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European Commissioner for Economic and Monetary Affairs
Ongoing developments in the eurozone
Brussels, 5 August 2011
I will start by stating the obvious: markets have not reacted as we expected or hoped for to the measures agreed by euro-area Heads of State and Government on 21 July.
The spread of bond-market tensions across the euro area is, however, not justified by economic and budgetary fundamentals. Economic recovery is proceeding in most parts of the euro area, while important steps in budgetary consolidation and structural reform are underway across Europe and in particular in those Member States most exposed to market tensions.
Some of the reasons for market tensions relate to developments outside of the euro area. Investor sentiment has been negatively affected by the impact of the debt ceiling negotiations in the United States and recent data suggesting a soft patch in the global economy.
But other sources of tension can be found closer to home. While the 21 July agreement is a milestone in our management of the sovereign-debt crisis, we have had difficulties in communicating the agreement to the markets. Such a comprehensive, detailed and technically complex agreement requires time to implement. But there were expectations in financial markets that all elements could be implemented immediately. While these expectations were clearly unrealistic, markets have nevertheless been disappointed.
Two weeks ago, the euro area leaders re-affirmed their commitment "to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States." The political will to defend the euro should not be underestimated. Since the onset of the crisis, euro area leaders have always proven that they could take the necessary decisions and a continuously evolving situation.
Let me recall what The French and German finance ministers, Francois Baroin and Wolfgang Schäuble, said only a few days ago: "Rebuilding confidence in the eurozone will require patience, considerable stamina and vision. Our path is demanding… We have embarked on a way to ever closer co-ordination and co-operation of our national fiscal policies…."
Yesterday, President Barroso wrote to the Heads of State and Government urging them to ensure full and rapid implementation of the 21st July agreement.
The reason for me being here today is to do a follow-up on that letter, explaining how the various measures agreed to are being implemented, and how we are addressing market concerns about the management of the sovereign debt crisis. I am of course focusing on the work-streams and policy actions where the Commission has relevant responsibilities and policy competences.
First – we are doing what is necessary to implement the 21st July agreement fully and as rapidly as possible.
It would have been fantastic if the agreement had been fully operational on the 22 July, but this was of course impossible. The very technical details of the agreement must be fleshed out and then accepted and ratified in each Member State. This is the necessary – and legitimate – a price to pay for living in democracies.
Experts from Member States, supported by my services of DG ECFIN, as well as by the ECB and the EFSF , are working night and day to put flesh on the bones of the 21st July agreement. And we are progressing quickly. Meetings and conference calls are being organised very frequently and will take place as often as necessary in coming days. The technical work will be completed as a matter of urgency.
We are talking here of a matter of weeks, not months. In order to end the uncertainty, the technical and political processes should be finalised by early September. But the technical and the political processes are mutually dependent. There are different procedures for ratification across Europe and we expect all euro area Member States to do what is expected of them to meet that timeline. That is what President Barroso called for in his letter yesterday, stressing that there could be no delay in ratification.
I am confident that, once investors understand that all this work is underway behind the scenes, they will be reassured about implementation of 21st July agreement. Yesterday, President Barroso wrote to Heads of State and Government of the Eurozone urging rapid implementation of the measures agreed.
It is the Commission's long-standing position that the effective lending capacity of the EFSF should be reinforced and the scope of its activity widened. We said this already in our Annual Growth Survey on 12 January this year.
That is why the European Commission was and remains satisfied with the 21st July agreement, which achieved most of these objectives with regard to the EFSF. The new EFSF instruments, now always linked with appropriate conditionality, include the possibility to act on the basis of a precautionary programme, to intervene in the secondary markets in the basis of an ECB analysis, and to finance recapitalisation of financial institutions through loans to governments.
But, as experience over the last few years has shown, we need to stand ready to adapt our crisis management tools to be credible and effective. Of course, this goes for the EFSF as well. To be effective, the EFSF needs to be credible and respected by the markets. Thus it will need to be continuously assessed, once up and running in its updated form, with those objectives in mind.
This is in line with the conclusions of the euro-area summit in July, which called for improvements of working methods and enhancements of crisis management in the euro-area. As President Barroso underlined in his letter to heads of state, the Commission stands ready to contribute to this task which is of paramount importance.
Second – heightened concerns around Greece are not warranted.
Investors seem unconvinced that Greece's debt will be put on a sustainable track. I think this is not the right conclusion. The 21st July agreement did deliver major improvements in the terms and conditions for financing Greek public debt. There will be a significant extension in the average maturity of all loans and a lowering of interest rates on official loans.
A reduction of interest rates to about 4% should reduce cumulative interest payments by some €25 bn between 2011 and 2020. This implies a reduction in the debt ratio in 2020 (without private sector involvement) of around 10% of GDP.
Meanwhile, the offer of private sector involvement (PSI) implies further important benefits for Greek public debt sustainability. PSI considerably stretches the average maturity of Greek government debt even further and reduces substantially the amounts that Greece will have to raise in the markets by the end of the programme in 2014. PSI and the accompanying debt buy-back entail a further estimated net debt reduction by some €26bn or 12% of GDP by 2020.
