Communication from the Commission - From financial crisis to recovery: A European framework for action
Date: 2008-10-29
Institutions: European Commission
Subjects: economic recession, monetary crisis, world economy

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.10.2008 
COM(2008) 706 final 

COMMUNICATION FROM THE COMMISSION 

From financial crisis to recovery: A European framework for action  

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COMMUNICATION FROM THE COMMISSION 

From financial crisis to recovery: A European framework for action  

Acting in a coordinated way at EU level 

The unprecedented  crisis  in  international financial markets has created major challenges for 
the  EU.  Co-ordinated  action  at  EU  level  by  all  27  Member  States  has  been  effective  in 
stabilising Europe's banking system. Implementation of measures has to be rapid so as to put 
much needed liquidity back into the financial system. But the financial crisis is not yet over 
and  is  already  feeding  into  a  serious  downturn  affecting  the  wider  economy,  hitting 
households, businesses and jobs. The shocks hitting the European economy are expected both 
to reduce the potential growth rate in the medium term and cut actual growth significantly in 
2009 and 2010. As investment shies away from risk, productivity will be put under downward 
pressure and innovation may suffer.  

Europe's strength lies in its solidarity and our ability to act together. All Member States will 
be  affected,  albeit  in  different  ways  and  to  different  degrees,  and  it  is  likely  that 
unemployment  will  increase,  demand  will  fall,  and  fiscal  positions  will  deteriorate.  Acting 
jointly means a more effective and credible response. In contrast, if each Member State acts 
alone, their efforts will fall short. There is also a risk of unwelcome spillover effects on other 
Member States.  

The fact that the EU was able to take collective action when the pressure on financial markets 
was  at  its  most  intense  was  central  to  the  stabilisation  of  the  banking  sector.  Coordinating 
national  action  inside  a  set  of  clear  EU  principles,  complemented  with  direct  EU  action, 
proved  to  be  the  right  approach.  It  was  backed  up  with  decisive,  coordinated  and  effective 
action:  at  the  EU  level  by  the  French  Presidency  of  the  Council,  the  Commission  and  the 
European Central Bank, and at the national level by the Member States, with full support and 
cooperation from the European Parliament. 

The  EU  should  build  on  this  success  and  decide  to  tackle  the  next  stages  of  the  crisis  in  a 
united, co-ordinated manner turning these challenges into opportunities; adding selected short 
term  measures  to  the  Lisbon  Strategy  for  growth  and  jobs.  This  paper  sets  out  a  three  part 
approach which will be developed into an overall EU recovery action plan/framework: 

•  A new financial market architecture at EU level 

•  Dealing with the impact on the real economy 

•  A global response to the financial crisis 

This Communication is presented as a Commission contribution to ongoing debate inside the 
EU  and  with  our  international  partners  on  how  best  to  respond  to  the  current  crisis  and  its 
aftermath.  On  26  November  the  Commission  will  propose  a  more  detailed  EU  recovery 
framework, under the umbrella of the Lisbon strategy for growth and jobs, bringing together a 
series of targeted short term initiatives designed to help counter adverse effects on the wider 
economy  and  adapting  the  medium  to  long  term  measures  of  the  Lisbon  strategy  to  take 
account of the crisis.  

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1. 

A NEW FINANCIAL MARKET ARCHITECTURE AT EU LEVEL 

Steering the European financial sector out of crisis 

Working  closely  together,  Member  States  and  the  Commission  have  agreed  a  series  of 
immediate measures to protect our citizens' savings and rescue banks in difficulty. The initial 
reaction to the various packages in credit markets has been positive, but they will need to be 
implemented  rapidly  and  their  impact  assessed  on  an  ongoing  basis.  Competition  policy 
provides  a  vital  contribution  to  a  coordinated  reaction,  whilst  preserving  the  possibility  for 
Member  States  to  intervene  where  necessary  according  to  national  conditions.1  The 
Commission  will  continue  to  ensure  a  level  playing  field  among  beneficiaries  and  non-
beneficiaries of public sector assistance.  

