The European sovereign debt
crisis and the future of the euro
Peter Bekx
European Commission
Japan, March 2012
European Commission, Economic and Financial Affairs

1Outline of Presentation
The current economic situation
 The global financial crisis
 The euro-area economic outlook

Responses to the sovereign debt crisis
 5 point plan

European Commission, Economic and Financial Affairs

2The global financial crisis has
evolved through phasesPhase 1: US mortgage market crisisPhase 2: Global credit crisisPhase 3: Global economic and financial crisis

Phase 4: Sovereign debt crisis

European Commission, Economic and Financial Affairs

3Interaction of sovereign andbank-balance sheets
Credit risk transferred from banks to government
2008/9

Government finances weakened further by recession

Investors focus on public debt sustainability

Pressure in sovereign debt markets

Banking sector vulnerable via sovereign exposures

European Commission, Economic and Financial Affairs

4The vicious circle
Slowing economy

Sovereign crisis

European Commission, Economic and Financial Affairs

Banking sectorfragility

5Deepened sovereign-debt crisisBank lending to households and nonfinancial corporations, euro area

Sovereign bond yields, selected
Member States358%

30625420215010-25-40-607

08

09

ITES

Source: Ecowin

10PT

y-o-y%

16141210
86420-2-400 01 02 03 04 05 06 07 08 09 10 11

11IE

y-o-y%EL

GDP (lhs)
Loans to households (rhs)

Source: European Central Bank and European Commission

European Commission, Economic and Financial Affairs

6Sharp deterioration inleading indicators
Overall survey indicators, EUSource: European Commission

European Commission, Economic and Financial Affairs

7

The recovery has come to a halt
Real GDP, euro area

Source: European Commission

European Commission, Economic and Financial Affairs

8

Public deficits continue to recede
General government budget balance2

pps. %% of GDP

2

1

1

00-1

-1

-2

-2

-3-3-4-4-5-5

forecast-6-6-7-7
04

05

06
07
08
09
10
11
General goverment balance (lhs)
Changes in structural balance (rhs)12

13

Source: European Commission

European Commission, Economic and Financial Affairs

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Short-term impact of thecrisis on public debt
200%% of GDP

180%
160%
140%
120%
100%80%
60%
40%
20%0%
EE LU LV RO LT BG SI

IE DK CZ SK FI

Source: European Commission

ES SE UK PL NL CY EU- AT MT FR DE EA- HU PT BE IT
27
17

2007

EL

2012

European Commission, Economic and Financial Affairs

10Responses to the crisisRemove market uncertainty relating to GreeceBudgetary consolidation and growth in vulnerable Member StatesFirewall against contagion in sovereign debt markets

Reinforcement of the EU banking sector

Strengthening of euro-area governance frameworkEuropean Commission, Economic and Financial Affairs

11Greece Early 2010: confidence lost
 May 2010: € 110 bn package
 Mid-2011: new package, easierconditions for existing loan
 End-2011: upward revisions
deficit, slower growth

European Commission, Economic and Financial Affairs

12Action on vulnerable Member States Ireland: good programme implementation market confidence is returning Portugal: structural reforms aim at switchfrom consumption to exports
 Italy: new government adopted package toaddress twin challenges
 Spain: new government adopted package
for fiscal reform at all levels of government
European Commission, Economic and Financial Affairs

13Firewall 1
Up to €750 bn financial stability
package(support in the form of loans
under strict conditionality)

EFSM - €60 bn
European Financial
Stabilisation Mechanism

EFSF - €440 bn
European Financial
Stability Facility

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

IMF – up to €250 bn
International Monetary
Fund

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Firewall 2: ESM
Capital size and structure: Size:€ 500 bn
 Paid-in capital; callable capital; guarantees;
 AAA ratingInstruments:
 Loans (ESM stability support)
 Bond purchases (Primary market support facility)

Pricing: in line with IMF pricing
European Commission, Economic and Financial Affairs

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Reinforcing the banking sector
Restore confidence 9% capital ratio
 submit plans to deal with shortfall
ECB measures easing of collateral erquirements
 reduce reserve requirements
 LTRO with 3-y maturities
European Commission, Economic and Financial Affairs

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Governance Reform Strengthening the SGP Preventing and correcting macroeconomicimbalances Reinforcing economic surveillance

European Commission, Economic and Financial Affairs

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Reform of the SGP More focus on public debt

 Strengthening Enforcement

Wider range of sanctions
Triggered at an earlier stage
More automaticity

European Commission, Economic and Financial Affairs

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MacroeconomicSurveillance Preventive arm:

– Alert mechanism – scoreboard– In-depth country analysis– Recommendation on how to tackle
imbalances Corrective arm:

– Excessive imbalances position
 stricter surveillance
European Commission, Economic and Financial Affairs

19Europe 2020
 Structural reforms to raise potential

growth– Smart consolidation– Reforms with low costs for the budget– Priority to growth-stimulating reforms
European Commission, Economic and Financial Affairs

20Fiscal Compact
 Legally binding balanced budget rule
 Automatic correction mechanism Ex-ante coordination of debt issuance Ex-ante coordination of major

economic policy reforms
 Euro Summit meetings
European Commission, Economic and Financial Affairs

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European Commission, Economic and Financial Affairs

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