How did Europe react to the economic and financial crisis

Debate on Europe

Adnan Bećirović Andrei Damian Andrea Danni Lorenc Gordani Dario Grbović

How did Europe react to the economic and financial crisis

Debate on Europe

Adnan Bećirović Andrei Damian Andrea Danni Lorenc Gordani Dario Grbović

Summary

1. origins and consequences of the crisis

2. measures adopted by the EU

3. decision-making method

4. focus on Germany’s line of action

What is the financial crisis? !

Anatomy of the crisis

A situation in which the value of financial institutions or assets drops rapidly.

Before declaring bankruptcy in 2008, Lehman was the fourth-largest investment bank in the US.

!The collapse of Lehman Brothers saw the US stocks fluctuate

with over $300 billion in market value.

Root causes of the crisis

This initiated a chain reaction...

A combination of complex factors:

The result: Europe experiences combined 

– a government debt crisis – a banking crisis  – a growth and competitiveness crisis

The crisis in Europe

• Globalization of finance

• high-risk lending and borrowing practices

• the Great Recession of 2008–2012

• fiscal policy choices related to government revenues and expenses

• approaches used by nations to bail out troubled banking assuming private debt burdens or socializing losses

 Government debt crisis !!

Some MS faced difficulties in repaying or refinancing their government debt without the assistance of

institutions like the ECB or IMF.

Euro Area Government debt to GDP Percentage of GDP

Source www.tradingeconomics.com | EUROSTAT

Banking crisis

! Banks in the Eurozone were undercapitalized and have faced

liquidity and debt problems. !!!

 Growth and competitiveness crisis

!Economic growth was slow in the whole of the Eurozone and

was unequally distributed across the member states.

A) Direct impact on actual and potential growth

Consequences of the crisis and implications for the EU economy

B) Direct impact on budgetary positions

Euro Area Government Budget Percentage of GDP

Source www.tradingeconomics.com | EUROSTAT

Consequences of the crisis and implications for the EU economy

C) Direct impact on labour market Area Euro unemployment rates

Total unemployment Youth unemployment

Consequences of the crisis and implications for the EU economy

Source EUROSTAT

What the crisis exposed

A major deficit of executive decision-making capability in the EU and Euro Area institutional framework.

!It can thus be said that the banking and sovereign crises are compounded

by a crisis of the EU institutions themselves. !

Specialized European bodies (i.e. ECB) have partly bridged this gap with policy initiatives that go beyond a narrow reading of their mandate, but they could do so only to a limited extent that has not been sufficient to

stop the contagion.

The EU's response to the crisis

• The Six-pack (entered into force in December 2011) - 5 regulation + 1 directive - applies to all MS - reinforces both the preventive and the corrective arm of the SGP

!• European semester (entered into force in May 2013) - to coordinate ex ante MS`s budgetary and economic policies, in line with both the SGP and the Europe 2020 strategy.

!• The Two-pack (entered into force in May 2013) -improve budgetary coordination -improve economic and financial surveillance in the euro area

Inside EU framework

The EU's response to the crisis

Beyond the EU legal framework

• Euro Plus Pact (entered into force in March 2011 ) -Fostering competitiveness - Fostering employment - Contributing to the sustainability of public finances - Reinforcing financial stability. - Tax policy coordination !• The Treaty on Stability, Coordination and Governance (TSCG)

AKA Fiscal Compact (entered into force in January 2013) - A balanced budget rule in MS`s national legislation through permanent, binding provisions, preferably of a constitutional character. - Limiting deficits - Automatic correction mechanism - Reinforced coordination - Euro Summit meetings

The EU's response to the crisis

Financial stability support mechanisms

• European Financial Stability Facility (EFSF) !

• European Stability Mechanism (ESM) !

• European Financial Stabilisation Mechanism (EFSM) !

• Green paper on stability bonds !

• New Credit rating agencies rules

The EU's response to the crisis

Supervision of financial institutions

!• European Banking Authority !• European Insurance and Occupational Pensions Authority !• European Securities and Markets Authority !• European Systemic Risk Board for macro-prudential supervision. !• Banking union - an EU-level banking supervision and resolution system

The EU's response to the crisis

Growth and jobs

Efforts to ensure stability are not an end in themselves: stability is a precondition for economic growth and employment.

!EU adopted common targets to promote growth in its Europe

2020 strategy !

In 2012 the EU leaders adopted a compact for growth and jobs Youth Employment Initiative

- Stronger coordination of economic and fiscal policies within the Economic and Monetary Union !

- Increasing cross-border mobility of citizens and businesses !- Supporting the digital economy !-Strengthening social entrepreneurship, cohesion and consumer confidence. !- EU of regions !

- The completion of the single market

The way forward

How the EU's responses to the crisis have been agreed and approved? What decision-making process has been used?

Some of the responses that we have enlisted do not belong to the EU framework but are intergovernmental agreements:

! • Fiscal Compact ! • Euro Plus Pact • European financial stability facility ! • European stability mechanism !

Community method or intergovernmental method?

Community method or intergovernmental method?

How the EU's responses to the crisis have been agreed and approved? What decision-making process has been used?

