The sovereign debt crisis: a catalyst for further European integration? Gabriel Glöckler * Deputy Head of the EU Institutions Division European Central Bank Poros, 9 July, 2011 * The views expressed are those of the author and do not necessarily reflect the position of the ECB.
Getting out of a systemic crisis Kindleberger: 5 functions essential to stabilise (international) economic system 1. Maintaining open market for distressed goods 2. Stabilising exchange rates 3. Acting as lender of last resort 4. Providing countercyclical long-term lending 5. Ensuring coordination of macroeconomic policies 2
EMU has done well overall Delivered all 5 functions during the crisis 1. Open market maintained through internal market rules 2. Exchange rates stabilised through euro 3. Eurosystem as lender of last resort 4. Countercyclical long-term lending though Greek Loan Facility, EFSF, ESM 5. Coordination of macroeconomic policies through SGP, Euro Plus Pact, governance reforms 3
But results uneven • Kindleberger: 5 functions have to be performed by single authority (‘benign hegemon’) • Where EMU has de facto ‘hegemony’ through EU/euro area governance/institutions, response has been very effective (1-3) • But where authority is decentralised at national level, results has been less conclusive (4-5) 4
Problems with decentralisation (I) … Resurgence of nationalism Influence of domestic politics Lack of capacity to enforce common rules 5
Problems with decentralisation (II) … Govt balance in EL and PT, 2000-2007 0 Uncertainty over outcomes, -1 -2 making final costs higher -3 % GDP EL -4 800.0 PT -5 700.0 600.0 -6 500.0 -7 400.0 -8 300.0 2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007 200.0 Weak implementation 100.0 0.0 01/01/10 01/02/10 01/03/10 01/04/10 01/05/10 01/06/10 01/07/10 01/08/10 01/09/10 01/10/10 01/11/10 IE 10y bond spreads over DE 10y, Jan-Nov 2011 6
Poor compliance with SGP targets Table 1: Compliance with the preventive arm of the Stability and Growth Pact (as a percentage of GDP) indicates budgetary position close to balance or in surplus prior to 2005 and compliance with medium-term objective thereafter indicates compliance with minimum benchmark only indicates non-compliance with minimum benchmark General government structural net lending (+)/borrowing (-) MB MTO 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -1.3 0.5 Belgium -0.6 -0.8 -0.9 0.1 -0.1 -1.1 -0.9 -0.2 -0.6 -0.3 -1.6 BB Germany -1.9 -1.3 -1.9 -3.4 -3.6 -3.3 -3.0 -2.4 -1.4 -0.3 Ireland -1.5 CTBOIS 2.0 1.5 3.0 -0.2 -1.7 -0.1 2.1 1.3 2.9 0.2 Greece -1.4 BB -3.3 -2.6 -3.3 -4.9 -4.7 -5.9 -8.0 -5.7 -3.7 -3.5 Spain -1.2 BB -3.1 -1.7 -1.9 -1.4 -0.9 -0.3 -0.2 1.2 2.0 2.4 France -1.6 BB -2.4 -2.1 -2.6 -2.5 -3.5 -4.0 -3.8 -3.6 -2.7 -2.7 Italy -1.4 BB -2.5 -1.6 -2.9 -4.1 -3.4 -5.1 -4.7 -4.5 -2.8 -1.5 -1.8 BB Cyprus -3.7 -4.5 -3.1 -3.4 -5.1 -8.1 -5.2 -2.8 -0.7 3.5 -1.0 -0.8 Luxembourg 4.3 3.0 4.0 5.3 1.6 1.2 -0.9 0.4 1.4 2.8 -1.7 BB Malta -10.3 -8.5 -7.8 -6.5 -5.8 -6.5 -4.2 -4.1 -2.9 -2.4 -1.1 -1 to -0.5 Netherlands -1.3 -0.8 -0.4 -1.3 -1.9 -2.0 -1.1 0.8 1.1 0.3 Austria -1.6 BB -2.5 -2.8 -3.0 -0.3 -0.3 -0.6 -3.1 -0.8 -1.4 -1.0 Portugal -1.5 -0.5 -3.8 -3.5 -4.5 -5.4 -3.4 -4.7 -4.9 -5.2 -3.2 -2.2 Slovenia -1.6 -1.0 -2.5 -2.4 -4.1 -4.5 -2.2 -1.9 -1.6 -0.9 -1.3 -0.7 -1.2 2.0 Finland 0.6 0.6 5.2 4.0 4.1 3.3 2.9 3.7 4.2 4.9 Euro area -2.1 -1.6 -2.0 -2.6 -2.7 -3.1 -2.9 -2.2 -1.2 -0.7 7
Slow correction of excessive deficits Table 2: Compliance with the corrective arm of the Stability and Growth Pact Unit labour costs in selected euro area countries, nominal (as a percentage of GDP) (index 2000Q4 = 100, relative to Germany, based on sa data) Germany France Italy Spain indicates a deficit ratio below the 3% reference value (a debt ratio below the 60% reference value) Netherlands Belgium Austria Greece indicates a deficit ratio above the 3% reference value which was not recognised as excessive in the following year (usually Ireland Finland Euro area Portugal because the deficit was revised upwards ex post) 135 135 indicates a deficit ratio above 3% of GDP which was recognised as excessive in the following year (a debt ratio above 60%) 130 130 General government: 125 125 Net lending (+)/borrowing (-) Gross debt 120 120 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998 