SLIDE 1 The Eurozone crisis: Lessons Learned & Next Steps
OECD Lunch Seminar
9 January 2017
Hans Vijlbrief
Treasurer-General of the Netherlands and Principal Advisor to the President of the Eurogroup
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Outline
I. The Eurozone: where are we now? II. Lessons learned from the crisis
- III. Undertaken steps since the Euro crisis
- IV. Next steps for the Eurozone
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I . THE EUROZONE: W HERE ARE W E NOW ?
SLIDE 4 Eurozone faced double dip but output gaps are now closing
Output gap steadily reduced Eurozone experienced double dip
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- I. The Eurozone: Where are we now?
SLIDE 5 Domestic demand and labour participation have picked up
Dom estic dem and driving EZ grow th Gradual rise of labour participation
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- I. The Eurozone: Where are we now?
SLIDE 6 Labour market conditions have shown considerable improvement
Large reduction of unem ploym ent since 2 0 1 2
Em ploym ent grow th rebounds in form er crisis countries
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- I. The Eurozone: Where are we now?
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I I . LESSONS LEARNED FROM THE EURO CRI SI S
SLIDE 8 Start Eurozone coincided with buildup of global financial bubbles
- II. Lessons learned from the Euro crisis
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Lesson 1 Structural impediments can cause misallocation of labour and capital
SLIDE 10 Allocation of capital, credit and labour to non-tradable sectors contributed to divergence in productivity
Large dispersion in labour flow to building and construction sector Contributing to divergence in productivity
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- II. Lessons learned from the Euro crisis
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Lesson 2 Adequate buffers are required for anti-cyclical policy during crises
SLIDE 12 Buildup of buffers was inadequate before crisis
Structural deficits not reduced before the crisis Buffers eroded rapidly
- II. Lessons learned from the Euro crisis
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Lesson 3 Insufficient risk perception led to improper financial incentives
SLIDE 14 After EMU markets no longer differentiated between credit risks
I nterest rates converged after introduction Euro until start of financial crisis
- II. Lessons learned from the Euro crisis
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Lesson 4 Alternative adjustment mechanisms are essential for a functioning currency union
SLIDE 16 Capital & credit markets and internal devaluation are important adjustment mechanisms
Capital m arkets can play im portant role in sm oothing asym m etric shocks I nternal devaluation accelerates adjustm ent
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- II. Lessons learned from the Euro crisis
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I I I . UNDERTAKEN STEPS SI NCE THE EURO CRI SI S
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Many undertaken steps within Eurozone after the crisis
- I ntroduction of rescue funds ( EFSF, ESM)
- I m plem entation of structural reform s in country
program m es ( GR, PT, I E)
- Strengthening of fiscal and econom ic governance
( tw opack, sixpack)
- Start of banking union and application of bail-in
SLIDE 19 Undertaken steps have improved the fiscal position and supply side
Deficits and debt in Eurozone have declined Country program m es have led to im plem entation of reform s
- III. Undertaken steps since the Euro crisis
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SLIDE 20 Banking union has contributed to delinking sovereign and bank risks
Spread betw een CDS of banks and sovereigns has increased
- III. Undertaken steps since the Euro crisis
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I V. NEXT STEPS FOR THE EUROZONE
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Next Steps
- Com plete Banking Union and solve debt legacy
- Progress on Capital Markets Union
- Strengthen fiscal buffers
- I ncrease potential output and real convergence through
structural reform s
- Prom ote inclusive grow th
SLIDE 23 Completion of banking union and progress on CMU and insolvency frameworks
Solving legacy debt: reduce NPLs Level of NPLs differ w ithin eurozone
- IV. Next steps for the Eurozone
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SLIDE 24 Strengthen fiscal buffers and increase potential growth
Structural budget deficit above SGP norm
Real convergence starts to resum e
- IV. Next steps for the Eurozone
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SLIDE 25 Gains can be made in spreading growth more evenly
- IV. Next steps for the Eurozone
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GI NI coefficient has increased in som e countries
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Summing up
- The Eurozone econom y has seen solid grow th
- The Euro crisis show ed us the consequences of financial
bubbles as w ell as design flaw s
- The Eurozone has im plem ented effective reform s in a short
tim e
- Further focus needed on legacy debt, real convergence and
inclusiveness
