Competitiveness and productivity imbalances


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Key breaking the feedback loop

Economic growth Sovereign debt

Financial stability

Dealing with the crisis while the global recovery weakens

World trade and global manufacturing output

30

40

50

60

70

-20

-15

-10

-5

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11 12

World trade volume, CPB data (lhs)

Global PMI manufacturing output (rhs)

y-o-y% 3-month moving average

25252525

Source: EU Commission services’ 2012 Autumn Forecast


Financial-market tensions have eased…

Stock-market indices, euro areaTen-year government-bond yields, selected euro-area Member States

0

4

8

12

16

09 10 11 12

DE IT ES

PT IE FR

%

20

40

60

80

100

120

07 08 09 10 11 12

EuroSTOXX (financials)

EuroSTOXX 50

index, Jan. 2007=100

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…although banks' credit standard remain tight

Credit conditions in the euro areaECB Bank Lending Survey

Bank lending to households and non-financial corporations, euro area

-12

-9

-6

-3

0

3

6

9

12

15

-6

-4

-2

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09 10 11 12

GDP (lhs)Loans to households (rhs)Loans to non-financial corporations (rhs)

y-o-y% y-o-y%

-40

-20

0

20

40

60

80

100

-40

-20

0

20

40

03 04 05 06 07 08 09 10 11 12

Supply - past 3 months (lhs) Supply - next 3 months (lhs)

Demand - past 3 months (rhs) Demand - next 3 months (rhs)

balance

tightening ↑ ↓ easing

balance

decrease ↓

increase ↑


27272727

Economic outlook for the euro area

28282828European Commission, Economic and Financial Affairs European Commission, Economic and Financial Affairs Delegation of the European Union to ChinaDelegation of the European Union to China

Euro area: Forecast Real GDP growth

2012 2013 2014

ECB 6 Sep (-0.6;-0.2)

(-0.4;1.4)

Consensus 8 Oct -0.5 0.2 1.2

IMF - WEO 9 Oct -0.4 0.2 1.2

European Commission

7 Nov -0.4 0.1 1.4

Gradual recovery from 2013 on

90

95

100

-3

-2

-1

0

1

2

3

4

5

07 08 09 10 11 12 13 14GDP growth rate (lhs)GDP (quarterly), index (rhs)GDP (annual), index (rhs)

forecast

q-o-q% index, 2007=100

3.20.3

-4.3

1.5-0.3

0.4

Figures above horizontal bars are annual growth rates.

1.6

2.1

29292929


GDP at constant prices, EU


Outlook (and challenges) differ across countries:

Country cases I

GDP growth 2011 2012 2013 2014

Germany 3.0 0.8 0.8 2.0

Spain 0.4 -1.4 -1.4 0.8

France 1.7 0.2 0.4 1.2

Italy 0.4 -2.3 -0.5 0.8

Netherlands 1.0 -0.3 0.3 1.4

Euro area 1.4 - 0 .4 0 .1 1.4

Po land 4.3 2.4 1.8 2.6

United Kingdom 0.9 -0.3 0.9 2.0

EU 1.5 - 0 .3 0 .4 1.6



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GDP growth 2011 2012 2013 2014

Estonia 8.3 2.5 3.1 4.0

Latvia 5.5 4.3 3.6 3.9

Lithuania 5.9 2.9 3.1 3.6

Ireland 1.4 0.4 1.1 2.2

Portugal -1.7 -3.0 -1.0 0.8

Greece -7.1 -6.0 -4.2 0.6

Outlook (and challenges) differ across countries:

Country cases II



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Public finances to improve further

General gov. budget balance, EA General government debt, EA

60

65

70

75

80

85

90

95

100

05 06 07 08 09 10 11 12 13 14

% of GDP

-7

-6

-5

-4

-3

-2

-1

0

1

2

05 06 07 08 09 10 11 12 13 14

General goverment balance

General government balance in structural terms

forecast

% of GDP

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Part 3 Part 3

Responses to the crisisResponses to the crisis


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A global crisis called for a common response – G20

� G20 emerged as the premier forum for international coordination in the midst of the crisis, better reflecting today’s multi-polar world

� Financial sector reforms key - need to stabilise financial markets and restore capital flows, as well as to address the root causes of the crisis, e.g. regulation and

supervision

� Depression avoided – through unprecedented andstrongly coordinated fiscal and monetary stimulus; framework for “strong, sustainable and balanced growth” launched

Comprehensive crisis-response strategy in the EA

1. Supporting vulnerable countries

2. Creating EA/EU financial safety nets

3. Enhance growth through structural reforms

4. Provide robust and integrated economic

governance: moving to a genuine Economic

and Monetary Union



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(1) Particular challenges in some countries called for EU-IMF programmes under strict

conditionality

Ireland - €85 bn Nov. 2010Reform banking system;

fiscal consolidation;and structural reforms

Portugal - €78 bn May. 2011Measures to enhance growth;

fiscal consolidation;and ensure financial stability

Greece - €110 bn, Apr. 2010Preserve financial stability;restore debt sustainability;and boost competititveness

2nd programme for Greece, adding €130 bn, Mar. 2012

Spain - up to €100 bn Jul. 2012“Financial Assistance Programme”

for the recapitalisation of banks

(1) Progress in

vulnerable countries

� Ireland has been able to re-access the markets earlier than envisaged.

