Euro area: the way forward
Boris KISSELEVSKY,Financial Councellor to the Embassy of France in Moscow
Bank of Russia, 17 May 2013
• The 2007 financial crisis, the most severe recession since the 1930s.
• A sovereign debt crisis during the summer of 2011, with its epicentre in the euro area.
• Yet, public finances in the euro area are in better shape than in most other large advanced countries:– How did we get there?– What has been the policy reaction?– What reforms to ensure the success of the euro area?
Introduction
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Policy answers to deal with the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
1. The Sovereign debt crisis, third phase of the
financial crisis
The Sovereign debt crisis, third phase of the financial crisis
1st phase: a financial crisis
Risk aversionRisk aversion common factor
Interbank Risk premium (in basis points)
The Sovereign debt crisis, third phase of the financial crisis
2nd phase: a deep and global economic crisis
-10
-5
0
5
10
15
-10
-5
0
5
10
15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Zone euro Etats-Unis BrésilJapon Chine
PIB en volume (données trimestrielles, %, ga)
Sources : Eurostat, instituts nationaux (Chine et Brésil)
Derniers points : T3 2011 (sauf Chine T4)
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010United States France
GDP growth rate(volume, %)
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
The rise in public debt after the financial crisis
8Lyon – 18 Octobre 2011
Strong use of fiscal policy
-14,0
-12,0
-10,0
-8,0
-6,0
-4,0
-2,0
-
2,0
4,0
6,0
1980 1985 1990 1995 2000 2005 2010
Euro area
Japan
United Kingdom
France
United States
Fiscal balance(in GDP %)
The rise in public debt
9Lyon – 18 Octobre 2011
A high level of public debt in peace time
0
20
40
60
80
100
120
140
160
180
200
220
240
260
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Public Debt (in GDP % )
1800- 2012
- Unis - Uni Italy FranceUnited States United Kingdom
Fiscal balance 2011 estimates
A better fiscal position for the euro area
The rise in public debt
The rise in public debt
A better fiscal position for the euro area
Public Debt – 2011 estimates
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
The euro area at the epicentre of the sovereign debt crisis
0
5
10
15
20
25
30
35
40
01/2008 07/2008 01/2009 07/2009 01/2010 07/2010 01/2011 07/2011Austria Belgium Germany Spain Finland France
Greece Ireland Italy Netherlands Portugal
10 years Interest rates- Benchmark (%)
The euro area at the epicentre of the sovereign debt crisis
Refinancing needs for Euro area countries (Bns Euros)
15Lyon – 18 Octobre 2011
Low compliance with the Stability and Growth Pact
The euro area at the epicentre of the sovereign debt crisis
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
2000 2001 2002 2003 2004 2005 2006 2007
Germany France Greece Portugal Italy
Fiscal balance(% of domestic GDP)
Source:CE
16Lyon – 18 Octobre 2011
Protracted external imbalances
The euro area at the epicentre of the sovereign debt crisis
-20,0
-15,0
-10,0
-5,0
0,0
5,0
10,0
2005 2006 2007 2008 2009 2010 2011
Germany France Greece Spain Ireland Portugal
Balance of payments(% of domestic GDP)
Source:OCDE
The euro area at the epicentre of the sovereign debt crisis
Strong divergences within the euro area
70
75
80
85
90
95
100
105
110
115
120
70
75
80
85
90
95
100
105
110
115
120
2005 2006 2007 2008 2009 2010 2011 2012
Zone euro France
Allemagne Italie
Espagne Portugal (mm3m)
Grèce (mm3m)
Production industrielle (2005=100, cvs-cjo)
dernières valeurs : janvier 2012 (DE, FR, ES, IT, PT)
décembre 2011 (ZE, GR)
Sources : Eurostat, Insee
Industrial production (2005=100, sa-wda)
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
Risks of adverse feedback loops
19Lyon – 18 Octobre 2011
Lowergrowth
Fiscalsituation
Financial sector
Wor
sen
fisca
l
bal
ance
Less bank
lending
Sovereign risks increase
Higher guarantees
Aut
omat
ic s
tabi
liser
s
held
bac
k
Lower bank
asset quality
Risks of adverse feedback loops
Spillover from sovereign risk to the banking sector
CDS average premium: Sovereign vs banks (in basis points)
Risk of a credit crunch?