However, conditions in the global financial system remain very fragile and the risk of a severe 
credit crunch persists. Accordingly, there can be no room for complacency in implementing 
the strategy to steer the European financial sector out of crisis. The EU needs to continue to 
act in a co-ordinated manner to maximise the success of its response. In particular there is a 
need for: 

–  Continued strong support for the financial system from the ECB and other central 
banks.  Central  banks  have  demonstrated  impressive  flexibility  and  ingenuity  in 
providing sufficient liquidity to the banking sector and in ensuring that the crisis 
does not spread to other parts of the financial system.  

–  A  rapid  and  consistent  implementation  on  the  bank  rescue  plans  established  by 
the  Member  States.  This  is  essential  to  quickly  restore  confidence  in  the  EU 
banking sector and so limit the damage to the economy and create the conditions 
for  a  strong  and  sustained  recovery.  Consistency  is  necessary  to  optimise  the 
overall impact of the rescue plans across the EU, to avoid a fragmentation of the 
Internal Market and to maintain a level playing field among beneficiaries and non-
beneficiaries of public sector assistance.  

–  Decisive  measures  to  limit  the  spread  of  the  crisis  across  Member  States.  The 
financial  crisis  has  now  begun  to  affect  the  recently  acceded  Member  States  of 
central  and  eastern  Europe.  In  order  to  meet  this  threat,  the  EU  stands  ready  to 
provide  substantial  medium-term  financial  assistance,  together  with  the  IMF,  to 
those  Member  States  experiencing  balance  of  payments  pressures  or  serious 
financial-stability risks. 

Ensuring reinforced regulation and supervision 

In  parallel  to  the  stabilisation  of  the  crisis,  it  will  be  necessary  to  move  on  to  the  phase  of 
restructuring the banking sector and, at some stage in the future, returning banks to the private 
sector.  The  Commission  will  work  directly  with  Member  States  to  ensure  that  the 
restructuring of parts of the banking sector is done in a way which will ensure fair and healthy 
competition in the sector for the future. Private individuals and businesses need to have access 
to a sound and stable banking system in order to be able to finance their investment plans and 
society as a whole will benefit from the measures taken to ensure that credit remains available 
on reasonable terms. 

1 

The Commission has adopted a Communication on the application of State aid rules to measures taken 
in relation to financial institutions in the context of the current global financial crisis (add ref) 

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The Commission has tabled proposals on deposit guarantees and capital requirements, and on 
countering the risk of pro-cyclicality in the effects of regulation and accounting standards. It 
will  also  soon  make  proposals  on  credit  ratings  agencies  and  executive  pay.  Work  has  also 
been launched on the adequacy of capital market supervision and risk management, including 
on derivatives, hedge funds and private equity. The Commission encourages the Council and 
the  European  Parliament  to  give  priority  to  dealing  with  its  proposals  so  that  stronger 
regulation  and  supervision  can  be  implemented  as  soon  as  possible  and  play  their  role  in 
restoring confidence in the system. 

These measures will tackle the shortcomings identified and will help to restore confidence in 
the system as a whole. We need to redefine the regulatory and supervisory model of the EU 
financial  sector,  particularly  for  the  large  cross  border  financial  institutions.  The  current 
national-based organisation of EU supervision limits the scope for effective macro-prudential 
oversight. The Commission has launched work on the kind of supervisory system which we 
need for the future through the De Larosière Group2.  

2. 

DEALING  WITH  THE  IMPACT  ON  THE  REAL  ECONOMY:  A  FRAMEWORK  FOR 
RECOVERY 

The  impact  of  the  credit  crunch  on  the  wider  economy  will  be  felt  in  rising  unemployment 
levels and reduced demand for the goods and services of companies of all sizes. The policy 
instruments for dealing with employment and stimulating demand are mainly in the hands of 
the  Member  States.  However,  the  EU  dimension  brings  added  value  to  national  actions.  As 
the  positive  results  of  the  Lisbon  strategy  have  shown,  where  Member  States  and  the 
Commission  work  in  partnership  to  create  growth  and  jobs  considerable  additional  benefits 
can be delivered.  

