The European sovereign debt crisis and the future of the euro

1. The European sovereign debt crisis and the future of the euro Peter Bekx European Commission Reykjavik, 19 February 2013

2. A Vicious circle FINANCIAL BANKS STABILITY Value loss of public bonds Slow growth US Contagion Deleveraging Bailoutcosts SOVEREIGN SOVEREIGN ECONOMIC ECONOMIC DEBT DEBT GROWTH GROWTH Lower tax receipts Higher expenditure Fiscal consolidation 2

3. Overarching: Completing EMU Architecture Single Supervisory Mechanism Up to EUR 100 bn to cover financing needs of the Spanish banking sector OMT Bank funding BANKS Bank recaps Structuralreforms Firewalls Breaking the negative feedbackloop ESM: fully operational since October Compact for Growth and Jobs SOVEREIGN DEBT ECONOMIC GROWTH Fiscaldiscipline Programmes in vulnerable countries Differentiated fiscal consolidation & quality of public finances

4. Breaking the negative feedback loop Banking Bank Bank Bank FINANCIAL BANKS funding Union recaps recaps STABILITY SOVEREIGN SOVEREIGN ECONOMIC ECONOMIC DEBT DEBT GROWTH GROWTH

5. Reinforcing the banking sector • Restore confidence  9% capital ratio  submit plans to deal withshortfall • ECB measures  easing of collateralrequirements  reducereserverequirements  LTRO with 3-y maturities • SSM

6. RecentSummitDecisions • Single banking supervisor • Direct recapitalisation of euro area banks • No preferred creditor status to EFSF/ESM support for Spain • Use of the EFSF /ESM in a flexible way to stabilise markets

7. SSM: legislativeproposals • Supervisorytasksshifted to European level by 1 July 2013 • Defining the role of the EBA • Nextstep: proposal for a Single ResolutionMechanism

8. Breaking the negative feedback loop FINANCIAL BANKS STABILITY Firewalls SOVEREIGN SOVEREIGN ECONOMIC ECONOMIC DEBT DEBT GROWTH GROWTH Fiscal discipline Programmes in vulnerable countries Firewalls 8

9. Greece • Early 2010: confidence lost • May 2010: € 110 bn package • Mid-2011: new € 130 bn package, easier conditions for existing loan • End-2011: upward revisions deficit, slower growth • Has achieved much more than is often recognised in terms of fiscal consolidation and structural reforms

10. Action on vulnerable Member States • Ireland: good programme implementation  market confidence is returning • Portugal: structural reforms aim at switch from consumption to exports • Italy: government adopted package to address twin challenges • Spain: government adopted structural reform packages and package for fiscal reform at all levels of government. Banking sector is in difficulties

11. Further developing firewalls ESM the main instrument to finance new programmes as of October 2012: The maximum lending volume will be EUR 500bn The EFSF will remain active in financing programmes before and during a transitional period The ceiling for combined ESM/EFSF lending will be EUR 700bn Total firewall more than EUR 800bn - combining ESM/EFSF, EFSM and bilateral loans European firewalls acting in conjunction with IMF support Situation May 2010 Capacity as of October 2012 11

12. Reform of the SGP • More focus on public debt • More focus on structural deficits • Strengthening Enforcement • Wider range of sanctions • Triggeredat an earlier stage • More automaticity

13. 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

14. Breaking the negative feedback loop FINANCIAL BANKS STABILITY Structural Structural reforms reforms Compact for Growth and Jobs SOVEREIGN SOVEREIGN ECONOMIC ECONOMIC DEBT DEBT GROWTH GROWTH Improved Governance Differentiated fiscal Differentiated fiscal consolidation & quality consolidation & quality of public finances of public finances

15. Governance Reform • Strengthening the SGP • Fiscal compact • Preventing and correctingmacroeconomicimbalancesthroughreinforcedeconomic surveillance • Towards a genuine EMU

16. Macroeconomic Surveillance • Preventive arm: • Alert mechanism – scoreboard • In-depth country analysis • Recommendation on how to tackle imbalances • Corrective arm: • Excessive imbalances position  stricter surveillance

17. Europe 2020 Structural reforms to raise potential growth • Smart consolidation • Reforms with low costs for the budget • Priority to growth-stimulating reforms

18. Growth vs. Austerity • Fiscal consolidation: TINA • But SGP is not "stupid" • Scope for judgement • Structural sustainability • Differentiation among Member States • MS with fiscal space: automatic stabilisers • Focus on structural deficits

19. Compact for Growth and Jobs: MS Action • Re-confirm objectives of Europe 2020 • Re-confirm differentiated growth-friendly consolidation • Complete restructuring of banking sector • Promote growth and competitiveness through structural reforms • Tackle unemployment • Modernise public administrations

20. Compact for Growth and Jobs: Contribution of EU Policies • Deepening the Single Market • Digital • Energy • Unitary patent • Financing • EIB capital • Project bonds • Taxation • Employment package • Trade

21. Towards a genuine EMU • Short term • Progress withbanking union • Two-pack • Medium term • Complete banking union • Develop fiscal capacity

22. Overarching: Completing EMU Architecture Single Supervisory Mechanism Up to EUR 100 bn to cover financing needs of the Spanish banking sector OMT Bank funding BANKS Bank recaps Structuralreforms Firewalls Breaking the negative feedbackloop ESM: fully operational since October Compact for Growth and Jobs SOVEREIGN DEBT ECONOMIC GROWTH Fiscaldiscipline Programmes in vulnerable countries Differentiated fiscal consolidation & quality of public finances