It is correct that PSI entails certain costs, but these costs impact more on gross debt than on net debt. The costs relating to PSI include the recapitalisation of Greek banks (€20 bn) and credit enhancements (€35 bn), in the form of AAA rated bonds paid on an escrow account, for the new government bonds that are exchanged for existing bonds maturing during the period 2011-20. This escrow account is an asset for the Greek government and has a positive impact on net debt.
And the Greek authorities are doing what is necessary to implement their various commitments. They are developing the proposals for the PSI along the lines of the IIF proposal. Preparatory work is continuing for the new support programme for Greece, in liaison with the ECB and together with the IMF. The Commission's Task Force set up at the end of July is starting to coordinate technical assistance to Greece. Importantly, it will help ensure measures are taken to accelerate take-up of EU funds which make a visible impact on competitiveness, growth and employment.
Let me conclude on Greece by recalling that the situation of Greece is exceptional, and that's why it requires a special and unique solution with regard to PSI. I can therefore only reiterate what the Heads of State and Government said on 21st July – PSI will be restricted only to Greece, and will thus not be a feature of crisis management in other Member States.
Third – the ECB is playing its part.
The ECB continues to play a key role in managing the financial crisis. Yesterday, the Governing Council announced a number of non-standard measures in order to tackle the tensions in some financial markets within the euro area.
The Commission fully trusts that the ECB will continue to do what is needed to preserve financial stability in the euro area and restore an appropriate monetary policy transmission channel.
Fourth – a word on Italy and Spain
The market unrest witnessed in the last few days is simply not justified on the grounds of economic fundamentals. It is not justified for Italy. It is not justified for Spain. Such dramatic changes in the markets are incomprehensible. It is not as if the fundamentals of the Italian or Spanish economies have changed overnight!
Both countries have committed themselves to ambitious measures to reach fiscal consolidation and to put their economies back on track. And both countries are implementing those measures. It is essential they do so, and pursue growth-enhancing structural reforms. That's what matters, and that's what should be taken into account.
Italy has taken the measures to secure a balanced budget by 2014. The forceful implementation of theses measures is now of paramount importance. The government has also announced that measures will be adopted to reduce the high financing needs in the months to come. This is welcome.
The Commission also supports the intention to enshrine a balanced budget in the constitution, so as to fully respect the commitment under the Stability and Growth Pact on a permanent basis.
The welfare reform plan which is currently in the Italian Parliament is a very important step towards fiscal sustainability, but its approval and implementation should be accelerated, which will have positive effects on the budgetary balance already in 2012.
As already stressed in the past, the key priority for Italy now is to move full steam ahead and accelerate the necessary structural reforms to boost economic growth. The authorities should work closely with social partners to adopt courageous measures and implement them without delay: in this strategy, the opening up of closed professions and further labour market reforms should be prioritised. Such a programme of reforms must be supported across the political spectrum.
Spain has committed itself to broad ranging measures. Spain has made major progress in the areas of fiscal consolidation, banking sector restructuring, pension reform, as well as labour and product market reforms. These bold reforms have been acknowledged in our analysis as part of the European Semester.
Even though many of these measures are already underway, as for Italy, forceful implementation is paramount. Therefore, fiscal consolidation plans need to be strictly implemented, particularly at regional level. Strengthening of the banking sector has to be completed. And the planned structural reforms need to be concluded.
In the short term, despite tense market conditions, the results of the bond auction yesterday of 3-year and 4-year bonds were relatively positive, which is a good sign.
Fifth and finally, let's not forget the bigger picture.
The 21st July agreement is a milestone in economic policy coordination in the euro-area. But it's not the only important reform we need to finalise. A year ago, the Commission proposed a comprehensive package of reforms of economic governance.
Strengthening the Stability and Growth Pact and the new macroeconomic surveillance system that we have proposed will ensure that medium term expectations about national policies are framed within a strong structure. The rules for maintaining fiscal discipline in the Member States will be reinforced, while new rules will be introduced to prevent accumulation of macroeconomic imbalances.
Although all sides agree on the urgency and importance of this package, negotiations are held up by only one sticking point relating to the voting mechanism in the final stage of the preventive arm of the Pact. No one will understand if the adoption of the package is further delayed because of this disagreement. That is why I call on both legislators, the Council and the Parliament, to make the final compromises necessary to strike a deal.
Finally, we must also look ahead to further reforms to strengthen even more the governance of the euro area. In that context, I look forward to the President of the European Council coming forward in the months to come with concrete proposals on how to improve working methods and enhance crisis management in the euro area. The Commission is ready to work together with him and Jean-Claude Juncker and thus contribute to this joint endeavour of paramount importance for the future of the euro and of Europe.
It should be clear to all that Europe is facing up to its challenges. We are not shying away from the task of crisis management. On the contrary, we are acting on all fronts to tackle the challenges. So we develop a stronger and better functioning euro area, and the right foundations for more growth and jobs in Europe.
I want to add one important final point. The current turmoil is not just affecting Europe, but has a global dimension and global repercussions. That's why the solution has to be global as well. And that's why international policy coordination through the G7 and G20 is of critical importance. Europe is playing and will continue to play its full role in this context.