� Portugal records stronger-than-expected export growth, which is helping to offset weaker domestic demand.

� Greece has achieved more than is often recognised in terms of fiscal consolidation and structural reforms.

� Spain and Italy : There is some regain of interest among international investors to buy bonds. Especially OMT has contributed to a renewed interest by international investors.


(2) Making European banks more robust

� December 2011: EBA bank recapitalisation exercise

� Restoring confidence in the EU banking sector

� Ensuring the medium-term funding of banks to avoid a credit crunch

� ECB support: two 3-year LTROs

� € 489 bn for 523 participating banks (21/12/2011)

� € 529 bn for 800 participating banks (29/02/2012)

� ECB announces OMT, to buy government bonds unlimitedprovided country program (04/09/2012)

� Enhancing the quality and quantity of bank capital to withstand shocks

– � Core Tier 1 ratio of 9% to be achieved in 2012

38European Commission, Economic and Financial Affairs European Commission, Economic and Financial Affairs

Delegation of the European Union to ChinaDelegation of the European Union to China3838383838383838

(2) Creating a permanent crisis mechanism for the EA: the ESM

� The European Stability Mechanism (ESM), the permanent crisis mechanism for the EA, was created in Oct. 2012, 9 month ahead of schedule

� ESM has an effective lending capacity of € 500 bn � Aim: ”to safeguard financial stability in Europe by

providing financial assistance to euro-area MemberStates”

� Instruments: loans; primary and secondary market purchases; precautionary programmes and bank recapitalisations through loans to governments

� All assistance is linked to appropriate conditionality


(3) Implementing the EU's pro-growth policies

Priorities in the 2013 Annual Growth Survey (AGS):

� Pursuing differentiated, growth-friendly fiscal consolidation (e.g. cutting back on research and education expenditures could be short sighted)

� Restoring normal lending to the economy (beyond the measures to strengthen the banking sector, boost financing of SMEs by better mobilising structural funds and implementing "project bonds" for European infrastructure)

� Promoting growth and competitiveness for today and tomorrow (with the “Compact for Growth and Jobs” e.g. highlighting the full implementation of the Single Market Acts in the area of IT, services, patents and energy; with a reinforced industrial policies etc.)

� Tackling unemployment and the social consequences of the crisis (focus on improving employability levels and promoting social inclusion, with a particular emphasis on youth unemployment e.g. suggesting a “youth guarantee” of a job / further study or traineeship within 4 months)

� Modernising public administration


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(4) From fragmentation to integration:

Moving towards genuine EMU

1. Banking union– Common EU supervisor for European banks (proposal p ublished

by European Commission on 12 September)– To be considered: Common-deposit insurance – To be considered: EU bank-resolution mechanism

2. Fiscal union: integrated budgetary structure

3. Economic union– Further development of system for coordination econ omic policies

4. Political union: legitimacy and accountability


Structuralreforms

Fiscaldiscipline

Differentiated fiscal consolidation & quality

of public finances

Bank funding

Bankrecaps

Firewalls

Compact for

Growth and Jobs

ESM: fully

operational since

October

Commission proposal for Single Supervisory

Mechanism

Up to EUR 100 bn to cover

financing needs of the Spanish banking sector

Programmes in vulnerable countries

OMT

Breaking the negative feedback loop via completing EMU architecture

Financial stability

Economic growth Sovereign debt

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Overarching: Completing EMU Architecture

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The crisis – both a challenge and an opportunity

�� Problems clearly identified within the first decade of the EAProblems clearly identified within the first decade of the EA–– growing macroeconomic imbalancesgrowing macroeconomic imbalances–– lack of ambition on fiscal consolidation and debt reductionlack of ambition on fiscal consolidation and debt reduction–– financial sector increasingly susceptible to shocksfinancial sector increasingly susceptible to shocks

�� Action was taken by the Member States and the EUAction was taken by the Member States and the EU–– strengthening financial market supervision strengthening financial market supervision –– national austerity packages and reforms to enhance competitivenenational austerity packages and reforms to enhance competitivenessss–– strengthening the Stability and Growth Pactstrengthening the Stability and Growth Pact–– new procedure to identify and tackle emerging macroeconomic imbanew procedure to identify and tackle emerging macroeconomic imbalanceslances

�� Through adjustment, reform and better governanceThrough adjustment, reform and better governance–– European economic and monetary union will function betterEuropean economic and monetary union will function better–– Europe will play its role in the international monetary system aEurope will play its role in the international monetary system and in shaping nd in shaping

globalisationglobalisation

We are in all this together: We are in all this together: "If you want to go fast, go "If you want to go fast, go alone. If you want to go far, go together."alone. If you want to go far, go together."



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Thank you for your attention

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