21Lyon – 18 Octobre 2011
-100
-80
-60
-40
-20
0
20
40
60
80
100
03/05 03/06 03/07 03/08 03/09 03/10 03/11France: credit conditions France: credit demandEuro area: credit condition Euro area: Credit demand
Bank lending survey: Credit to firmsNet answers (in % points)
Tightening/Increase
Softening/Decrease
2. Economic policy answers: the acute phase of
the crisis
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
Fiscal consolidation
-2.0
0.0
2.0
4.0
6.0
2010 2011 2012 2013
Portugal
automne 2010 printemps 2011 automne 2011
Source: European Commission
0.0
0.5
1.0
1.5
2010 2011 2012 2013
France
automne 2010 printemps 2011 automne 2011
Structural effort (% GDP)
Lecture: les tableaux ci-dessous dressent, pour un échantillon de pays de la zone euro, les évolutions de prévision d’efforts structurels. Pour 2012 (dans une moindre mesure pour 2011) l’effort structurel prévu est plus important lors de la dernière prévision, signe que la consolidation est bien engagée.
-2.5-2.0-1.5-1.0-0.50.00.51.01.5
2010 2011 2012 2013
Germany
automne 2010 printemps 2011 automne 2011
-2.0
0.0
2.0
4.0
6.0
8.0
2010 2011 2012 2013
Greece
automne 2010 printemps 2011 automne 2011
-0.50.00.51.01.52.02.53.0
2010 2011 2012 2013
Spain
automne 2010 printemps 2011 automne 2011
0.0
0.5
1.0
1.5
2.0
2010 2011 2012 2013
Italy
automne 2010 printemps 2011 automne 2011
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
A strong monetary policy reaction
26Lyon – 18 Octobre 2011
dernière valeur : 14/03/2012
0
1
2
3
4
5
6
7
8
01/01/97 01/01/99 01/01/01 01/01/03 01/01/05 01/01/07 01/01/09 01/01/11
0
1
2
3
4
5
6
7
8
Policy rates
Euro area Eurosystem Eurosystemfrom 28/06/2000 to 8/10/2008
US UK J apan
0%
5%
10%
15%
20%
25%
30%
35%
mars-05 mars-06 mars-07 mars-08 mars-09 mars-10 mars-11
Central banks total assets(Quaterly GDP %)
Japan
Euro area
United Kingdom
United States
Source :BRI Eurostat BoE FED OCDE
Non conventional monetary policy measures
• Measures aiming the banking sector, which finance ¾ of the euro area economy:
• Fixed rate full allotment• Up to 3-year maturity• Extension of collateral requirement
• Direct market purchases to insure a correct transmission of monetary policy:
• SMP: Government securities• CBPP: Covered bonds• OMT: Outright monetary transactions
•STANDARD MONETARY POLICY MEASURES:•Interest rate cuts to historical minimum of 0.75%•but insufficient since markets do not transmit price signals
•NON-STANDARD MEASURES:•Temporary and extraordinary•Complement (not replace) standard measures•Objective: Restore the monetary policy transmission mechanism•by providing liquidity to the banking system through relevant markets:
Interbank money markets Covered bond markets (CBPP1& 2) Debt markets (SMP and OMT)
Eurosystem Response to the Crisis 1/5
Eurosystem Response to the Crisis 2/5
•Measures addressed to the INTERBANK MARKET:•ECB replaces the missing intermediation role of the market
•1. Full allotment policy (since 15 October 2008)• Counterparties have their bids fully satisfied (against collateral)• ensures banks’ continued access to liquidity
• 2. Lengthening of the refinancing operations• 6-month, 12-month and 3-year operations (LTROs)• reduce funding risk of banking system over a longer horizon
• 3. Lower reserve requirement (reserve ratio: from 2% to 1%)• brings down the liquidity needs of banks around EUR100bn
EurosystemResponse to the Crisis 3/5
1st date for3y- LTRO earlyrepayment
0
200
400
600
800
1.000
1.200
1.400
J an 07 J an 08 J an 09 J an 10 J an 11 J an 12 J an 13
EUR bn MRO 1mp LTRO
3m LTRO 6m LTRO
12m LTRO 3y LTRO
Liquidity needs
EurosystemResponse to the Crisis 4/5
4. Narrow the corridor set by standing facilities (from ±1% to ±0.75%)
to reduce market rates volatility
5. Increase collateral availability
to avoid collateral shortages, especially in some jurisdictions,
and to foster bank lending, mainly to SMEs and households
• Rating requirement: from A- to BBB-
• Suspension of minimum rating requirement for assets issued/guaranteed by countries under a EU/IMF programme.
