03 March2012
EUIJ Kyushu, 1st International Conference

Sadayoshi TAKAYA
Kansai University

2008-2011
 Financial Crisis →Economic Crisis→FiscalCrisis
This pattern is typical one !
1999-2006 (South European Countries) Lower interest rate→Asset Price Bubble
Emerging + High growth of Consumption→Bubble burst (triggered by subprime crisis
in U.S. ?) →Financial Crisis
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 Prof. Rawlinson

pointed out Revision of Pactduring 2003-05. This was wrong sign!

 Furthermore, in 1990s and 2000s, most ofeconomists believed equilibrium mechanismof the markets. Low inflation, globalism ,flexible labor market etc emerged.
Not only EU but U.S. were not cautious forrecession or crisis.

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Fiscal Crisis → Financial Crisis →Econ Crisis
Reverse pattern of crisis
1.

If a disorder default breaks out, most banks
will face massive loss in their balance-sheets.
Then, “credit crunch and higher interestrates” will be brought.
They will trigger economic crisis in EU area.

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41) Incomplete convergence criteria ?
2) Greece participation in EURO area all-right ?
3) Delayed reforms of economic systems4) Monetary integration without fiscal
integration

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5 Convergence criteria in Maastricht Treaty

focused mainly on the demand sides ofmembers’ economies.

 Supply-side, or international competitivenessin Euro Area was neglected on purpose.
←Convergence of the competitiveness is sodifficult and time-consuming process.
For example, current account ration per GDP
would have been introduced.
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6 In 1990s, convergence criteria was requiredfor participation of the EURO.
 Greece was imperfect achievement in fiscal
criteria. But we learnt that later.
 This indicates Greek government has beendifficult to control her budget.
 When we think Greek participation now, it
was inadequate ?

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 Changes of supply sides have delayed,

because most are unwilling to accept changeof life(?).
 Changes mean more flexibility of labormarkets, more mobility of product factors,
more transparency of transaction andbusiness customs.
 Those delays affect less competitiveness.

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8 Fiscal policy is restrained by the rule,“Structural and Growth Pact”.
 But, there is no “coordination rule” for fiscal
deficit, expenditure, transfer between centralgovernments.
 Lisbon Treaty prohibits Fiscal support toother member countries as a rule.
 “Rule must be revised in case of necessity !”Copyright@Sadayoshi_TAKAYA

9 Why?

1.
2.

Central bank function as LLR(Lender of LastResort) requires fiscal support to ECB.
Fiscal crisis of member countries will resultin emergent support by othercountries.→This is a controversial point.

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10 Fiscal supports may bring about “moral-hazard”of crisis countries.
 However, economic linkage in Euro Area is morestrengthened.
 So, fiscal support dared to be introduced.
 Next section, we will propose reform of EU
economic governance.
 Also, we will propose temporal resolution forGreek crisis.

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11 1.EU Fiscal Integration

 Fiscal supports in EU are unpopular politicaloptions.
 However, partial collapse of Euro-Area must beavoided, because benefits of the maintenance arelarger than the costs.
 Benefits: larger exports to intra-Euro Area.

Efficient financial market
evolution of new business etc.
 Costs: Structural reforms of economicsystems
Short-term supports to fiscal crisis
members If (future) reforms of EU economic governancewill be secured, agreement of fiscal
assistance to Greece may be achieved.

 Greece should accept a declaration of default.
 But, this is short-term resolution, notstructural one.

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13 Main point of our proposal

1.
2.
3.

4.

Strengthening of monitoring fiscal stancesof member countries
Approval of default of member government
Introduction of Emergent assistance among
member countries
Strengthening economic reform of a default
memberCopyright@Sadayoshi_TAKAYA

14 My definite proposal

1.
2.
3.

4.

Approval of Euro Common Government Bond→ Blue Bond proposal by BRUGEL slide A
Introduction of European Brady Bond for thedefault scheme slide B
Expansion of European Monetary Fund (EMF)from EFSF, with European Public FinanceAgency (EPFA) slide C
Creation of EU Emergent (standby) Fund in
EMF slide D
Next section

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A. Euro Common Bond Proposal( by Brugel)
Independent StabilityCouncil (ISC)

Determination oflimitations ofIssues

European PublicFinance Agency (EPFA)Blue Bondfor Financing government debt under
60% : Euro common bond applied byEuro average interest rateissuesMemberCountry“A”

Red Bond
for Financing government debt over
60% : each government Bond appliedby each interest rateback
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B. European Brady-Bond
write-off of claims→loss
SchemeCommercial Banksin EUSell（write-offfrom Balance
Sheet ofBanks)

SecondaryMarketDebt reduction (20-50%)

Issue of European Brady-Bond(long-term bond）

European debt
country

Secured by Euro
Common Bond
Guaranteed by EUand member
countries

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C.

European MonetaryFund（EMF）
EMF Loans

Recommendation ofEMF Loans

European Public Finance Agency (EPFA)•Approval of budget
and bond issuance•Monitoring reformsof nation’s finance•Determination oflimitation of blue
bond issuance•Submission ofannual budget
plan•Submission ofannual budget
plan

Membercountry “A”
with default

Membercountry “B”

back
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D.
ＥＭＦ
EU Emergent (standby) Fund

Member “A”
government
With fiscalcrisis

Member “B”
government withfinancial crisis

BanksbackCopyright@Sadayoshi_TAKAYA

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 How should Current Account disequilibrium

be dealt with ?
→ New criteria will be introduced, forexample, Current account ration per GDP ?

 Structure reforms will continue in fiscal crisis

countries?
Innovation and new industry will
emerge in all member countries ?
Mr. Bexs points out that Europe 2020 will be
important strategy. I also expect, but・・・・・？
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