the euro’s growing pains antonio de lecea european union delegation to the united states of...
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The Euro’s Growing Pains
Antonio de LeceaEuropean Union Delegation to the United States of
America ________________________________________________________________________
The Streit Council for a Union of DemocraciesSAIS
May 4, 2010
1.A Greek accumulation of policy mistakes…
2.…an incomplete Euro Area enforcement and crisis resolution
3.…both now being tackled…4.…for the benefit of the Euro
Area and the global economy.
Outline
The euro: It can’t happen, It’s a bad idea, It won’t last.
US economists on the EMU, 1989-2002
by Lars Jonung and Eoin Drea Economic Papers No. 395 / December 2009
Death throes?
1. An accumulation of policy mistakes in Greece
Poor fiscal policies and governance
Declining competitivenessPoor statisticsled to miss many opportunities
from entry in the Euro Area
Bloated public employment
Poor procurement rules Poor revenue
performance Serious expenditure
slippage in 2009 Poor fiscal accounting
Poor fiscal policies
Deteriorating competitiveness
1. Fiscal surveillance initially focused on nominal deficits
2. Reviewed in 2005 to bring more economic rationale
3. And expanded in 2009 to take account of structural aspects
4. Though assessed on the basis of statistics not sufficiently surveilled
5. Crisis resolution mechanisms available for non-Euro Area members (and third countries) but not for Euro area countries.
2. Incomplete Euro Area governance
0
100
200
300
01/01/99 01/01/00 01/01/01 01/01/02 01/01/03 01/01/04 01/01/05 01/01/06 01/01/07 01/01/08 01/01/09
Greek spreads on 10 year benchmark bonds to German Bund
Markets did not price risk properly for a long whileMarkets did not price risk properly for a long while
3. Now being tackled by Greece …
On 15 January commitment to reduce deficit by 4% in 2010 (both revenue and expenditure).
On 3 March additional 2% deficit reducing measures for 2010
3. Now being tackled by Greece …
Additional fiscal consolidation measures announced on 3 March 2010
million EUR
% GDP
(as announced by Greece)
REVENUE
Increase in VAT rates (from 4,5%, 9% and 19% to 5%, 10% and 21% respectively) 1300 0,5%
Increases in excise taxes (additional to those previously voted in Parliament) 1100 0,5%
EXPENDITURE
Reductions in public sector nominal wages and pensions (additional to the wage cutbacks already announced) of which:
1700 0,7%
Reductions in current and capital expenditures in the public sector 700 0,3%
TOTAL 4800 2,0%
3. Now being tackled by Greece …
On 15 January commitment to reduce deficit by 4% in 2010 (both revenue and expenditure).
On 3 March additional 2% deficit reducing measures for 2010
Ambitious tax reform launched in March Statistical data reviewed in April On 2 May Greek Government approves
extraordinary adjustment programme (negotiated with the EC, ECB, and IMF) for 2010-2014, with further consolidation for 2010 and specification of fiscal measures and structural reforms for 2010- 2012
3. …and by the EU
On 16 February package of enforcement measures (fiscal, structural, statistical) addressed to Greece
Euro Area Leaders and Finance Ministers commitment to support stability of the Euro Area with financial support alongside the IMF.
Proposals for enhanced economic policy coordination (May 12)
Enhanced EC (fiscal, structural) surveillance in close cooperation with ECB, IMF
Proposal for a more permanent crisis resolution mechanism for the Euro Area
And an ambitious framework of structural reforms (Europe 2020)
4. for the benefit of the Euro Area and the global economy
Ensure stability in the Euro Area to enable the EU to focus on crisis
recovery, increasing growth potential,contributing to a reinvigorated, balanced
global growth,a sound reform of global financial
regulation,and an effective and legitimate global
economic governance.
Conclusion
Greece and some Euro Area countries are not the only ones with large fiscal and external imbalances
Conclusion
Greece, and other members of the Euro Area family, will still have growing pains.
But they will grow strong.The euro is not a substitute for sound
policies.
Conclusion
Also state and local finances are a challenge
Its governance must still be perfected.
But it will certainly outlive us.
Thank you for your attention
Antonio de LECEA