However, in the current crisis the EU needs to adapt the medium to long term measures of the 
Lisbon strategy to take account of the crisis. It needs to add short term actions to its structural 
reform agenda, while continuing to invest in the future through:  

•  Increasing, investment in R&D innovation and education; 

•  promoting flexicurity as way of protecting and equipping people rather than specific jobs; 

•  freeing up businesses, especially SMEs, to build markets at home and internationally; 

•  enhancing  European  competitiveness  by  continuing  to  green  our  economy  as  a  way  of 
creating  new  jobs  and  technologies,  overcoming  our  energy  security  constraints  and 
achieving our environmental goals. 

The more Europe can coordinate effectively, the more the positive benefits of these measures 
will  be  multiplied.  Building  on  the  partnership  approach  which  characterises  the  Lisbon 
Strategy, we invite Member States to agree to higher levels of coordination, to face these new 
challenges. 

2 

The  mandate  of  the  group  is  to  consider  the  organisation  of  European  financial  institutions  to  ensure 
prudential  soundness,  the  orderly  functioning  of  markets  and  stronger  European  co-operation  on 
financial  stability  oversight,  early  warning  mechanisms  and  crisis  management,  including  the 
management of cross border and cross sectoral risks. It will also look at co-operation between the EU 
and other major jurisdictions to help safeguard financial stability at the global level. Its members are: 
Jacques  de  Larosière  (Chairman),  Leszek  Balcerowicz,  Otmar  Issing,  Rainer  Masera,  Callum 
McCarthy, Lars Nyberg, José Perez Fernandez, Onno Ruding  

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The Stability and Growth Pact 

Given  the  EU-wide  nature  of  the  shocks  and  the  fact  that  inflationary  pressures  are  now 
easing, monetary and fiscal policy can contribute to supporting demand. Government budget 
positions  are  likely  to  deteriorate  considerably  in  coming  years  reflecting  falling  revenue. 
While part of falling revenues is linked to the slowdown, the part linked to the adjustment of 
some  sectors  like  the  oversized  housing  sector  will  have  some  consequences  of  a  more 
permanent  nature  for  revenues.  Forecasts  suggest  an  overall  EU  budgetary  deterioration  of 
above 1 percentage point of GDP over the next year, with large variations from one Member 
State  to  another.  This  might  partially  cushion the  impact  of  the  slowdown  in  the  short-term 
but at the expense of fiscal deterioration, even before the financial rescue plans are taken into 
account.  However,  and  largely  due  to  previous  implementation  of  the  Stability  and  Growth 
Pact,  the EU deficit,  and  in  particular that of the Euro  area, is currently expected to remain 
below 3% of GDP.  

While  the  largest  share  of  the  announced  measures  in  support  of  financial  stability 
(guarantees)  will  not  have  an  immediate  impact  on  the  deficit,  real  fiscal  costs  will  be 
incurred to the extent that public guarantees are called in. At the same time, measures taken to 
recapitalise  banks  are  already  increasing  debt  levels.  Together  with  the  evidence  of  an 
ongoing  structural  deterioration  in  budget  balances,  this  may  raise  concerns  about  the  long-
term sustainability of public finances, especially in the most exposed countries.  

