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1 The Eurocrisis: new challenges for the EU s Klicken Sie, um das Titelformat economic policy zu bearbeiten Thomas Westphal Klicken Director Sie, General um das European Format Policy des Untertitel-Masters German Federal Ministry zu bearbeiten. of Finance 23th of February 2015 College of Europe, Bruges 1

2 Five points: 1. Talking about EMU 2. The crisis 3. Analysing the current situation 4. What needs to be done to come to a stable EMU 5. Next steps

3 MEETING OF THE HEADS OF STATE OR GOVERNMENT THE HAGUE, 1-2 DECEMBER 1969 They have reaffirmed their readiness to expedite the further action needed to strengthen the Community and promote its development into an economic union. To this end they agreed a plan in stages will be worked out during 1970 with a view to the creation of an economic and monetary union. 3

4 Benefits of a Monetary Union No exchange rate risk Lower transaction cost Lower interest rates Lower public deficits Improvements for the international monetary system 4

5 Cost of a Monetary Union Limits the number of policy instruments to deal with shocks: exchange rate policy Monetary policy commit to coordinate economic/fiscal policy 5

6 Optimal Currency Area Ex-ante criteria: Flexible prices and wages Factor mobility Financial market integration Open economy 6

7 Optimal Currency Area Ex-post criteria: Trade integration Commitment = stability FDI Institutional effects 7

8 Five points: 1. Talking about EMU 2. The crisis 3. Analysing the current situation 4. What needs to be done to come to a stable EMU 5. Next steps 8

9 A crisis in different shapes US-subprime crisis (2007) Banking crisis (2008) Economic crisis (2009) Eurozone debt crisis (2010) Social and political crisis (current). 9

10 The crisis: loss of confidence Long term interest rates Quelle: Eurostat 10 BEL DEU IRL GRC ESP FRA ITA NLD AUT PRT FIN

11 6 Euro area inflation rates Euro area Germany Ireland Greece Spain France Italy ECB reference value 11

12 25 Real long-term interest rates Germany Ireland Greece Spain France Italy Portugal

13 Building-up of imbalances 150 Unit labour costs before the crisis Index: 1999= Euro area Germany Ireland Greece Spain France Italy Portugal 13

14 14 14 Public and private sector debt in % of GDP German Private Debt Public Debt Ireland Greece Spain France Italy Portugal Finland

15 What to do? growth Eurobonds reforms debt banks competitiveness solidarity 15 exchange rates ECB bazooka

16 Crisis response 16

17 Policy coordination boldly go where no man has gone before 17

18 A dynamic system 18

19 Five points: 1. Talking about EMU 2. The crisis 3. Analysing the current situation 4. What needs to be done to come to a stable EMU 5. Next steps 19

20 Market confidence has returned 3 programmes completed (IRL, PRT, ESP) Ex-programme countries growing again Recession behind us Achievements 20

21 21

22 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 125 Real GDP in the euro area (Index: 2005Q1=100, Commission forecast as of Q1 2015) Euro area Germany Spain France Italy 22

23 upswing weak growth recovery average Euro zone: +1,3 23

24 Effects of low inflation 24

25 Debt ratio in the Eurozone (% BIP) Eurozone aggregated historic debt/gdp for selected countries: Austria, Belgium, France, Germany, Italy, Netherlands, Portugal, Spain. Sources: IMF historical public debt database, Angus Maddison Project, BMF staff calculations 25

26 180 Public debt in the euro area in % of GDP GRC ITA PRT IRL CYP BEL ESP FRA AUT SVN DEU NLD MLT FIN SVK LTU LVA LUX EST p 2016p 60% Threshold 26

27 16 General government deficit in the euro area in % of GDP ESP SVN PRT FRA IRL BEL ITA CYP SVK AUT NLD FIN GRC MLT LVA LTU EST DEU LUX p 2016p 3% threshold 27

28 Five points: 1. Talking about EMU 2. The crisis 3. Analysing the current situation 4. What needs to be done to come to a stable EMU 5. Next steps 28

29 A stable EMU: substance In absence of political and fiscal union: CONFIDENCE Community vs. Intergouvernemental rules Set of (simple) rules (common sence, ownership) Fiscal policy: lowering debt ratios, MTO allows stabilisation via automatic stabilisers Policy coordination (forward looking) Agreement on debt reduction, structural reforms, how to support growth Internal market, incl complete banking union, budget (put the money where your mouth is) tax rules? 29

30 A stable EMU: institutional Commission: Guardian of the Treaty or political institution? EP: grand coalition? Eurozone chamber? Council: ability to shape policy? National parliaments: how to ensure national support for European ideas and policies? 30

31 Challenges remain Geopolitical Political: support for European idea Social: unacceptably high unemployment in some countries Fiscal: legacy of high public debt limits policy space Economic: growth fragile; still need for structural reform Institutional: new Commission, new Parliament Confidence: need to implement our rules 31

32 Five points: 1. Talking about EMU 2. The crisis 3. Analysing the current situation 4. What needs to be done to come to a stable EMU 5. Next steps 32

33 Juncker Plan 33

34 Connect policies Policy coordination identifies challenges Policy recommendation address challenges Member States act accordingly 34 EU-budget finances

35 Create space for shock absorbtion Member States reach MTO Lower debt ratios = room for lower taxes debt ratios reduced = room for lower taxes automatic stabilisers can work 35

36 36

37 Thank you for your attention Thomas Westphal Director General European Policy German Federal Ministry of Finance 23th of February 2015 College of Europe, Bruges 37

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