2007 Belgium -0.9 -0.5 0.1 0.4 0.0 0.0 0.0 -2.3 0.3 -0.2 117.1 84.8 115 115 Germany -2.2 -1.5 -1.1 -2.8 -3.7 -4.0 -3.8 -3.4 -1.6 0.0 60.3 65.0 54.0 25.5 Ireland 2.4 2.7 4.7 0.9 -0.6 0.4 1.4 1.6 3.0 0.3 110 110 105.8 94.5 Greece -3.9 -3.1 -3.7 -5.0 -4.7 -5.6 -7.4 -5.1 -2.6 -2.8 105 105 64.1 36.2 Spain -3.2 -1.4 -1.1 -0.6 -0.5 -0.2 -0.3 1.0 1.8 2.2 59.4 63.9 France -2.6 -1.8 -1.5 -1.6 -3.2 -4.1 -3.6 -2.9 -2.4 -2.7 100 100 114.9 104.0 Italy -2.8 -1.7 -2.0 -3.1 -2.9 -3.5 -3.5 -4.2 -3.4 -1.9 Cyprus -4.1 -4.3 -2.3 -2.2 -4.4 -6.5 -4.4 -2.4 -1.2 3.3 58.4 59.8 95 95 Luxembourg 3.4 3.4 6.0 6.1 2.1 0.5 -1.2 -0.1 1.3 2.9 7.4 6.9 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 Malta -9.9 -7.7 -6.2 -6.4 -5.5 -9.8 -4.6 -3.2 -2.5 -1.8 53.4 62.6 Netherlands -0.9 0.4 1.3 -0.2 -2.1 -3.1 -1.7 -0.3 0.5 0.4 65.7 45.4 Source: Eurostat. Quarterly data up to 2010 Q1 for EA, GR, IT, ES, FI, BE, FR; 2009Q4 for NL and AT; 2009Q3 for IE; PT is based on Austria -2.3 -2.2 -2.1 0.0 -0.6 -1.4 -3.7 -1.5 -1.5 -0.5 64.3 59.1 annual data (up to 2009). Portugal -3.4 -2.8 -3.2 -4.3 -2.9 -2.9 -3.4 -6.1 -3.9 -2.6 52.1 63.6 Note: The ULC indices are set to 100 in the last quarter before the euro area accession of Greece. 23.1 24.1 Slovenia -2.4 -2.0 -3.8 -4.6 -2.5 -2.7 -2.3 -1.5 -1.2 -0.1 The ULC developments presented for Greece and Portugal might differ from the calculations made by the National Central Banks. 48.2 35.4 Finland 1.7 1.6 6.9 5.0 4.1 2.6 2.4 2.9 4.1 5.3 The quarterly pattern in Greek ULC is affected by substantial volatility in quarterly compensation of employees figures. 72.8. 66.3. Euro area -2.3 -1.4 -1.0 -1.9 -2.5 -3.1 -2.9 -2.5 -1.3 -0.6 8
Cacophonous communication Government bond spreads against German Bund in basis points (10 yr) 23/11/10: Merkel : “We are facing an exceptionally serious 28/11/10 : situation.” ECOFIN approves €85 bn Irish package 12/11/10: G-20 Joint F/D/IT/ES/UK statement “Any new 16-17/12/10 : European Council [bail-out] mechanism only after mid-2013; confirms private no impact on current creditors’ involvement in the ESM arrangements.’’ 28-29/10/10 : 10/01/11: European Council After China, Japan endorses the Van announces bond buys Rompuy report but to boost confidence in divided on sanctions. EFSF. 25/01/11: EFSF first bond issue. 18/10/10: Deauville Summit declaration: private creditors to be involved in the crisis resolution mechanism 9
… lead to obvious conclusion? • Kindleberger was right • Either: – continuation of myopic crisis management; – accept de facto German hegemony (veto power and essential financier); – overburdening of ECB • Or: create supranational ‘hegemony’ at euro area level (for 4-5) • This is what most current reform proposals in fact imply 10
3 popular ideas of how to overcome crisis I. Eurobonds II. ‘Orderly’ III. Loss of default sovereignty Proposal EU hegemony Market Adjustment via financing of hegemony via hegemony via government “perpetual technocracy borrowing opinion poll” Countercyclical Common bonds Market EU-IMF lending (4) financing programmes Coordination of Pre-condition for Threat of Conditionality macroeconomic participation default policies (5) But problems with all three 11
I. Eurobonds 12
‘Transfer union’ politically not acceptable Domestic communication ‘challenging’ Source: Financial Times In addition: moral hazard problems, costs/incentives for AAA countries, operational and legal questions 13
Strong resistance to implicit transfers Greek sovereign liabilities (in bn €, assuming gross financing need is met by official loans) 350 Official liabilities (incl. ECB holdings) 300 250 200 150 100 Market debt 50 0 2009 2010 2011 2012 2013 2014 2015 Source: JP Morgan Chase Global Data Watch, June 2011 14
Not yet serious about stronger governance ECB Opinion on “economic governance” package Current text 1. Greater automaticity Non-compliance must have predictable consequences; Council to have less room for manoeuvre to halt or Partly suspend procedures 2. Strict deadlines No to avoid lengthy procedures; delete “escape clauses” 3. Focus – asymmetrically – on problem countries i.e. those with current account deficits, competitiveness Partly losses, high levels of public and private debt. 15
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