The  Stability  and  Growth  Pact  provides  the  right  policy  framework,  balancing  short-term 
stabilisation  needs  and  long-term  structural  reform  requirements,  notably  supporting  the 
adjustment process. Implementation of the Pact should ensure that any deterioration of public 
finances  is  accompanied  by  structural  reform  measures  adequate  to  the  situation,  while 
ensuring that sustainable positions are being restored. Budgetary policies should draw fully on 
the degree of flexibility permitted by the Treaty and the revised Stability and Growth Pact and 
should take into account the following principles:  

•  Fiscal  policy  should  be  maintained  on  a  sustainable  course,  anchoring 

expectations of an ordered resolution of the crisis;  

•  Country-specific differences in fiscal room for manoeuvre should be considered, 
conditional  on  strong  and  credible  national  budgetary  institutions  and  medium-
term budgetary frameworks;  

•  The  level  of  ambition  of  the  structural  reform  agenda  should  pay  particular 
attention  to  those  reforms  that  strengthen  resilience  and  enhance  sustainability 
over the long run;  

•  Reforms  supporting  demand  in  the  short  run  should  be  timely,  targeted  and 

temporary.  

The  excessive  deficit  procedure  should  be  seen  as  peer  support  to  overcome  current 
difficulties  and  ensure  long-term  sustainability.  A  clear  distinction  will  be  made  between 
budgetary  consequences  stemming  from  policy  errors  and  cyclical  effects  including 
consequences of the financial crisis rescue package. In particular, increases in debt levels due 
to rescue plans will be taken into account in the surveillance process.  

Accelerating reform and investment 

The  shocks  hitting  the  European  economy  are  expected  both  to  reduce  the  potential  growth 
rate  and  increase  unemployment,  thereby  reducing  demand.  Structural  reforms  are  therefore 
essential to sustain demand in the short-term, facilitate transitions within and into the labour 
market in the short and medium run and increase potential growth in the long-term. 

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It will be particularly important to ensure that investment is directed to best effect. This means 
using EU and national public sector support to businesses to have a double impact – offsetting 
falls  in  demand  in  the  short  term,  but  doing  this  in  a  way  that  will  help  reform  and 
modernisation  in  the  longer  term.  Within  the  existing  reform  priorities,  identified  under  the 
Lisbon  Strategy,  immediate  priority  should  be  given  by  Member  States  to  key  reforms  that 
support  innovation  and  productivity-enhancing  investment,  which  together  with  bringing 
down inflation and supporting household incomes through targeted social protection measures 
will support demand.  

Moreover, with the financial system in the grip of a prolonged process of deleveraging, and 
given  the  expected  changes  in  the  banking  sector's  appetite  for  risk,  the  question  of  how  to 
fund innovative technologies, preserve the international competitiveness of European industry 
and finance SMEs will need to be addressed. In addition, a continued focus on opening third 
country markets for European business, including small and medium sized enterprises will be 
required. 

The Commission will explore with the Member States the following measures: 

•  Following  the  informal  ECOFIN  last  month,  the  European  Investment  Bank  Group  put 
together an overall package  of €30bn for loan s  to  small  and  medium-sized  enterprises  in 
Europe granted via commercial banks. This constitutes a substantial increase over its usual 
lending in this sector but has to be implemented with urgency; 

•  Working  closely  with  the  Commission,  the  EIB  could  accelerate  its  work  of  financing 
climate change, energy security and infrastructure projects, in particular those of a cross-
border nature. There may be a need to reinforce the capital base of the EIB by for example 
advancing the date of its next capital increase currently scheduled in the course of 2010;  

•  The  EBRD  has  been  playing  a  key  role  in  financial  sector  reform  and  in  financing  the 
private  sector  in  our  newer  Member  States.  In  the  current  financing  environment  its 
activities in these countries could be strengthened. 