• Assets denominated in foreign currency
• Additional credit claims and ABS (securitised credit claims)
6. Liquidity provision in foreign currency (currently USD operations)
Central banks international cooperation key to ease pressures
OUTRIGHT OPERATIONS
COVERED BOND MARKET: Covered Bond Purchase Programmes
to ease funding conditions and encourage lending to clients
CBPP1 (2009/10): 60bn (now 48bn) & CBPP2 (2011/12): 40bn (now16bn)
DEBT MARKETS
Securities Markets Programme (SMP): (May 10/Sep 12)
to address severe tensions in financial markets (currently 206bn)
Liquidity conditions unaffected: absorbing operations (currently 206bn)
Outright Monetary Transactions (OMT): (Sep 12, but not activated yet)
Sovereign bond purchases in the secondary markets (1-3 year bonds)
to repair monetary policy transmission
Subject to strict conditionality: to maintain governments discipline.
EurosystemResponse to the Crisis 5/5
Summarising…
BEFORE THE CRISIS DURING CRISIS
(Money) Markets worked wellHigh integration: very narrow spreadsECB interest rate decisions reached the economy evenly across euro area
Dysfunctional (money) marketsUncertainty, liquidity hoarding Market segmentationDifferent rate signals across area
Flexible operational framework: - Large number of counterparties - Broad range of eligible assets - Large refinancing operations
Increase recourse to the ECBFlexibility of the operational framework is exploitedNon-standard measures
Eurosystem provided “only” liquidity needed by the system on aggregateMarginal use of the standing facilities
MRO: key instrument to steer rates (2/3 of the liquidity provided by ECB)
Full allotment policy: liquidity provided driven by counterpartiesVery significant use of std. facilities
>80% of the liquidity currently provided through 3-year LTROs
Looking ahead…
•The flexibility of the monetary policy operational framework•has allowed the Eurosystem to provide the necessary liquidity during•the crisis while maintaining the primary objective of price stability
•Non-standard measures are not the lasting solution to the crisis•but “buy time” for the needed structural reforms• (fiscal consolidation, orderly deleveraging of banks…)
•Phasing-out of non-standard measures? Gradual
•Post-crisis operational framework?•Possibly: core features maintained refined with lessons learnt
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
A successful stabilisation
Decrease in sovereign yields
1
2
3
4
5
6
7
8
07/2011 08/2011 09/2011 10/2011 11/2011 12/2011 01/2012 02/2012 03/2012
Belgium Germany Spain France Italy
10-year interest rates - Benchmark (%)
A successful stabilisation
Contrasted situation for countries under programme
0
5
10
15
20
25
30
35
40
45
07/2011 08/2011 09/2011 10/2011 11/2011 12/2011 01/2012 02/2012 03/2012
Greece Ireland Portugal Germany
10-year interest rates - Benchmark (%)
A decrease in banking risk
A successful stabilisation
-6
-4
-2
0
2
4
6
8
janv.
-10
mar
s-1
0
mai
-10
juil.
-10
sept.
-10
nov.
-10
janv.
-11
mar
s-1
1
mai
-11
juil.
-11
sept.
-11
nov.
-11
janv.
-12
France
Allemagne
Espagne
Italie
Zone euro
Non financial corporations
-5
0
5
10
janv.
-09
avr.
-09
juil.
-09
oct.
-09
janv.
-10
avr.
-10
juil.
-10
oct.
-10
janv.
-11
avr.
-11
juil.
-11
oct.
-11
janv.
-12
France
Allemagne
Espagne
Italie
Zone euro
12-months change (%) (gross; not corrected for securitisation for housing loans)
Housing loans
Impact on credit to be confirmed
3. Long term reforms
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
European Governance overhaul
1/ A strengthening of the Stability and Growth Pact
2/ Economic imbalances surveillance
3/ A framework for the crisis management
A strengthening of European Governance
European Governance overhaul
A strengthening of ex ante surveillance :• The European semestre• The golden rule• Structural deficit below 0.5% of GDP• Debt reduction:1/20th a year above 60% of GDP
More automatic sanctions ex post:
• Reverse qualified majority at all stages of the excessive deficit procedure
• Infra-annual surveillance
• Progressive sanctions up to 0.5% GDP fine
A strengthening of the Stability and Growth Pact
European Governance overhaul
• A yearly scoreboard prepared by the Commission:• External imbalances:
• Balance of payment• Net investment position• export market shares• unit labour costs• effective exchange rates
• Internal imbalances:• Public and private indebtedness• Housing prices• Unemployment
• European Council Recommandation in case of excessive imbalances
• The Member-State presents a corrective action plan
• Sanctions in case of insufficient action plan
Surveillance of economic imbalances
European Governance overhaul
• For France, 2 surveillance points:
• export market shares: -19 points in 5 years/ 6% threshold
• Public Debt: 82% / 60% threshold
• In-Depth study for 12 Member-States, among which France
• 4 Member-States under programme (Ireland, Portugal, Greece and Romania) already under strengthened surveillance.