Many other responses have been approved through the Community method:

! • European Financial Stabilisation Mechanism (EFSM) ! • Financial authorities ! • Banking union ! • Two-pack ! • Six-pack

What is the community method?

!• Commission monopoly of the right of initiative; • widespread use of qualified majority voting in the Council; • an active role for the European Parliament (opinions, proposals for amendments, etc.); • uniform interpretation of Community law by the Court of Justice. • balance of powers to include all interests and promote unity in diversity

PROs √ - Its fairness is guaranteed by the UE treaties which are recognized by all MS

√ - It guarantees a common view shared by MS √ - It is supposed to ensure a coherent development of EU

CONs x - It can be very slow and MS can block decision easily, especially when

unanimity is required by the treaties. x - The treaties give legal basis to act only in restricted areas.

It is the creation of agreement between MS which do not involve the EU, its institutions or its treaties.

Not to be mistaken with meeting of Heads of State and Government

PROs √ - It can be faster and more flexible

√ - It can avoid MS vetoes √ - It allows to reach agreements between smaller group of MS

CONs x - It does not reflect a common european vision

x - It could undermine the EU structure x - Small and weak countries are subject to stronger nations negotiation power

What is the intergovernmental method?

During crisis fast action and prompt responses are needed. In such cases politics and governance have to take action even outside

of the consuetudes and the standards. !

Crisis historically represent occasion of change and innovation in the governance framework.

!Angela Merkel, among others, addressed the crisis as an opportunity

to build a stronger EU.

Whats the ratio of the choice of taking action outside the EU legal framework?

Do politics prevail upon rules?

Endorsed the Intergovernmental method highlighting the limits of the community method

!“The reform of Europe is not a march towards supra-nationality

(…). The integration of Europe will go the inter-governmental way.”

(Nicolas Sarkozy December 2011, EUobserver)

Germany - Merkel

“The architects of the economic and monetary union were unable to predict the crisis.

!We can only have a strong European Union if we use this crisis

as an onus and an opportunity. !

The German Chancellor mentioned a new way: “Method of the Union”

!!Speech by Federal Chancellor Angela Merkel at the opening ceremony of the 61st academic year of the College of Europe in Bruges on 2 November 2010

France - Sarkozy

Europe is governed by a France-Germany directorate?

“A coordinated European position can be arrived at - by applying the community method

- by applying the intergovernmental method. !

The crucial thing is that on important issues we have common positions.”

“If all the major stakeholders – the Union institutions, the member states and their parliaments – complement each other by acting in a coordinated

manner in the areas for which they are responsible, the immense challenges facing Europe can be tackled successfully.”

!“Who is responsible for what is very clearly defined.”

Method of the Union

“Who is responsible for what is very clearly defined”. !!

Commissioners and MEP are often influenced by their nation political parties

!!

Commission and EP cannot work freely in the interest of Europe

Method of the Union How could it be improved?

The creation of real and strong european political parties !

A juridical separation (including budget independence) of national and european political parties could help to overcome this conflict of interests.

Method of the Union How could it be improved?

Real and effective european political parties (financed by EU) would then operate in MS only about european affairs.

!––> increasing public awareness about EU agenda ––> assuring european vision in EP and Commission

Angela Merkel’s Germany:

Falling in or out of love

with Europe?

The development of the crisis in the Euro Area and the growth of states’ debt: ! Placed Germany into an even more central role in Europe; ! Markets view German government bonds as the benchmark for

the Eurozone; ! Economic policy decisions in Berlin started to see as the model

for the rest of Europe. !

In summer 2010, a lively debate took place regarding the progressive disaffection of Germany towards Europe. ! Germany’s apparent reluctance to aid Greece; ! Its retreat from the former role as committed leader of the EU; ! Position supported by public opinion and the majority of

German media.

A review on the leadership role of Germany in the EU

!Outlook 2014: Germany in recovery mode.

Differences of performance of German economy

Source: Jörg Zeuner, Germany: Outperformer in Times of Crisis, but major challenges ahead, KfW, 9 January 2014

!German Current Account Balance, from 1991 to 2013, in % of GDP.

Overview of key elements

Source: Eurostat - TGM

EU Compared Current Account Balance on 2014 in % of GDP.

Re-engagement of German policy with EU

Source: Eurostat - TGM

Outlooks

The challenge is not that a single country takes up a leadership role. !The overcome of today EU challenges require a significant deepening of the euro area, with a genuine transfer of sovereignty, stronger institutions and democratically legitimate decision-making structures in areas of common policy.

“The euro is our common fate, and Europe is our common future.” Chancellor Angela Merkel.

To sum up

More integration in fiscal and economic policies !

Complete the internal market !

Treaty revision and institutional changes !

Solving conflict of interests of MEPs and Commissioners !

Europe of regions or federation of nations?

“People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them”.

!!!!!!!!!!!!

Jean Monnet, the first honorary citizen of Europe

c

Thank you for the attention.

Thank you for the attention.

Credits !

• Work developed for the European College of Parma Foundation - Debate on Europe held on May 19th 2014. !

• Contents by: Adnan Bećirović, Andrei Damian, Andrea Danni, Lorenc Gordani, Dario Grbović. ! • Slides graphics and design by: Andrea Danni.