•  With a financial envelope of over €350 bil lion for the period 2007-2013, cohesion policy 
provides  considerable  support  to  public  investment  by  the  EU's  Member  States  and 
regions.  The  Commission  will  explore  with  Member  States  the  scope  for  accelerating 
investment projects and for bringing forward payments to Member States; 

•  Finding innovative funding for a wide range of infrastructure projects, including transport, 
energy and high technology networks, for example through a better use of public-private 
partnerships; 

•  Boosting  energy  efficiency  and  green  technology,  for  example  in  buildings  and  in  clean 
cars, which would provide new opportunities for the economy, including for SMEs, while 
at the same time helping the EU to meet its climate change aims; 

•  Increasing  demand  for  energy  efficient  goods  and  services  through  reduced  taxation  and 

other targeted fiscal measures; 

•  Maintaining  and  creating  new  export  opportunities  for  EU  business,  including  SMEs, 
through a pro active market opening agenda, including pursuing trade agreements and our 
market access strategy; 

•  Using national and EU competition, as well as consumer, policies to make markets work 
better, bringing down prices for consumers and taking full advantage of the Single Market.  

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Acting together in a spirit of partnership and co-ordinating their activities, Member states and 
European  Institutions,  can  mobilise  important  funds  to  accelerate  much  needed  investment 
and equip the EU to emerge stronger from this crisis. 

Addressing the employment and social impact 

The  economic  downturn  will  affect  families,  households  and  the  most  vulnerable  people  in 
our  societies.  It  is  already  being  felt  in  terms  of  unemployment.  The  EU  needs  to  work  to 
minimise the impact on jobs and job losses and to use the levers at its disposal to cushion the 
social  impact.  Whereas  the  main  responsibility  lies  with  the  Member  states,  a  good 
coordination  between  community  and  national  action  will  be  helpful.  The  Commission  will 
work with the social partners to find the best response to the crisis. Growth areas in terms of 
job  creation  should  continue  to  be  encouraged  –  such  as  personal,  health  care  and  social 
services,  in  a  rich  source  of  job  creation  which  also  serves  as  a  tool  for  access  and 
opportunities.  

Europe has suffered in the past from a failure to apply active labour market measures to help 
people  to  retrain  for  the  future,  to  find  and  to  create  new  jobs.  There is  now  a  more  urgent 
need to support transition within and into the labour market, raising and matching supply and 
demand  for  labour,  and  increasing  labour  productivity.  This  means  applying  measures 
encouraged by the Lisbon strategy including:  

Countering  the  effects  of  unemployment  by  offering  Member  States  the  possibility  of 
reprogramming  funds  under  the  European  Social  Fund  to  support  measures  to  quickly 
reintegrate unemployed into the labour market; 

•  Reviewing the effectiveness of the Globalisation Adjustment Fund;  

•  Helping the unemployed to start up a new business quickly and cheaply; 

•  Monitoring  the  impact  of  the  crisis  on  different  sectors  affected  by  structural 
adjustments  and  using  the  scope  offered  by  the  State  Aids  regime  to  enable 
timely, targeted, and temporary support where appropriate; 

•  Pursuing  flexicurity:  in  particular  active  labour  market  policy  measures,  tax  and 
benefit reform, and reinforced matching of skills and jobs. The situation is likely 
to  be  particularly  difficult  at  the  lower  end  of  the  labour  market,  making  it 
particularly  important  to  ease  the  unavoidable  restructuring  and  provide  income 
and targeted social protection support. 

3. 

A GLOBAL RESPONSE TO THE FINANCIAL CRISIS 

Every region of the world has been affected by the crisis and no region working alone will be 
able to tackle its effects. There are clear signs that the crisis is spreading to emerging markets 
and will further add to existing pressures on developing countries. It is important that further 
contagion is contained and the IMF should stand ready to intervene with emergency financing 
as appropriate. Europe will work together with the IMF and will use its instrument of macro-
financial support, particularly to help neighbouring countries. Europe is and will continue to 
be an active actor in the coordinated global response.  

The  current  financial  crisis  has  underlined  more  than  ever  the  interaction  between 
macroeconomic  policies  and  financial  markets  on  a  global  scale.  Addressing  it  will  hence 
require tackling both regulatory and supervisory failures, as well as the macro-economic and 
exchange rate imbalances that are among the origins of the current crisis.  