Surveillance of economic imbalances
European Governance overhaul
• A credible stabilisation mechanism « firewall »:
• European Financial Stability Fund (EFSF - June 2010): 440 Mds €
• 192 Mds for Greece, Ireland and Portugal
• 109 Mds additional for Greece
• Leverage?
• European Stability Mechanism (ESM – july 2012): 500 Mds €
• Conditionality
• Interest rates close to EFSF funding costs
• Prevent spillovers and insure financial stability
A permanent framework for the crisis management
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
• Increase capital requirement for market operations
• Increase the quality and quantity of capital
• Reinforce and harmonise liquidity regulation
• Regulate bonuses
•BANKING UNION
Financial regulation reform
A global reform of banking regulation…
…a reform to be extended to the financial system
• Regulation of Systemic Financial Institutions:• Enhanced loss absorption capacity (G SIB)• Restructuration mechanism and enhanced supervision• Extending G SIB to all systemic institutions
• Market risks:• Standardisation of complex financial products• Compensation by regulated central conterparts• Better supervision of shadow banking, in particular hedge funds
Financial regulation reform
A new macroprudential surveillance
• Macro-prudential surveillance :
• Complement microprudential supervision
• Take into account interconnexion between institutions, markets, instruments and risks accumulation.
• For example: preventing housing bubbles
• A new institutional framework:
• Financial stability board and IMF at a global level
• In the US, Financial Stability Oversight Committee (FSOC)
• In Europe, European Systemic Risk Board (ESRB)
• In France, creation of the « Autorité de Contrôle prudentiel » under the aegis of Banque de France and of the COREFRIS
Financial regulation reform
A new European system of financial supervision
Financial regulation reform
Outline
1. The Sovereign debt crisis, third phase of the financial crisis1. The rise in public debt after the financial crisis
2. The euro area at the epicentre of the sovereign debt crisis
3. Risks of adverse feedback loops
2. Economic policy answers: the acute phase of the crisis1. Fiscal consolidations plans…
2. …and a strong monetary policy reaction…
3. …achieved stabilisation of the acute phase of the crisis
3. Long term reforms to make the euro area a success1. A new Governance for Europe
2. Financial regulation reform
3. Increasing long-term growth
Which impact on potential growth?
Advanced countries: towards a lower potential growth
-8,0
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
-8
-6
-4
-2
0
2
4
6
2005 2006 2007 2008 2009 2010 2011 2012 2013
PIB (% an)
Japon
Etats-UnisZone euro
Source : FMI
Prévisions FMI WEO (Update janvier 2012)
UK
Increasing long-term growth
Europe 2020 Strategy for a smart, sustainable and inclusive growth
• A smarter growth: digital economy, innovation, education• A more sustainable growth: low-carbon economy ; improving the business environment• An inclusive growth: raising Europe’s employment rate, investment in skills & training, European platform against poverty.
2010 Goal Employement rate (20-64 year-old) 68,6% 75% R&D domestic gross expenses 2% 3% Greenhouse gas emissions, 1990 base year 83%* 80% Share of energy from renewables 11,7%* 20% increase in energy efficiency (kg oil equivalent per 1 000 Euro of GDP) 165,2* 132,2 Reducing school drop-out rates (% of 15-24 year-old) 14,1% 10% Completing third level education (% of 30-34 year-old) 33,6% 40% People in or at risk of poverty and social exclusion (in ‘000) 115 479 -20 000
2010 key - indicators and goals
• Negative feedback loops have been interrupted by fiscal consolidation plans and strong monetary policy measures.
• In the medium term, three priorities:
– Implement European governance reforms
– Carry on banking regulation reforms (Banking Union and banking resolution mechanism)
– Increase long-term growth
Conclusion