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The  financial  crisis  has  raised  issues  of  global  governance  which  go  beyond  the  purely 
financial sector. The issue of global imbalances has come to the fore, but must also be seen in 
the broader context of the need to maintain the EU's commitment to open markets in trade and 
services  and  deeper  multilateral  co-operation,  fighting  against  protectionist  tendencies  and 
pursuing a positive outcome of the WTO Doha Round. It is also about sharing the benefits of 
sustainable  growth  with  developing  countries,  particularly  at  a  time  of  volatile  commodity 
prices,  and  tackling  challenges  like  climate  change,  global  prosperity  and  delivering  on  the 
Millenium Development goals. 

Following an EU initiative in which the Commission played a full part, the US will host on 15 
November  the  first  international  summit  on  the  financial  crisis.  One  of  the  goals  of  the 
summit  is  to  begin  to  improve  coordination  at  global  level,  review  the  role  of  international 
institutions in financial market surveillance and to adapt global governance structures for the 
future.  The  Commission  has  given  active  support  to  international  efforts  to  provide  a 
consistent framework for addressing investment issues at global level, including on the IMF 
General Agreed Principles and Practices on Sovereign Wealth Funds. 

In order to reduce the risk of a recurrence of financial crises in the future, a series of measures 
to reform the global financial architecture should be pursued. These should relate broadly to 
the following areas: 

•  Strengthening  the  international  consistency  and  quality  of  regulatory  standards, 
including  implement  reforms  (as  reflected  in  the  ECOFIN  roadmaps  and  FSF 
recommendations) and extend them at global level; 

•  Strengthening international coordination among financial supervisors; 

•  Strengthening  macroeconomic  surveillance  and  crisis  prevention,  bringing 
together  macro-  and  micro-prudential  aspects,  enhancing  financial  stability  and 
developing early warning systems; and  

•  Further  developing  the  capacity  to  deal  with  financial  crisis  and  resolution 

capacities, at the national, regional and multilateral levels. 

Ultimately, to deliver financial stability it will be essential to undertake a major overhaul of 
the relevant institutions. Only in this way we could lock in a sustainable way the results of the 
series  of  global  financial  crisis  summits.  While  the  current  crisis  has  revealed  some 
weaknesses in the European regulatory system, Europe is well placed to play an active role in 
designing the new global architecture and making it work effectively. This should be based on 
key principles:  

•  Efficiency: A balance is needed to ensure speed and quality in decisions, without 

excessive intrusion; 

•  Transparency  and  accountability:  new  or  reformed  organisations  need  to  be 
properly accountable, to increase incentives for implementation and enforcement; 

•  Representation: Global groups should include key emerging countries to improve 
the legitimacy of the decision making process. The fragmented representation of 
the European countries and of the euro area should also be addressed to increase 
the EU's overall effectiveness and influence. 

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Risks and opportunities 

The EU needs to take effective action now to counter the crisis. This action needs to be smart 
so that it stimulates the right changes in our economy ensuring that we emerge from this crisis 
ready  to  take  full  advantage  of  the  upturn  when  it  comes.  It  can  best  do  this  if  we  seize 
opportunities  to  continue  to  restructure  our  economies,  train  and  equip  our  citizens  for  new 
challenges  while  taking  care  of  the  most  vulnerable  people  in  our  societies  in  the  spirit  of 
Article 2 of the Treaty. We know from past experience that our success is based on moving 
away  from  economic  nationalism  and  that  the  drivers  of  European  growth  come  from 
removing  barriers  between  Member  States,  capitalising  on  the  scale  and  strength  of  our 
Internal Market.  

The EU has faced different kinds of crisis in its history and has always managed to emerge 
from  them  stronger  and  more  united.  We  have  already  shown  that  when  our  27  Member 
States  and  the  European  Institutions  decide  to  act  together,  we  are  able  to  get  results  and 
deliver  for  our  citizens.  The  current  crisis  can  also  be  an  opportunity  for  Europe  and  the 
actions outlined in this paper show how we can work together to put the EU on the road to 
recovery. 

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